Decisions decisions...

Pete Kelly, Managing Director

05 April 2018

Automotive scenario planning

Making forecasts about automotive (or any) markets can be difficult at the best of times. Right now, we are faced with a complex array of new and evolving political-economic trends that only serve to highlight the difficulties of the task. However, making balanced projections for the industry is what we, at LMC Automotive, have to do every day – and it is what our clients have to do as they make important binary decisions on how they will manage their businesses.

Light Vehicle Production ForecastWhen the future is clouded, it pays to look at what alternative outcomes might look like. This is where our scenario forecasts come into play. Back in 2009, when a once-in-a-lifetime (we hope) financial crisis was unfolding across the world, we joined with long-time partner, Oxford Economics, to produce vehicle-industry-specific scenarios. This approach lasts to the present day, taking topical risks and applying differing macroeconomic forecasts to the industry.

What do our latest set of scenarios tell us? For one thing, it is the first time in a number of years that there appear to be multiple scenarios with upside potential, relative to the baseline forecast, rather than, as has been the case for a number of years, risks relating to various downside alternatives. Among the more optimistic scenarios that might lead to over-performance is the possibility that the fiscal stimulus in the US generates a more dynamic recovery, with some spillover outside of the US. Also, more significantly, the rare synchronous economic upturn in the global economy could be reinforced through trade, creating higher volumes.

“overconfidence in a single projection might be misplaced”

Of course, there remain areas of concern. Protectionist policies in the US could spark significant trade frictions, reducing total demand in most markets. Overvaluation in financial asset markets has been a worry for some time and the recent correction(s) could deepen in a Financial Market Turmoil scenario and begin to have a significant real-world impact. Finally, a persistent fear has been that China might seek to tighten policy aggressively to address an unsustainable build-up of debt.

The range of possibilities shown in the chart is quite stark, but that is the reality of the world we inhabit. As forecasters, we would always advise that overconfidence in a single projection might be misplaced. And what is clear from this analysis is that quantifying the impact of different futures is vital in making balanced judgements on future investment decisions.

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