Declining Savings Ratios Support Recovery of European Car Sales

GDP growth is commonly used as a key indicator of car demand and in Western Europe annual GDP growth over 2% typically translates into an increase in new car registrations. Economic growth certainly helped to fuel the surge in new car registrations around the region from 2004 to 2007. Since 2008, however, GDP growth has stayed below the 2% threshold every year except for 2010 (even that was a bounce following the 4% decline in 2009). As a result, car sales in Western Europe have declined every year since 2008, other than a slight upturn in 2009 when they were artificially inflated by numerous incentive schemes.

However, there are signs of a broad-based recovery in 2014, with sales up 6% in the first two months of 2013 according to data released by the European Car Manufacturers Association, ACEA on March 18. Although Euromonitor International projects just 1.3% GDP growth in 2014, the number of European households that can afford a new car is slowly climbing again and there is more positive news in the form of an indicator which is typically overlooked – savings ratios.

The savings ratio is the proportion of household disposable income which is saved and with consumer confidence weakened, it spiked in 2009. This largely explains why although the number of West European households with sufficient disposable income to buy a new car has actually remained fairly static throughout this recession, the inclination of consumers has been to save rather than spend on big-ticket items, including cars. However as a result of protracted low interest rates savings ratios in the key European economies continue to decline and this is naturally a positive for car sales.

Despite the return to spending that these falling savings ratios imply, the outlook for GDP growth remains subdued until at least 2016, so I don’t actually envisage new car demand returning to pre-crisis levels this decade. However, I do foresee new car sales in West Europe ascending to peak levels in the early 2020s and climbing on to 17 million units by 2030, underpinned to a large extent by the number of households in Western Europe rising to a landmark of 200 million.