Whether you are an Ernst Hemingway fan or a Metallica devotee, you will get the reference. The bell is tolling for the automotive sector! There is a visible slowdown in the automotive industry which can be easily explained by the economic crisis situation Pakistan has once again found itself in. This slowdown will likely be prolonged as the economy trudges out of this quagmire. But while it does, consumer spending, consumption patterns and manufacturing will undoubtedly suffer. The auto industry is now registering a double digit negative growth—starting with the commercial segments and ending finally with passenger vehicle segment that was the most resistant to changes in the economic climate.
But their time is here. Suzuki sales have declined by 10 percent in the 10-month period of the fiscal year, Honda by 11 percent, with Toyota still showing a positive growth of 5 percent due to Corolla, but will likely join its peers in negative volumes very soon. Motorcycle sales have fallen by 7 percent. One can’t say they didn’t see it coming. Warning signs had been blared—month after month increase in prices of vehicles, monetary policy tightening and retightening, and overall inflation.
Car makers have raised prices up to 25 percent for different vehicles in the past year or so. It was estimated that together with rising interest rates, the additional burden on an average consumer would be more than Rs10,000 per month. That analysis was based on numbers for Dec-18, but since then, companies have raised prices further, and policy rate has also been raised (read: “How much is Rs10,000 worth?”, March 28, 2019). The burden would be much higher.
It is however interesting to note that while demand is significantly and highly sensitive to per capita income and interest rates; it is not as sensitive to changes in prices of vehicles. Research done by Hafiz Pasha et al. for International Growth Center shows that a) income elasticity are high for demand of different types of vehicles i.e. changes in the growth of real per capita income in the economy will have a “magnified effect on demand for vehicles”; b) price elasticity of vehicle are low i.e. changes in prices of vehicles will have little effect on demand; c) elasticities with respect to interest rate are significant and moderately high i.e. when interest rates fall, vehicle demand soars and when interest rates increase, demand weakens. (In layman’s terms: elasticity is simply a measure of how sensitive one variable is to changes in another).
Globally, demand is highly sensitive to prices as well as income in the short-term but the low elasticity of demand in Pakistan with respect to prices is because there are fewer substitutes and for many, the lack of public transport makes vehicles a necessary purchase.
It is clear that the decline has already come into the passenger car segment will persist and the negative growth will grow as consumers’ purchasing power declines. What remains to be seen, and is a potential area of study for economists interested in the industry, is to determine which segments within the car industry are more (less) sensitive to prices, income and interest rates which can narrate how different income groups adjust spending behavior as the economy enters the different boom and bust cycles. Such a study could even create an understanding for inequality in the country.