Global demand for new light vehicles (cars and light trucks) is softening and analysts at Moody’s Investors Service forecast global unit sales growth of just 1.1% in 2017. That growth level is below the company’s threshold of 2% in order to earn a stable outlook and, consequently, Moody’s now rates the automakers’ outlook for the next 12 to 18 months as negative.

In the United States, the market for new light vehicles is flattening out after solid growth since 2010. Moody’s base case forecast calls for U.S. light vehicle sales to rise 0.3% in 2016 to 17.5 million units and to decline to around 17.4 million units in 2017. In the firm’s downside case, sales could tumble to 16.5 million units next year.

Carmakers also will continue increasing incentives to attract more buyers. Since posting a low of around $2,500 per vehicle in 2012, incentive spending has risen to more than $3,100 per unit as of July. Moody’s noted:

While automakers can remain quite profitable at these levels, they must keep incentives and discounts in check. This will be challenging without capacity reductions, which do not seem to be imminent in North America.

Building fewer cars and pickups has so far, at least, been off the radar for both General Motors Co. (NYSE: GM) and Ford Motor Co. (NYSE: F). GM has a Moody’s credit facility rating of Baa3, the firm’s lowest investment grade rating, with a positive outlook. Ford’s rating of Baa2 is one notch higher, and Moody’s outlook for Ford is stable. Both companies “have trumpeted their continued operational and financial discipline, which came out of the 2009 downturn and subsequent restructuring of the US auto sector, but stalled growth will test that discipline,” Moody’s says.

In Western Europe, Moody’s expects base case sales to improve 8.1% to 16.07 million units in 2016 before falling by 0.4% in 2017. In its downside case, sales could drop 5% year over year in 2017. The key challenges for all European automakers, according to Moody’s, are “coping with rising costs as a consequence of carbon-emission regulation, the technological shift toward Alternative Fuel Vehicles (AFV) that require significant investments, as well as rising competition and the resulting price pressure.”

New car sales growth in China is forecast to rise 6.7% in 2016 and another 2.7% in 2017. Pricing pressure is rising in China as domestic carmakers now pose a sharper challenge to foreign makers, particularly in the market for small passenger cars.

Demand in Japan is forecast to remain weak. Moody’s forecasts 2016 sales to contract by 2.4% and to gain just 0.9% in 2017. A stronger yen increases export margin pressure on Japanese automakers Toyota Motor Corp. (NYSE: TM) and Honda Motor Co. Ltd. (NYSE: HMC). Moody’s notes that the effect is most significant for Toyota, where unit exports accounted for about 18% of its global production for the most recent fiscal year that ended in March.

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