The global economic recession experienced in 2008 and 2009 was as a result of poor banking policies adopted in the United States. The federal government implemented a policy of deregulating sub-prime mortgages in the country leading to massive investment in the policies. Many investors borrowed money from banks to purchase sub-prime mortgage policies. By definition, sub-prime mortgage are policies with a high risk of default. The heavy investment in these policies caused an economic bubble which bust in 2007 leading to huge losses by the banking industry and the mortgage industry. As a result of the increasing rate of inflation as well as the rising oil prices in the global markets, many sub-prime borrowers were unable to repay their mortgage loans (Organization for Economic Cooperation and Development OECD, 2010).
Massive default in the mortgage policies caused bankruptcy in many banks and this lend to a national crisis. All other sectors of the industry were affected and because the economy of the United States connects other world economies, spill-over effects were experienced in other countries. Global trade reduced by great margins leading to a world economic recession (Organization for Economic Cooperation and Development OECD, 2010). After the recession many international organizations such as the World Bank and World Trade Organisation (WTO) intervened to improve trade and help governments restore their economies. In 2009 most of countries in the world started to recover from the recession. It is expected that most countries will have recovered completely from the recession in 2011.
The automobile industry is not only one of the most important sectors in the world but also a great revenue contributor to many countries. Peak in the production of automobile products in the global scene was reached in 2007 when approximately 73.3 million automobile products were produced. The rate of production declined in 2008 and 2009 by almost 14 percent leading to 60 new motor vehicles produced in 2009. The sales volume for automobile products declined by 1.3 percent in the European market during this period (OICA, 2010).
The global recession that was experienced in 2007 to 2010 has negatively affected the automobile industry. Some automobile industries have been forced to close business due to declining demand for these products. The recession affected the economic activities in the global markets and this reduced the incomes of most people leading to reduction in the purchasing power of customers in the automobile industry (House of Commons Business and Enterprise Committee 2009).
Severe inflation rates were experienced during the recession and this caused the prices of most products to rise up. The automobile industry was affected by the rise in oil prices because the industry uses oil as a supplementary product (Harari, 2010). Consumers developed a negative attitude towards the prices and car brands because automobile products are secondary needs to most people and during a recession their consumption is expected to decline. Inflation has been defined as a continuous increase in the prices for products in a given period of time. During the global recession of the 20070-2009 many countries experienced inflation and this caused a decline in the demand for automobile products. It is well known that the law of demand dictates that when prices increase the demand declines. This effect was felt in the automobile industry because inflation caused an increase in the prices for products leading to a decline in the demand for such products (Kash, 2002).
According to Levchenko, Lewis and Tesar (2009), international trade was affected during the economic recession and this affected almost all the industries. The suppliers and marketers of automobile products were affected by the declining prices for their products which corresponded with an increasing cost of production. During this period many automobile manufacturers had few resources to manufacture innovative products and this reduced the number of brands available in the market. Consumers in the industry developed a dislike for the common products in the market because few innovative brands were being developed. In the global scene, the market for automobile products reduced drastically due to reduction in demand for automobile products.
McLaughlin and Maloney (1999) opined that brand loyalty reduces during the economic recession period. Many consumers were forced to shift brands during this period in search for better brands at reduced prices. Brand loyalty refers to the tendency of consumers to re-buy from the same company. During a recession there is disequilibrium in the market and the need for price elastic products is experienced in the market. Consumers are ready to purchase products which are price inelastic during a recession. The prices of automobile products during the recession were not stable due to the changes in prices of related products (McLaughlin and Maloney, 1999). Brand loyalty was affected by the changing prices within a short duration leading to frequent shifts in demand. The automobile industry in the UK was affected by the changing market conditions and this led to a decline in the amount of sales made during this period.
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