Insight: Sterling flash crash not reflected in sales and RVs

November 07, 2016

The pound lost 12% of its value against the euro between June and October, falling from an exchange rate of £1:€1.26 to £1:€1.12. Moreover, the pound suffered a 10% drop in a single day on October 7 in a ‘flash crash’ although it rebounded the following day. Volatility in the value of the pound and the overriding uncertainty in the UK, both politically and economically, has had no visible impact on the UK car market. Data released by the UK's Society of Motor Manufacturers and Traders (SMMT) on 4 November reveal that new car registrations increased by 1.4% year on year in October. This follows a slight decline in June, a flat July and gains of 3.3% and 1.6% in August and September respectively. This is intriguing as it suggests that the run-up to the referendum actually had a greater destabilising effect on new car demand than the result, especially given the lag between orders being placed and converted into registrations.

The impact of currency movements on new car sales is impossible to quantify in isolation, but initial analysis does not reveal any clear correlation. Furthermore, the flash crash fall in the pound also occurred shortly after the change in registration plates in the UK. This boosts demand every year in both March and September.

Figure 1: UK, new car registrations (‘000s), and £:€ exchange rate, January 1999 to October 2016

Source: ACEA, SMMT, ECB 

However, the weak pound is already starting to have an inflationary impact on consumer goods prices. This led to a spat between consumer goods giant Unilever and supermarket chain Tesco over a proposed 10% hike in prices which culminated in Tesco removing Unilever products from supermarket shelves until an agreement was reached. Such price hikes squeeze household budgets and, in conjunction with rising fuel prices, are increasing inflation. However, the real test will be whether consumer confidence starts to fall as this will undoubtedly have an impact on consumer spending, especially for big-ticket items such as cars.  

There was a sharp fall in consumer confidence in July immediately following the referendum result, but it has rallied since. According to GfK, its consumer confidence index fell by two points from a score of -1 to -3 in October. Joe Staton, head of market dynamics at GfK, says: ’Declining optimism about economic prospects for the wider UK economy has depressed the consumer mood this month. Despite the continuing feel-good factor arising from persistent low interest and inflation rates, sterling’s sharp decline is arguably stoking fears that price rises will hit UK living standards hard next year. However, views on the state of our personal financial situation for the past year and next continue to remain positive (when comparing with 2015 levels), underlining that we feel more optimistic about situations we can control. This month also continues the upward trend on spending intentions with high levels of agreement in the Major Purchase Index. This shows that many consumers agree now is the right time for people to spend.’  

On balance then, there is no definitive indication of a negative impact on new car demand and this is supported by research by Motoring.co.uk which revealed no clear shift in car-buying attitudes. This sentiment was essentially echoed by Mike Hawes, chief executive of the SMMT at their Open Forum event on 1 November. The overriding tone was one of reassurance, reiterating that the UK economy and the automotive sector is fundamentally strong. Mike Wright, chairman of the Automotive Investment Organisation (AIO), also highlighted that the UK is the number one destination in Europe for foreign direct investment (FDI) and that the automotive sector ‘has led the charge’.  

On 1 November, the SMMT also issued its latest quarterly forecast for UK new car registrations, which is based on an average of data received from participating market analysts. The SMMT forecast for new car registrations in the UK in 2016 is 2.68 million units, up by 1.7% on 2015. Although this is lower than the market’s performance so far in 2016, the expectation throughout 2016 has always been that growth would weaken as the year progresses and so no major detrimental impact has been factored in as a result of the Brexit vote in June and the devaluation of the pound.   

While currency movements alone are not expected to impact demand, it has led to numerous carmakers increasing their prices. But even this is actually likely to have a limited impact on demand, given the large proportion of cars purchased on finance deals in the UK. The price will not be fully passed on to consumers in monthly repayment rates, especially as interest rates were cut to a record low of 0.25% in August. Nevertheless, the forecasts for new car registrations are rather bearish in 2017 and 2018, with declines of 5.0% and 1.3% expected respectively. This is certainly a reflection of expected political and economic turbulence as the UK transitions to exit the EU over a two-year period after Article 50 is triggered to start the process, by March 2017. It is also worth noting that UK new car registrations are at record levels and a correction was already anticipated before the referendum took place.  

Figure 2: UK, new car registrations forecast, millions, 2015-18

Source: SMMT  

Residual value analysis  

Given the limited impact on new car registrations in the UK since the decision in June to leave the EU, it makes sense that there has also been no tangible impact on aggregate residual values. Residual values for cars with a replacement cycle of 36 months and 90,000km were especially strong in 2014 as used car demand outstripped supply, which was still rather limited due to the weakness of new car demand back in 2011. However, residual values have been falling in 2015 and into 2016 as demand for used cars is increasingly satisfied by the improving sales of new cars in 2012 and 2013 flowing into the used car market. This seasonal pattern has continued into 2016, declining over the year except for spikes caused in March and September as a result of the new age-identifier number plates. In fact, the drop in residual values in June to August is slightly less pronounced than in previous years, which tallies with the robust new car sales in those months.

Figure 3: UK, aggregate RV percentage trends (36 months/90,000km), January 2013 to September 2016

This movement in aggregate residual value trends ties in with Autovista Intelligence research which reveals that stock levels of used cars have followed a standard seasonal profile in 2016 and have not increased as would have been expected if consumers were shying away from used car purchases as a direct result of the Brexit vote. In 2016, stock volumes are again at their lowest level in the autumn, coinciding with the spike in demand and residual values, but are naturally expected to rise towards the end of the year and again be at their highest in December to January. Looking ahead, residual values are expected to weaken further as the healthy recovery of new car registrations in 2013-16 flow through to the used market. However, there are significant downside risks if used car demand is adversely affected by the challenging times ahead for the UK as it navigates its exit from the EU. The key risk is that OEMs push new car prices higher and, moreover, monthly repayments increase as residual values fall. There could then certainly be challenging times ahead for both OEMs and fleet managers.






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