New car sales go into reverse in the UK
A Brexit-induced price rise and increases in taxation bring sales boom to an end
After several years at full throttle, new car sales in the UK have gone into reverse.
Sales of new vehicles have fallen for seven straight months since April, according to the Society of Motor Manufacturers and Traders, the industry trade body. So far this year, new car registrations are down 4.6 per cent compared with the same period in 2016.
Analysts and economists say a potent mixture of factors explain why the market has turned, ranging from higher car prices because of Brexit-induced inflation to government moves to increase vehicle taxes.
But experts’ starting point is to flag how there were six strong years of car sales between 2011 and 2016, so now fewer people are looking to buy vehicles compared with previously. The average age of a UK car on the road is just under eight years, according to the SMMT.
“The cycle has naturally had a strong run,” says Mike Allen, an analyst at Zeus Capital. “We were due a downturn.”
The UK vote to leave the EU has had some impact on new car sales, because sterling’s fall in value since the Brexit referendum last year has stoked inflation — including vehicle prices.
New car prices increased by 3.2 per cent between January and October compared with the same period last year, according to the Office for National Statistics, the UK statistics agency.
Almost every mass market carmaker raised prices as they faced higher costs when importing vehicles to Britain.
Even companies that manufacture cars in British factories, such as Nissan and Toyota, were forced to pay more for the components they ship in from continental Europe.
Meanwhile consumer confidence in the UK following the EU referendum is hovering close to its lowest level since 2013, according to data issued by the European Commission, and that may well have hit car sales.
A car is the most expensive item most people buy after their house, and economists say vehicle purchases are closely tied to consumer confidence.
“Car sales are very sensitive to consumer confidence,” says Samuel Tombs, economist at Pantheon Macroeconomics. Usually it takes about six months to see the effects of a drop in confidence feed through to car sales, he adds.
Another factor weighing on the car market may be regulators’ concerns at the growth of cheap financing deals.
There has been widespread use of so-called personal contract purchases — where customers pay a deposit and monthly payments for a fixed period before having the option to buy the car outright — since the financial crisis, when the Bank of England cut interest rates to historic lows.
But the Financial Conduct Authority launched a review of these deals in the summer, and a Bank of England survey of credit conditions in the third quarter identified weaker growth in car dealership financing.
However these PCP deals also force consumers to make a decision about a new car when their contract ends — helping to drive sales that motorists would otherwise have delayed.
The deals also lessen the impact of price rises, spreading them across monthly payment.
Analysts and dealers therefore say that without the high penetration of PCP deals — around 80 per cent of new car sales — it is highly likely new car sales would actually have fallen much further.
A further factor influencing car sales was the introduction in April of higher taxes on more expensive vehicles and those that emit the most carbon dioxide.
As a result, sales in the first quarter boomed as people bought cars early to avoid the more onerous taxes. New vehicle registrations in March rose 8.4 per cent compared with the same month last year.
A bigger negative for new car sales could be the government’s efforts to safeguard the environment by encouraging people to buy electric vehicles rather than petrol or diesel cars.
In July Michael Gove, the environment secretary, proposed a ban on sales of new petrol and diesel cars from 2040, although hybrid vehicles were excluded. Then last Wednesday Philip Hammond announced in the Budget that buyers of new diesel cars would face a one-off payment of up to £500.
The Volkswagen scandal in 2015 highlighted how vehicles powered by diesel engines emit significant amounts of nitrogen oxides — key contributors to air pollution — and there are signs of a consumer backlash against the fuel.
Diesel car sales fell 14.9 per cent between January and October compared with the same period last year, while alternative fuel vehicles including electric and hybrid models rose 34.8 per cent.
“There’s a lot of uncertainty about the government’s stance on diesel cars and emissions generally,” says Ian Crowder of the Automobile Association.
The uncertainty over how far the government will go to try to discourage vehicles reliant on fossil fuels, as well as broader questions on the form Brexit will take, are likely to weigh on the car market for some time to come.
For this reason, in its latest set of forecasts issued in October, the SMMT predicted that car sales will fall not just this year but also in 2018 and 2019.