Cap HPI warns that political and trade conflicts will reshape the automotive industry
In his latest global outlook, Dylan Setterfield warned of rising volatility and recession risks around the world. Crucial to that is China’s defiant stance in the face of escalating US trade measures.
“China has made it clear they’re not going to be bullied by US President Donald Trump,” said Setterfield, referencing Beijing’s dramatic response in the form of 145% tariffs on US imports. This retaliation deepens an already strained trade relationship and, according to Setterfield, may be only the start of a wider economic fallout.
Geopolitical flashpoints
Beyond trade disputes, geopolitical tensions are simmering elsewhere. Taiwan remains a critical flashpoint, with growing fears that strained relations between China and the island’s new government could boil over.
Setterfield underscored Taiwan’s strategic significance to the automotive sector: “The vast majority of automotive semiconductors are made by TSMC. If China were to invade, the impact on the industry could be significant.”
As well as the ongoing conflict in Gaza and tensions between Iran and Israel, instability in the Red Sea and around the Suez Canal continues to disrupt global shipping.
“We’re more than three years on from the Russian invasion of Ukraine,” Setterfield remarked. “Trump says he’ll sort that out in a day, but nearly 100 days into his return to the spotlight, there’s still no sign of resolution.”
He cautioned that if the US disengages, the burden of response will fall on the EU and its allies -already under pressure from inflation and trade friction.
UK and EU prospects
Turning to the UK, Setterfield was critical of the Labour Government’s policy direction: “They’re still trying to find their feet with a stated growth agenda, but they’re taxing business and upsetting everyone with a series of quite strange decisions.”
Even though UK carmakers are subject to lower US tariffs (10% compared to 25% for the EU), they continue to suffer from squeezed margins and a diminishing global role.
The EU, too, faces headwinds. Politically fragmented and economically strained, it could be at risk of deeper instability especially if the US adopts a more isolationist posture.
Tariffs and recession risks
Setterfield took aim at the rationale behind the latest wave of US tariffs, questioning whether any coherent strategy exists. “Probably misguided, maybe deluded,” he said, warning that such policies are far more likely to drive inflation and limit growth.
Referencing revised IMF forecasts, Setterfield noted that global growth projections have dropped from 3.3% to 2.8% this year, while US recession odds have jumped from 25% to 40%. JP Morgan’s outlook is even bleaker, placing global recession risk at 60%, largely due to the tariff standoff.
“They expect tariffs to hurt the American economy more than anyone else and believe that the damage done to the US and China could drag down the rest of the world,” Setterfield noted.
Financial markets
Setterfield also pointed to worrying signs in the financial markets. “The bears are certainly outnumbering the bulls,” he observed.
While stock indices such as the Dow Jones and NASDAQ have slipped, it’s the bond market that alarms him more: “With bond yields rising, any income from tariffs could be more than wiped out. The rising cost of government borrowing is a clear signal of market anxiety.”
Investors are fleeing to safe-haven assets, pushing gold prices to record highs.
Used car market resilience
Amid this turmoil, one sector stands out for its relative resilience: the UK’s used car market. Setterfield, using historical data to challenge the assumption that GDP contractions have a direct impact on used car sales. In a recession people buy cars, but they are smaller, older and higher mileage. That filters through the entire value chain.”
Luxury vehicle segments tend to be less affected too, while broader price shifts are more closely linked to vehicle supply than to macroeconomic trends.
ZEV Mandate
Setterfield also critiqued the UK government’s recent updates to the Zero Emission Vehicle (ZEV) Mandate. While some relief has been offered to manufacturers such as reduced fines and more flexible CO2 credit rules, Setterfield argued the measures fall short.
“We could have introduced real incentives to boost private retail demand – the list of missed opportunities is almost endless.”
Among the changes, hybrids and plug-in hybrids can now be sold until 2035, and CO2 credit flexibility has been extended. “Some significant changes,” Setterfield acknowledged, “but mostly aimed at easing penalties, not driving transformation.”
One possible bright spot lies in energy prices. Wholesale electricity prices have fallen by almost 30% since February. This could lead to a reduction in the UK’s cap on energy costs.
