Adrian HollidayUK car sales fell almost -10% in 2017 while investment slumped by more than a third, new, figures reveal. Some of sales collapse is blamed on Brexit anxiety, some on flailing diesel car demand. Overall 1,671,166 cars were built in the UK in 2017, compared to 1,722,698 in 2016.
At the start of 2017 the Society of Motor Manufacturers and Traders (SMMT) predicted a -2.6% slowdown in UK car registrations for the year. Professor David Bailey, an expert in economic restructuring and industrial policy at Aston University, says this estimate was way too optimistic.
“I’d foreseen,” he told Capital, “a 5-10% 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 PCP-fuelled car buying boom could go.”
Bailey thought the market was over-trading. “As it turned out, domestic sales were down by over -9% in 2017. What’s more, none of the factors acting as a drag on car sales have gone away.”
Car sales are increasingly reliant on credit and surging PCP deals: ShutterstockTrouble further down the road?
More than 80% of new car sales in the UK are funded by credit – personal contract purchase loans – according to the Finance & Leasing Association. In other words, the vast majority of all new metal on UK roads is driven by consumers who normally could not afford to be behind the wheel.
In 2017 Morgan Stanley estimated the UK car industry was underpinned by a £41bn credit bubble. While the car market is a fraction of the UK’s housing market, the risk principle is similar: PCP deals are built around valuations – specifically the Guaranteed Future Value (GFV) calculation. If this slips then the whole chain – finance lease company, driver – suffers.
PCP – a 15-sec explainer
- PCP spreads the cost of a car across monthly payments plus an optional final payment
- It essentially funds depreciation costs – what the initial price is and what the car is worth when returned after a set period
- But it’s the driver who has “equity” in his PCP vehicle who shoulders the ultimate devaluation risk
- Some deals start from less than £100 a month for a brand-new, fully warrantied car. No MOT or expensive servicing to worry about
PCP deals enable many to 'trade up' to an Audi or BMW – ShutterstockMore automotive weakness in 2018
The UK’s PCP market is now very close to absorbing several large waves of decent quality – ease of PCP credit has encouraged many to trade up to the class above – used vehicles, thereby exerting pressure on existing values. This might be manageable when the economy is doing okay. But what if it tanks?
Professor Bailey says the new car market in the UK must contract further. “I can see another contraction of the order of -5-10% for the year,” he told Capital. “Even after a fall in 2017 and a further drop in the -5-10% 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 he thinks. But quite what the ‘new normal’ will be in terms of UK car registrations isn’t clear.
