Car market to be stuck in the slow lane in 2018?

15 February 2018

Professor David Bailey examines what impact the latest car registration figures will have on the automotive manufacturing sector.

At the start of 2017, the trade body the Society of Motor Manufacturers and Traders forecast a 2.6 per cent slowdown in car registrations for the year.

This was way too optimistic.

I'd foreseen a five to ten per cent fall in 2017 on the back of economic slowdown linked to Brexit uncertainty, rising import prices on the back of a fall in the pound, the turn against diesel in the wake of 'dieselgate' and a big question mark over how far the Personal Contract Purchase (PCP)-fuelled car buying boom could go.

Put simply, I thought the market was over trading. As it turned out, sales were down by more than five per cent in 2017.

What's more, none of the factors acting as a drag on car sales have gone away. Add to the mix the Bank of England's rise in interest rates and a sustained pick up in European car markets.

The latter means that manufacturers are no longer offloading cars on a UK "treasure island" market.

As a result, the new car market in the UK is set to contract further in 2018: I can see another contraction of the order of five to ten per cent for the year.

It should be noted that, even after a five per cent fall in 2017 and a further drop in the five to ten per cent range in 2018, the market will still be operating at historically high levels.

This isn't a "crash" but rather a slowdown linked to economic factors and a market correction.

Quite what the new normal will be in terms of UK car registrations is not yet clear.

With real wages being squeezed by a wider pick-up in inflation, households are holding off on new car purchases, a traditional cyclical 'big ticket' item.

Car sales were a boost for the UK's post-crash economy up to 2016.

Low petrol prices and attractive financing deals boosted sales which in turn helped economic growth in the UK.

But now a softening economy, falling consumer confidence, rising prices, muted earnings growth and the effects of dieselgate are likely to mean another slowdown in car sales in 2018, with consumers likely to delay purchases or trade down to cheaper models.

Diesels are likely to be most hit amidst a perfect storm of bad publicity over air quality and concerns over tightening regulations and residual values.

Diesel sales are set to fall by as much as ten per cent in 2018 and their market share could be as low as 30 per cent by 2020 and 15 per cent by 2025.

Only a few years ago, diesels accounted for 50 per cent or more of the market.

Used diesel prices are also down, owing to the shift away from diesels.

Petrols, petrol/hybrids and a burgeoning array of electric vehicles are set to see growth, especially as the price of the latter and their range improve dramatically.

I also expect car sales to fall through 2018 as the credit-fuelled new car sales boom reaches the end of the road.

Over 75 per cent of UK new car sales are financed by lenders and cheap credit has driven sales, particularly via PCP financing schemes.

PCPs are a nifty financing model, for sure.

But, the PCP structure depends on that residual value remaining robust and keeping the monthly repayments affordable.

Dark clouds are looming on the horizon which may dent to the ability of PCP to keep cars coming out of the showrooms at quite such a rate: used car values and a slower economic growth.

In effect, the surge in PCP-propelled new car sales may lead to a wave of used cars hitting the second-hand car market, in turn depressing second hand values (unless broader economic growth is fast enough to boost confidence and used car sales).

That in turn could impact on the very collateral that lenders rely on to make PCP deals work.

If so, car firms may take a hit on the value of used cars being returned and PCP rates may start be less attractive in the future. That in turn could act as a further drag on the market.

All in all, 2018 will likely see car sales stuck in the slow lane.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

Related   Automotive