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West European car sales are gaining momentum as underlying economic conditions improve, and analysts are scrambling to raise their estimates for the year with LMC Automotive reporting an annual sales rate of over 13 million for the first time in 3-1/2 years.

Morgan Stanley upped its forecast for 2015 Western Europe car sales to a still modest 3.6 percent from its previous forecast of a 2.5 percent increase. This compares with LMC Automotive’s latest prediction of a 6.1 percent gain for the year. In January LMC was only predicting a 3.0 percent increase for the year.

But Morgan Stanley remained wary about a lasting improvement because of a lack of improvement in French and Italian unemployment.

Earlier this year consensus pointed to an anemic European sales gain of between two and four percent. Last year Western European sales grew 4.8 percent to 12.1 million.

Standard & Poors said things are looking better in Europe because of the drop in oil prices, the weak euro and Quantitative Easing (QE).

“Standard & Poor's economists have revised upward their forecast for eurozone growth by 0.5 to 1 percentage point on average across the region's economies, compared with their December forecast, owing to the effects of the drop in oil prices and the euro, and the start of the ECB's quantitative easing,” S&P said.

“We estimate that the 50 percent drop in international oil prices between June 2014 and January 2015 should lift European consumption by 0.4 percent on average in 2015. The 20 percent drop in the euro exchange rate against the U.S. dollar, and a drop of similar magnitude in the euro effective exchange rate since June 2014 is a boon for the eurozone's export competitiveness. We estimate that the weaker euro will add 0.3 percent on average to eurozone exports,” S&P said.

S&P had some cautionary thoughts though.

“However, we believe we are still far from a stable and robust recovery and serious downside risks remain, ranging from geopolitical to execution risks around QE,” S&P said.

LMC Automotive analyst Jonathon Poskitt didn’t address any potential problems in his latest report, quite the reverse, which he said included Western Europe sales up nearly nine percent in the first quarter for a current annual sales rate of 13.1 million a year.

“Taking into account recent results, it appears we are finally seeing a strong rebound in the market after years of underperformance. Accordingly, we have adjusted our forecast upward to 12.8 million units for 2015, though there remains the potential for further positive surprises from a market that has been operating at such a low base for years,” Poskitt said.

Meanwhile, the stock market was fulfilling its role as a long-term leading indicator, and looking beyond short-term trends and worrying about what the future might hold. Since last October, Europe auto stocks have been the darling of the market, gaining about 50 percent compared with the overall stock market’s gain close to 20 percent, presumably because investors had shrewdly foreseen 2015’s gains.

Morgan Stanley’s Harald Hendrikse wondered if this rally had any steam left in it.

“In March, the (auto) sector matched 25-year extremes versus trend, seen only in 1999 and 2007. Those rallies did not end well. Although we cannot forecast peak, is this a good time to take profits?” Hendrikse said.

“Although historical comparison suggests this rally could be sustained a little while longer, it also suggests to us that downside risks on a 12 million view are becoming very significant, suggesting the risk/reward for the sector has deteriorated,” he said.

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