Swiss monetary stability and Chinese cars...

There is a wide gap between perceived and actual inflation. This has a striking impact on consumers' buying behavior. In addition, China is in the fast lane in the field of electric vehicles. They are increasingly displacing European brands. This is shown by two studies recently published by the credit insurer Allianz Trade.

Inflation rates in Germany and Austria up to four times as high

The Swiss continue to live on an island of monetary stability. They recorded an inflation rate of just 2.2 % in May 2023. By contrast, inflation rates in Germany and Austria are almost three and four times higher, at 6.1 % and 8.8 % respectively. The Allianz Trade study has now investigated this major divergence in price increases in the countries bordering the Alps. It also explains why perceived and actual inflation are currently so far apart. The last time this was the case was when the euro was introduced more than 20 years ago. According to Jasmin Gröschl, senior economist at Allianz Trade, inflation was last seen at nearly 17 %, about a whopping 9 percentage points (pp) higher than the actual inflation rate this quarter. "In Germany, the divergence in perceived inflation of more than 18 % was as high as 11pp. This is not insignificant, because perceived inflation strongly influences consumers' actions, for example in their purchasing behavior. So this discrepancy plays an important role for the economy and companies in particular, as well as for interest rate policy," the expert explains.

There are various reasons for this discrepancy. Consumers, for example, pay more attention to price changes for frequent purchases such as food and beverages, gasoline or other errands for everyday use. If these prices rise at an above-average rate there, people tend to perceive a much higher inflation. But psychological aspects, demographic and regional differences, and individual consumer behavior can also cause consumers to assess price increases differently from official inflation measurements. This creates a distorted picture and a strong discrepancy between perceived and actual inflation.

Why is inflation so much lower in Switzerland than in Austria or Germany, for example? "Key factors in inflation are geographical proximity to Russia, dependence on energy and food imports, government intervention to lower individual prices, and the strength of the respective currency," explains Gröschl. Switzerland benefits from its location, from the Swiss franc, which has been strong for a long time, and which dampens inflation via import prices and the different consumption structure due to the higher income level in Switzerland. In addition, Switzerland is largely self-sufficient in hydroelectric and nuclear power and imports very little food. Fluctuations in food prices on the world market are regulated by variable tariffs that protect domestic producers and consumers alike. As a result, many goods are more expensive in Switzerland, but prices are less volatile.

Chinese cars in the fast lane

It may also be inflation that is fueling the trend toward cheaper electric cars made in China. Chinese cars are gaining ground both in the domestic market and increasingly in the European markets and are expected to significantly increase their market share in the coming years. A further study by Allianz Trade has examined scenarios and investigated possible resulting losses in value creation for carmakers. The latest analysis looks at whether the industry could consolidate further as Chinese competition increases. "We think a new wave of consolidation through mergers and acquisitions in the European market is unlikely - if only for antitrust reasons, because the market shares of the major European carmakers are already very high," says Aurélien Duthoit, industry expert at Allianz Trade. "But that doesn't mean manufacturers can sit back and relax: To keep up in the long term, they need to make significant efficiency gains without mergers."

It is indeed the case: In addition to IT connectivity and design, cars manufactured in China score points primarily on price. The manufacturers achieve this in particular through mass and the resulting economies of scale. The takeover of smaller market players would therefore not significantly advance the European carmakers, and larger mergers are unlikely. The only way forward is through efficiency gains, firstly by forcing smaller players out of the European market, secondly by developing new horizontal and vertical industry partnerships to pool resources in capital-intensive areas, particularly in the manufacture of electric batteries, and thirdly by further consolidating production to a smaller number of platforms and factories for greater standardization.

New industry partnerships play a key role in survival, because electric batteries in particular are the biggest price driver. "Europeans should join forces, even without mergers or acquisitions, to achieve efficiencies, especially in capital-intensive areas," Duthoit says. "They remain in a very good position. But they should now shift up a gear to make up for the ground lost by the Chinese lightning start in electromobility."

Source: Alliance Trade