Insight: UK New Car Market Outlook, July 2017
14 July 2017
Economic Update and Outlook
Despite the potential for the EU Referendum vote in June 2016 to derail economic growth, GDP exceeded expectations in the UK in 2016, increasing by 1.8%. Moreover, despite the economic weakness in the first quarter of 2017, the latest forecast from Oxford Economics still calls for GDP growth of 1.7% in 2017. This is just 0.1 percentage point lower than the growth achieved in 2016 and still ranks the UK as the third fastest growing of the Big 5 West European economies, behind Spain and Germany.
New Car Market - Review
In line with the economic resilience in 2016, the UK new car market exceeded expectations and expanded by 2.3% in 2016. This was the fifth consecutive year of growth and set a new record of 2.69 million new car registrations. However, despite the economy maintaining a healthy growth trajectory in 2017, new car sales plummeted 19.8% in April and fell by 8.5% in May.
In total, 243,400 vehicles were registered in June 2017, and while registrations were down 4.8% year on year, they did fall at a much slower pace than in April and May. Autovista Group concurs with the view expressed by the SMMT that this shows signs of a stabilising market, following market turbulence after changes to the UK’s vehicle excise duty (VED) were introduced in April 2017, with new bands to penalise the most polluting vehicles.
Demand in the month was down across private, fleet and business registrations, recording falls of 7.8%, 2.4% and 8.3% respectively. Meanwhile, the alternative fuelled vehicle (AFV) sector, covering hybrid, electric and hydrogen vehicles, enjoyed notable growth, with demand rising 29% to 10,721 units to maintain a record 4.4% market share for a second month. Petrol registrations rose by 2.5% and diesel fell by 14.7%.
In market segments, compact cars, typically powered by smaller petrol engines, remained the most popular choice for consumers, with superminis and small family cars accounting for almost 60% of registrations in June. Small family cars and SUVs were the only two segments to register growth in June, up 6.0% and 11.3% respectively.
Nevertheless, cumulative new car demand turned negative year on year in May and registrations were down by 1.3% in the first half of the year. The UK is the only one of the Big 5 West European markets to contract in the first half of 2017. Fleet and business buyers drove demand across the first six months with registrations up 1.5% and 2.7% respectively in contrast to a 4.8% drop in private purchases, although almost 650,000 private consumers have bought a new car in the first six months of the year.
Speaking about the figures, Mike Hawes, SMMT chief executive, comments: ‘As forecast, demand for new cars has started to cool following five consecutive years of solid growth but the numbers are still strong and the first half of the year is the second biggest on record. Provided consumer and business confidence holds, we expect demand to remain at a similarly high level over the coming months. It’s encouraging to see alternatively fuelled vehicles experiencing rapid growth but adoption is still at a relatively low level and more long term incentives are required if this new generation of vehicles is to be a more common sight on British roads.’
The much-maligned diesel market saw its overall share drop to 42.5% in June, a 5% reduction on the same month last year. In comparison, the market share of petrol was up 4% to 53%. Over the first half of the year, diesel’s market share has fallen by 4 percentage points compared to 2016, to 43.8%. This is a downward trend that continues across Europe.
New Car Market – SAAR Analysis
Considering the market in seasonally-adjusted terms reveals a truer picture of market developments than only considering the monthly movements in actual terms. Autovista Group has developed average seasonality based on registration figures between January 2009 and December 2016. Calculating out the SAAR (seasonally adjusted annual rate) of new car sales reveals that the annual rate has broadly stagnated since the EU referendum was held in June 2016 and also clearly shows the defined spike and fall in the selling rate of new cars in March and April as result of the introduction of the new VED regime on 1 April. Based on the performance of recent years, new car registrations for the first half of 2017 suggest an annual selling rate of 2.71 million units in 2017, which would equate to year on year growth of 0.6% in 2017. However, the market is expected to be slower in the second half than in the first and the SAAR analysis suggests a new car market of between 2.5 and 2.7 million units in 2017.
New Car Market - Outlook
Considering the SAAR analysis but also the uncertainty surrounding the departure of the UK from the European Union, Autovista Group has developed a base case forecast for the new car market in 2017 to 2019. This assumes that economic stability will prevail, punitive customs tariffs will not be introduced, interest rates will remain low and the pound will not be further devalued. Nevertheless, a slowdown in demand in the second half of the year of 4% compared to the second half of 2016 is assumed. Based on this scenario, 2.62 million new cars are forecast to be registered in 2017, with the market therefore suffering a contraction of 2.6% for the full year. The uncertainty surrounding Brexit negotiations is expected to impact on the market in 2018. Although it must be reiterated that a cooling of demand was to be expected anyway, especially after the rapid market growth since 2012 and the record level of registrations achieved in 2016. As it is, a further contraction of 2.0% is forecast in 2018. However, a recovery is expected in 2019 as details on the terms of the UK’s departure from the European Union begin to materialise and remove an element of uncertainty. Year-on-year growth of 1.5% is currently anticipated. This is of course rather speculative at this stage but provides a sense Autovista Group’s view on the market direction.
However, given the particular uncertainty in the UK, Autovista Group also deemed it pertinent to present upside and downside forecast scenarios. In an upside scenario, the environment of low interest rates and free trade between the EU and the UK is assumed as in the base case forecast scenario but healthier economic growth and a recovery in the value of the pound are also assumed, resulting in a market contraction of just 0.7% in 2017 based on the second half of the year holding at the same level as the second half of 2016. Furthermore, Brexit negotiations are assumed to have a far less derailing effect on the market and demand growth, albeit of just 1.0%, is expected in 2018. As in the base case scenario, details on the terms of the UK’s departure from the European Union begin to materialise but are actually even more favourable and the new car market is forecast to grow by 3.5% in 2019, setting a new record of around 2.8 million new car registrations.
Finally, in a downside scenario, the UK economy is expected to grow at a slower rate than currently forecast, possibly even contracting, and it is assumed that consumer confidence and business confidence would tumble and interest rates would rise. Standard WTO customs tariffs of 10% would be applied to the automotive sector too, impacting not just new car prices but also parts costs and in turn, insurance premiums. Another challenge to UK car sales in the form of tighter consumer credit also factored in. As it is, the Financial Conduct Authority (FCA) is planning to investigate the British car finance market, which is behind a massive expansion in consumer credit. Concerns are growing about its ever-more debt-financed growth, which is delaying an expected considerable national decline in borrowing. The industry has been boosted by high uptakes in Personal Contract Payment (PCP) car loans. Now the dominant form of car loan, PCPs require a fixed period from which there is rarely the ability to opt out. This risks trapping people in debt spirals, if proper checks are not made.
Speaking about the results, Graham Hill, car finance expert at the National Association of Commercial Finance Brokers, adds: ‘New car registrations have continued to fall, albeit at a slower pace, for a third consecutive month as VED tax changes and dwindling consumer confidence start to bite. It was always forecast that March's stampede to beat the VED deadline would in turn mean less registrations in consequent months, so this is no great surprise. Set against the wider backdrop, the new car market is still in rude health - after all, the first half of the year was the second biggest on record.
‘A large proportion of this success has to be attributed to the uptick in car finance, which accounted for around 86% of new car sales last year. However, as the FCA continues to look into the lack of transparency around the selling of certain car finance deals, the sabre-rattling around the actual finance products themselves needs to soften. It already looks like the adverse publicity surrounding Personal Contract Purchases in particular has knocked consumer confidence in the product. Carry on like this and we risk driving away consumers and talking the market into an early grave.’
In this downside or even ‘early grave’ scenario, based on a contraction of 8% in the second half of 2017, full year car sales could slump to 2.57 million units; 4.5% lower than in 2016. A further contraction of 4.5% is forecast for 2018 and with WTO trade rules taking effect, a further decline of 5.5% is anticipated for 2019. This would take the new car market back to a level of 2.32 million units, which is only 60,000 units higher than in 2013.