The automotive sector is one of the most important in the UK, directly hiring 156,000 people and nearly 800,000 indirectly, according to 2020 figures from the Society of Motor Manufacturers and Traders (SMMT).
The fortunes of the sector therefore have a big impact on both households and the web of businesses that support the industry, but what state is the industry in?
Automotive businesses were in trouble at the start of 2022
At the start of 2022, the global automotive market was seriously struggling. Since the pandemic ravaged the global economy in 2020, there had been a significant shortage of semiconductors. This led to an increase in their price.
Modern cars, heavily reliant on computer chips for everything from engine control units to parking sensors, saw their prices increase in kind, with delivery times jumping in line with this as manufacturers struggled to build vehicles.
Used cars were increasingly the only option available to motorists. Demand for them pushed up prices in this subsector too. Mechanics became more expensive too – replacement electronics saw their prices rise as well, after all. All this has dampened the automotive economy.
What is the state of the automotive industry today?
Thankfully, the slow return to normality has led to an easing of the chip shortage. In August 2022, JP Morgan predicted that the shortage would ease in the second half of 2022 owing to reduced demand in other sectors like consumer electronics. Great news for drivers? Not exactly. The investment bank believes that supply of semiconductors won’t fully meet demand until 2024.
So, does this spell doom for the industry? Sort of. Hopefully, car prices should decrease with the increase in supply, but will only increase again as another economic phenomenon makes itself known: inflation.
Inflation (an increase in prices) is hitting every major economy. This is having a big effect on exchange rates – the kind that forex traders buy and sell for profit – which ultimately means most things imported are going to cost more money. That means rising car prices for automakers purchasing parts from areas with lower inflation, such as chipmakers in East Asia.
What’s the long-term economic outlook for the automotive industry
The short-term implications of all these shocks are poor, but with inflation peaking around the world and demand reducing due to increased prices and interest rates, fewer industries should be in need of chips, reducing the supply issues for automakers and boosting their chances in kind.
What do you think will happen to the automotive industry? Let us know your thoughts in the comments section below.
