An uncertain future for the new and used car sectors?

car for saleFrom time to time K2 looks at the health and performance of specific sectors of the UK economy and this time it is the turn of the new and used car markets.

Data published by the Society of Motor Manufacturers & Traders (SMMT) tracks the monthly patterns of both production and sales in this sector and gives some sense of the overall picture.

After a record start to the year manufacturers reduced production by -9.7% in May 2017 compared with May 2016, when output increased by +26%. The SMMT says that exports are still the main driver of demand in the new car sector with almost 80% of all cars made in the UK going to Europe.

Also in May production for the home market fell -12.8% in May, down -8.1% on the year to date. Today’s June production figures show a continuation in the decline, down by 13.7% compared with a year ago.

Similarly, a three-month reduction in UK sales continued into June, when sales fell by -4.8%, following declines of -8.5% in May and -19.8% in April.

Meanwhile sales of used cars continued to rise throughout the first quarter of the year, up by +3.4% on the same quarter in 2016.

What is going on behind the new and used car figures?

The SMMT figures can be put in the context of Markit/PMI’s overall monthly manufacturing trends, where rates of increased production have been slowing throughout the second quarter (April to June).

It seems that the Brexit factor is beginning to weigh heavily on manufacturers, such that while the fall in the value of £Sterling since the 23 June 2016 Referendum decision to leave the EU has helped exporters, the increase in import costs for materials is having the opposite effect on domestic sales. These costs are now being passed on to domestic consumers.

Also, with the leave negotiations now under way, amid considerable uncertainty about the direction they will take and the outcome, it would not be surprising if producers held back from significant investment for growth.

Particularly for the consumer-dependent sectors of the UK market it is likely that wage growth stagnation, increased inflation and concerns being expressed by the Bank of England, among others, about high and increasing levels of consumer credit debt are also likely to contribute to a decline in new sales.

The rise in sales of used cars would bear this analysis out.

However, another factor that may have accounted for the significant dip in UK sales may be the April 2017 changes to road tax, which imposed new charges on all cars registered from 1 April 2017, and removed road tax exemption from hybrid vehicles, leaving only all-electric vehicles zero rated for road tax.

Finally, calls for the Financial Conduct Authority (FCA) to investigate the ease with which credit is being made available to UK new car purchases may well be adding to the dampening effect on consumer confidence in committing to a purchase.

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