A Much Deeper Recession and a Much Slower Recovery · Spending to stabilize the economy will result in record federal budget deficits, the Federal Reserve will maintain accommodative

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A Much Deeper Recession and a Much Slower Recovery

09 June 2020

Peter Nagle, Senior Analyst II, +1 248 465 2823, [email protected]

Association for Corporate Growth


Copyright notice and disclaimer

Association for Corporate Growth June 9th 2020

2

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Most regions already in severe recession as output drops at record pace to

all-time lows

10

20

30

40

50

60

70

2010 2012 2014 2016 2018 2020

Japan United Kingdom Eurozone United States

PMI by IHS Markit showing recovery from April's

Source: IHS Markit © 2020 IHS Markit


3

-15%

-10%

-5%

0%

5%

10%

2019 2020 2021 2022 2023

IHS Markit now projects a 5.5% decline in global real



What can we expect from the post-Covid recovery?

25

30

35

40

45

50

55

60

-3 -1 1 3 5 7 9 11 13 15 17 19 21 23

IHS

Mark

it P

MI

(Outp

ut

Index)

Number of months before/after eventWorld (Great Recession) Japan (2011 Tsunami)

China (Covid-19) EU (Sovereign Debt)

Historical comparison of post-crisis recoveries



4

-70

-60

-50

-40

-30

-20

-10

0

25

30

35

40

45

50

55

60

Containment Score Composit PMI

US containment measures to ease through 2020



Governments applying lessons from GFC to combat Covid-19 economic

Depression, 57 governments have announced almost $5T in support


5

Total cost of fiscal effort as a share of GDP

Australia 16.4%

Japan 15.5%

Germany 10.5%

United States 10.5%

Canada 6.6%

India 6.2%

UK 6.0%

Brazil 4.1%

China 4.0%

South Korea 0.6%


Automotive recession far deeper than 08/09 and more immediate


6

60

65

70

75

80

85

90

95

100

105

2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027

Lig

ht

Vehic

le S

ale

s

(Mill

ions)

Jan 2020 Forecast May 2020 Forecast

Global light vehicle demand to fall 23% as Covid-10


-8%

-23%

Market

2020 total

(million)

Growth

(% chg.)

vs. Jan

2020

(million)

China 21.2 -0.147 -3.4

United States 12.7 -0.254 -4.1

Europe 13.3 -0.264 -4.2

Global 69.2 -0.229 -19.5


40

50

60

70

80

90

100

1/1/2016 1/1/2017 1/1/2018 1/1/2019 1/1/2020

2008-09 SAAR

bottomed out at

54m (71m in ‘07)

Source: IHS Markit

Global Light Vehicle Demand – Seasonally Adjusted Annual Running Rate (SAAR)

© 2020 IHS Markit

Nature of autos demand likely means worst of is already behind us…

7

Millions


20m units below

previous SAAR

trend levels

SAAR collapsed

40m units in just

2/3 months)

Phase 1 –

“Lockdowns

Phase 3

‘Temporary new

normal’ – a more

normal recession

with social

distancing

Possible SAAR

relapse

Phase 2 –

Exit stage rebound of

sales as dealers open


US economy has experienced swift decline in output and employment,

however recent indicators improving

25

30

35

40

45

50

55

60

65

70

75

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Services Manufacturing

US PMI recovering from historic lows



8

0.0

5.0

10.0

15.0

20.0

25.0

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

2010:1 2012:1 2014:1 2016:1 2018:1 2020:1 2022:1 2024:1

GDP (% y/y) Unemployment Rate (%)

US GDP and unemployment rate



Disposable personal income grew 13% in April yet consumption fell 14%


9

0%

5%

10%

15%

20%

25%

-20%

-10%

0%

10%

20%

30%

40%

2008 2010 2012 2014 2016 2018 2020 2022 2024

Wage/Salary Disbursements (y/y) Transfer Payments (y/y) Saving Rate (% of Disp Inc)

Personal income being supported by increased federal transfers, consumers hesitant to spend



Spending to stabilize the economy will result in record federal budget

deficits, the Federal Reserve will maintain accommodative policies


10

-15.0

-12.5

-10.0

-7.5

-5.0

-2.5

0.0

2.5

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

1980 1990 2000 2010 2020 2030

Bil

lio

ns

of

do

lla

rs, fi

sc

al ye

ars

Unified budget balance (Left scale)

Balance as percent of GDP (Right scale)

US federal budget balance


0

2

4

6

8

10

12

1990 1995 2000 2005 2010 2015 2020 2025 2030

Pe

rce

nt

Federal funds 10-year Treasury

30-year mortgage BAA corporate

Interest rates



Collapsing global demand depresses prices, despite further production cuts


11

0

25

50

75

100

125

150

2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030

Do

lla

rs/b

arr

el

Current US dollars 2019 US dollars

Price of Dated Brent crude oil



USA—April sales down but not to worst-case levels. Slower rebound in sales

volumes with downgraded economic outlook in May settings

12

• While the economic damage brought on by

COVID-19 continues to lean to the downside, US

auto sales dropped an estimated 47% in April.

Better than some of the performances realized

elsewhere around the globe.

• OEM Incentives/support, online sales & almost

half of states not limiting dealer activity helping

to provide some cushion against worst-case

scenario.

• Vehicle inventory levels will be an important

variable moving through the immediate forecast

horizon. There could be some model-level

pressures as the sales pace picks up and

assembly plants begin slowly come online again.

• With employment losses totaling over 30 million

& the unemployment rate expected to rise to

almost 20% later this year, consumers are

expected to remain on the sidelines, pointing

towards a weak recovery outlook. US

unemployment rate settings sit at 14.9% in 2020,

13.5% in 2021, 9.5% in 2022, all up from previous

April settings. GDP of -7.3% in 2020, 5.1% in 2021,

4.6% in 2022.

• 2020 volume LVS setting of 12.7m units (-25% y/y)

followed by 14.3m in 2021 (up 12%).

USA – Covid-19 Impacted Light Vehicle Sales Forecast (May 2020)

2020 2021 2022 2023

% Growth YoY -25.4% +12.3% +8.1% +2.7%

Vol Delta vs. Pre-Crisis Jan Forecast -4,091,000 -2,291,000 -961,000 -553,000


10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

May '20 Apr '20 (V2)

Millions

+206k

-490k

-594k -280k

© 2020 IHS MarkitSource: IHS Markit


$300 or less payments disappearing, only 12% of registrations in 2019

Steady APRsLoan terms rising again as OEMs

expand programsAmount financed continues to rise

Rising monthly payments, for those

who can qualify…

13


67.51

54

56

58

60

62

64

66

68

70

2008 2010 2012 2014 2016 2018 2020

Average Maturity of New Car Loans


$32,724

$20,000

$22,000

$24,000

$26,000

$28,000

$30,000

$32,000

$34,000

2008 2010 2012 2014 2016 2018 2020

Average Amount Financed


5.15

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

2008 2010 2012 2014 2016 2018 2020

Finance Rate (%)



Demand recovering from April collapse, credit tightening as risk rises

14

Source: Board of Governors of the Federal Reserve System (FRED)

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Net

"Yes"

perc

enta

ge

Tightening Standards Increasing Demand

Federal Reserve domestic loan officers survey


32.5%

34.5%

16.5%

10%

15%

20%

25%

30%

35%

40%

2015 2016 2017 2018 2019 2020 YTD

Car SUV LTR

Lease share by bodytype

Source: IHS Markit © 2020

• Association for Corporate Growth June 9th 2020


Light vehicle SAAR for May 2020 fell to only 12.2m, volume down 30% y/y


15

0

2

4

6

8

10

12

14

16

18

20

January February March April May June July August September October November December

SAAR 2020 SAAR 2019 SAAR 2018 SAAR 2017

SAAR to recover from April near-record lows



Stimulus could provide near-term lift, second wave of infections produce

double dip recession

16

• Baseline forecast: Efforts to contain COVID-19

shutter large swaths of the economy and create

deeper recession than 2008-09. Inventory in the

system offsets some of the plant disruption impact,

yet also limits near-term growth prospects as we

re-open the economy; OEMs expected to prioritize

production of more profitable programs (e.g.

trucks).

• Optimistic forecast: Reflects a broader V-shaped

recovery as stimulus measures are expanded to

include light vehicle scrapping programs.

Additionally, measures to gradually reopen

shuttered economies are successful and not

interrupted by a return of the virus. A stronger

economic response in 2021–23 accelerates

recovery in light vehicle demand.

• Pessimistic forecast: Assumes that virus-fighting

efforts prove to be effective and allow for a

temporary recovery. However, a second wave of

the virus hits during the 4Q-2020. Another phase

of lockdowns is required, although learnings from

the initial experience mean the disruption is

shorter in nature. Stimulus measures prove

ineffective at backstopping the crisis. Economic

recovery begins later and at a much slower rate.

10

11

12

13

14

15

16

17

18

2010 2012 2014 2016 2018 2020 2022 2024

Baseline (50%) Optimistic (20%) Pessimistic (30%)

US Light Vehicle Sales Contingency Forecast

© 2020 IHS Markit

LV

Pro

du

ctio

n (

Mill

ion

s)

Source: IHS Markit

Sales (M) 2019 2020 2021 2022 2023 2024

Baseline (50%) 17.08 12.73 14.30 15.46 15.88 16.04

Optimistic (20%) 17.08 13.46 14.89 15.29 16.00 16.35

Pessimistic (30%) 17.08 11.44 13.11 14.12 14.86 15.28



Since 2010 fleet has averaged 2.6m units, pandemic having disproportionate

impact on rental demand

0

50,000

100,000

150,000

200,000

250,000

300,000

Rental Commercial Government

Fleet outlook by sector



17

125

130

135

140

145

150

155

2010 2012 2014 2016 2018 2020

CPI used car/truck not showing price impact yet



Impact of fleet sell-offs on used pricing could offset current dynamic


18

19.9 19.6 19.7 18.6 18.8 19.4 19.3 19.2 18.7 18.4

6.9 7.3 7.87.9 8.4 9.0 9.6 10.4 11.0 11.9

10.3 10.2 10.29.5 9.5

9.7 9.7 9.9 9.9 10.0

0

5

10

15

20

25

30

35

40

45

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Mill

ion

s

Car SUV LTR

Used vehicle registrations down 18% ytd


28%

10%62%

1ST USED/NOT OFF LEASE 1ST USED/OFF LEASE NOT 1ST USED

2019 used market by transaction type



The structural problem impacting new vehicle financing are more severe in

used marketplace

APRs appear more responsive to FED

action in 2019Loan terms continue to rise as vehicles

mix becomes more expensiveAmount financed continues to rise

Used market popularity driven by tighter lending

standards and more off-lease product

19


14.17

8

9

10

11

12

13

14

15

16

2008 2010 2012 2014 2016 2018

Finance rate (%)


63.25

50

52

54

56

58

60

62

64

2008 2010 2012 2014 2016 2018

Term length


$18,877

$15,000

$15,500

$16,000

$16,500

$17,000

$17,500

$18,000

$18,500

$19,000

$19,500

$20,000

2008 2010 2012 2014 2016 2018

Amount financed


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A Much Deeper Recession and a Much Slower Recovery · Spending to stabilize the economy will result in record federal budget deficits, the Federal Reserve will maintain accommodative