Brexit Begins: The UK Car Market Feels the Impact in June Already and Ahead Lies Only Uncertainty
My colleague, Caroline Bremner, Head of Travel, wrote on June 28 that “Dark clouds have gathered over the economic and political future of the UK following the dramatic decision to leave the European Union announced on 24 June 2016.” Only twelve days later and it appears that the dark clouds haven’t just gathered but have already unleashed a storm that is battering the UK’s automotive sector. According to data released by the SMMT trade association today, 6 July, new car registrations declined in June, albeit by only 0.8%. However, this is still the first market contraction since October 2015, which came after 43 consecutive months of growth.
It is course impossible to quantify accurately the impact of the Brexit on the UK’s car market and as the result of the referendum was only announced on June 24, it was undoubtedly weakened in June moreso by consumers being distracted by the coverage and uncertainty leading up to the referendum as well as the Euro 2016 football championship (especially with Wales and Northern Ireland participating as well as England) than the result itself. However, the fact of the matter is that fewer cars were registered in June 2016 than in June 2015. This was with the same number of working days too, whereas there was actually one fewer in October 2015 than in October 2014 which largely explains the market’s contraction then. Technically then, one could argue that the car market actually grew for 51 consecutive months until the newly infamous landmark Brexit month of June 2016.
Looking ahead, it is very difficult to be optimistic about the outlook for the UK’s car market, at least in the short term, with the negative impact on economic growth, employment, inflation, fuel prices, the pound and of course consumer confidence as reported in Brexit: What Next for the UK? In fact, the only foreseeable positive for the car market is that interest rates may fall but as they’re already at a low of 0.5%, there is little room for movement. Aside from the core economic concerns, there even remains uncertainty about the future of the some 3 million EU citizens residing in the UK, with no assurances from the government that their status is secure. It is certainly difficult to envisage any of these consumers investing in big-ticket items such as cars while they’re essentially in limbo. Similarly, it is unlikely that many UK citizens across the EU will be looking to purchase a car, especially those who rely on pensions, the value of which has been dramatically reduced as the pound has slumped from equating to €1.30 immediately prior to the Brexit result to just €1.17 today. A side effect of this is that many UK consumers may opt for a staycation holiday this summer instead of travelling to Europe. This could even prompt some consumers to purchase a new car for their road trip but with so much economic uncertainty and job insecurity permeating the Brtish psyche and most cars unlikely to be delivered in time for said staycation anyway, I don’t see this as having any tangible positive effect.
So, what is the outlook?
It is widely reported that financial markets have more liquidity than during the financial crisis and so credit availability should not be restricted in the same way that it was during the financial crisis. Similarly, the latest forecasts for unemployment and economic growth in the UK are nowhere near as dramatic as those that led to the precipitous drop in the car market of 11% in 2008, which was followed by a further 6% decline in 2009. Market contractions of this magnitude are thus not expected but I do currently call for a slowdown, whereby the 3.2% growth forecast in the Q2 update has been revised downwards to 0.9% in 2016 and a decline of 1.8% in UK car sales is now projected for 2017. In fact, I had provisionally pushed up the car registrations forecast for 2016 to 3.5% prior to the Brexit vote, based largely on the healthy January to May growth of 4.1%.
Although sales already declined by 0.8% in June, the lag effect from order intake to registration means that we may not see any noticeable change in the figures until August but that’s such a weak, skewed market because of it being holiday season and is in the run-up to new age-identifier number plates that are released in September that it’s not necessarily a reliable indicator. The key figure to look out for is thus the September sales result, due to be released by the SMMT on 6 October. Nevertheless, the sales figures results for the coming months will really determine the magnitude of the decline in 2016 and we could even see UK car sales already turn negative in 2016 compared to 2015. In a worst-case scenario, I could even envisage sales being down by up to 5%. As it is though, I have reduced the UK car sales outlook for the years 2016 to 2019 by 500,000 units compared to the pre-Brexit forecast revision I had made in June.
All of this of course hinges on whether the current uncertainty prevailing in the UK can be positively addressed and how markets and consumers react. However, the only real certainty is that the UK faces a prolonged period of uncertainty and this will be greatly reflected in the autos sector. No wonder then that Mike Hawes, SMMT Chief Executive, said in a statement issued on the morning of the Brexit referendum result that “It’s important government takes every measure to restore business and economic confidence to avoid the market contracting in the coming months.”