Lower interest rates in the United States: what impact for the automotive industry?

Among the many consequences of the Covid19 pandemic, confinements and supply chain disruptions, inflation is certainly the most noticeable for households. The U.S. Federal Reserve has undertaken several interest rate hikes to slow demand and curb rising prices. This Wednesday, the Federal Reserve decided to start lowering rates by half a point. The question now is how the automotive industry can benefit from this change.

From the real estate market, to company transfers, to car purchases, interest rates punctuate the lives of Americans.

For real estate, high interest rates have a double impact. Firstly, the purchase price of a home is higher because of particularly expensive loans. Secondly, the dynamics of a sluggish market lead to price stagnation, as sellers who need to find a property are faced with high price levels, limiting the potential for future buyers. At the same time, Americans benefit from a number of advantages, including the ability to refinance their home loan at regular intervals, as well as a type of mortgage to finance extensions to their home or simply to buy a car.

Secondly, for companies and investment funds, the fall in interest rates means that companies can be acquired more frequently, or at higher prices. This is an important part of the American economy. Finally, lower interest rates also mean easier or cheaper access to purchasing or leasing. The automotive market greeted the news with great enthusiasm.

Gentle liberation of the automotive market
The outlook for the automotive market is not exactly rosy at the moment. Slowing adoption of electric vehicles and rising car prices are putting the brakes on as we head into 2024. Production volumes for 2025 could be down very slightly. In Europe, prices and taxation (and indirectly emissions standards) are holding back the market more than rates. In North America, high interest rates are also one of the reasons for the market slowdown.

To understand the mechanics of the matter, you need to know that market forecasts are based on six main indicators. GDP, i.e. growth, is the first demand factor. This is followed by income growth, the household savings rate, the unemployment rate, inflation and interest rates. Other factors come into play, but they are relatively minor. When it comes to cars, taxation, particularly in Europe, is a major factor in car inflation. Consider that, on the Old Continent, car prices have risen by more than 18% between 2020 and 2023, while wages have only increased by around 8%.

In the United States, the market is slowed down by the concomitance of a market that is seeking to become more electrified, with the introduction of numerous BEVs (battery electric vehicles), and a residual policy of maintaining automakers' margins through a certain favoritism for larger models or higher finishes, which keeps the market at a distance from certain households. Finally, some manufacturers, such as Stellantis, have not renewed their models sufficiently to maintain a certain sales momentum. The result is a wait-and-see attitude on the part of consumers, all the more so as many of them exited their leasing renewal cycles by buying their vehicles when prices were particularly high in the two years following Covid.

The half-point cut in interest rates is not enough to give a real boost to the car market, but the government could make further cuts between now and the end of the year, and this is part of a dynamic of rising demand. Purchase loans and leases could increase in number over the coming months, particularly with the end-of-year targets for dealers, who would be more inclined to grant more favorable acquisition conditions to consumers. In addition to the major banks and captives, many dealer groups have their own credit agencies. For them, lower rents are likely to boost financing capacity.

And beyond for the industry
In addition to consumers, industry can also benefit from this initial fall in interest rates when it comes to financing plant and model projects. As a result of the Inflation Reduction Act, many automakers have invested in battery manufacturing and BEV assembly plants. Half a point is not likely to revolutionize accounts and results for automakers, but it is an encouraging first step that may bring advantages in the need to relaunch ranges with new hybrid projects. In addition, the three Detroit-based automakers have been hit by wage increases under the new contracts negotiated by the UAW in 2023. A problem that Volkswagen will have to face very soon, as the UAW moves into its Chattanooga plant in Tennessee. Against this backdrop, the financial impact of lower interest rates is more than welcome.

It may also boost investment in new technologies, or, on the contrary, facilitate the carve-out of certain activities that will be more easily snapped up by investment funds (PE firms, or Private Equity). Since 2022, the buying and selling dynamic of PE firms has been slowing down. At the same time, the end of the financial markets' enthusiasm for mobility in the broadest sense has slowed down IPOs for new activities. A fall in interest rates may encourage automakers and equipment suppliers to generate cash by divesting certain activities that will find easier buyers, particularly within the investment fund universe. But it will take time for this dynamic to recover.

Finally, an increase in the number of changes of hands is also expected on the dealer side. Consolidations are numerous, and the momentum could accelerate as early as next year.

Further declines on the horizon
The Fed (another name for the Federal Reserve, the US central bank) has yet to make an official announcement, but two further interest rate cuts are expected between now and the end of the year, one in November and the other potentially in December. For the moment, Wednesday's announcement was enough to put a smile back on the faces of investors and manufacturers alike.

For consumers, it's good news at a time when interest rates are averaging over 7% for new vehicles and over 11% for used ones. We're a long way from the 4.5% and 8%, respectively for new and used vehicles, common in 2022, but it's very encouraging. This won't necessarily change the decline in BEV adoption since, in addition to high tariffs, electric vehicles suffer from technologies that are still unaffordable and constraints on use linked to recharging time and the lack of sufficient recharging networks. But for those, like Stellantis, suffering from rising inventories, this boost in interest rates could ease the cost of commercial offers to destock.