Global Real GDP Growth
Real Gross Domestic Product growth is the market value of all goods and services produced in a nation during a specified time period, adjusted for inflation. This metric is the most common metric used to determine a nation's growth and ability to sustain growth within the capital markets. Since a healthy, growing economy is vital to the automotive industry, seeing growth around the world in Real GDP would be a great sign for General Motors (NYSE:GM) and other automotive manufacturers.
The last few years have seen dismal Real GDP growth around the globe. In the United States Real GDP has bounced between 2-3% growth since the Financial Crisis, most recently being closer to the 2% figure. In fact, in 4Q 2015, Real GDP only grew at 0.7%(and yes, that is an already annualized figure). It is said that in the long run a corporations revenues can only increase as fast as Real GDP, this does not bode well for General Motors.
For the last thirty years China's Real GDP has been growing at an average rate greater than 10% per year. However, China reported 2015 Real GDP growth at 6.9% which is why the world's commodities markets are all near historic lows. China was importing tons of commodities when it was growing greater than 10%, but with the slow in growth there is no longer a need for all of these commodities and there is a large over-supply in the market. What is worse, many economists believe that the 6.9% growth figure for China is actually overstated and could be closer to 5.5%. Although China is the fastest growing, large country in the world, its growth is slowing. This is not as bad for General Motors as it is for the rest of the capital markets. While Real GDP is slowing the citizens of China are as wealthy as they have ever been and tens of millions of citizens are now able to afford vehicles. China's slowing growth should not be General Motors' concern. Rather, General Motors needs to capture a much larger market share in the growing country.
Even though short-term Real GDP growth does not look good, I believe that the world will exit the current slowing in growth by 2018. This will occur because emerging markets, such as India, parts of Africa, Brazil, and Russia will see growth at levels we have seen in China for the past 20 years. This will create a great macroeconomic demand for vehicles as people in these countries will become wealthier and travel greater distances because of development that the period of growth has caused.
The other large market that General Motors is active in is the European Union, which has struggled to recover from the European Banking Crisis. With Real GDP growth struggling in almost every country in Europe, European Central Banks have resorted to "negative interest rates" in an attempt to stimulate spending. Implementing lower, or even negative, interest rates theoretically will stimulate spending by encouraging banks to make more loans instead of keeping the money deposited in the European Central Bank. While this approach has not worked so far, many economists believe that it will eventually stimulate spending and allow Real GDP growth to begin. When looking at General Motors we should be considering the effects that interest rates have on the ways that consumers spend their money. With interest rates at historically low levels, it has never been cheaper to finance large purchases, such as, cars, houses, and other luxury items. This is great news for General Motors because there is no sign of increasing rates in the European Union and Australia's Central Bank has said that it will cut interest rates if it needs to. This will be a boon to the automotive industry as people can afford more car, with less money.
The United States just saw its first interest rate hike in December 2015 and the market has been in turmoil since. It is likely that the Fed will avoid raising interest rates at the March meeting. Fed Chairwoman, Janet Yellen, has even said that the Fed is willing to cut to negative interest rates if a situation occurs that requires it. But, I believe that people will be more likely to buy cars over the next year because of the future expectations of higher interest rates. Think about it, if you knew that interest rates were going to be higher one or two years from now, wouldn't that cause you to consider making that car purchase now? Effectively, I think that the expectation for future rate hikes in the United States will bring future automobile purchases to the present time period. While there should be a net zero effect in the long-run, over the next two to three years General Motors and the automotive industry will benefit.
Global Oil Oversupply
While I do not believe that oil will stay below $35 in the long-run, I do believe that oil will stay below $55 for the foreseeable future. The reasons are twofold: declining growth in the consumption of oil and increasing availability of oil to produce. The United States has nearly doubled its oil output since 2008, while other countries around the world are also increasing their oil outputs. This caused a 1-2 million barrels/day oversupply which has brought prices down to current levels.
Recently, Russia and OPEC have been in talks to freeze oil output at January 2016 levels to try and stabilize the oil market and make prices rise. While this will work to make prices rise, prices will, for the foreseeable future, not rise above the $60 per barrel mark. At around $60 per barrel it again becomes profitable for US companies to begin searching for new oil drills and turn the spigots back on, causing another oversupply or at least half prices around those levels.
The implications this has for General Motors are enormous. The lower gasoline levels will allow consumers to go back to the large trucks and SUV's that consumers enjoy to drive. These cars also have margins that are much better than small, light cars, nearly twice as profitable for General Motors.
How Macroeconomic Trends Effect General Motors's Value
While global Real GDP growth points to a tough period for General Motors, it is not as dismal as the slowing in world GDP growth may show. In the short-run, Real GDP is not a great indicator for automobile sales. Look at the United States, the US grew at 1.8% in 2015, yet automobile manufacturers sold the most cars ever. So, while an up-tick in growth could definitely help General Motors, long-term Real GDP growth is a more important factor to consider when valuing General Motors and I see this being relatively average over the long-run when compared to the past thirty years.
I think that the current state of interest rates have the largest effect on the short-term (2-4 years) growth prospects for General Motors Motor Company. With interest rates at the lowest in history, and not much of an expectation for rates to continue their decline, consumers will expect higher rates in the future. This will cause some consumers to move their future auto purchase to the present. This results in more car sales in the short-term period. I think that we will see this expectations effect most in the United States because of the recent rate-hike and expectations of higher rates sooner in the future. In Europe, I think that interest rates will continue to stay low until 2018, where the world's growth will be healthy enough to normalize rates around the world. At this point, the expectations of higher future interest rates will cause a similar shift in purchases from the future to the present, as it has over the last year and will continue to do so over the next year.
In addition to the low interest prices, lower prices at the pump allow consumers to afford "more car" than they could when they were paying 5-8% interest and $4/gallon. In the same way that future expectations for higher interest rates can affect General Motors' current value, so can future expectations for gasoline prices. But, in this instance future expectations are for affordable gas prices. Maybe rising slightly, but nothing compared to the $100+ per barrel that we saw a few years ago. Expecting lower gasoline prices, consumers will be able to afford "more car", whether that it by purchasing a luxury brand or purchasing a truck or SUV instead of a car. These all have higher margins and will help General Motors throughout the next few years.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.