172 Promises to be a challenging market environment

CHALLENGING FIRST HALF FOR CAR SALES The solid momentum evident in the economy in 2016 has carried over into 2017 and most economic indicators are continuing to develop in a positive manner, The first half of 2017 has been challenging for the motor industry. In the first six months, new car registrations were 10% down on the first half of 2016 and registrations of light commercial vehicles were down by 14.2%. At the same time, imports of used cars increased by 43% and imports of light commercial vehicles increased by 35%. Sterling weakness, a scarcity of second hand cars in a certain age segment due to the collapse in new car sales from 2008 onwards, and the incessant search for value for money from a personal sector that is still financially stretched, are likely to be the key factors driving this surge in used imports. In 2013 the sterling/euro exchange rate averaged 84.91 pence; in 2014, it averaged 80.62 pence; in 2015, it averaged 72.63 pence; in 2016, it averaged 81.92 pence; and in the first six months of 2017 the exchange rate has averaged 85.98 pence. The adjustment between 2015 and 2017 is quite dramatic and has seriously enhanced the attractiveness of importing used vehicles from the United Kingdom. New car sales collapsed in 2009, with just 57,118 new cars registered that year. Between 2009 and 2013, new car registrations averaged just 77,884 per annum. In contrast, between 2014 and 2016 new car registrations averaged 122,563 per annum. As a consequence, there is a scarcity of second hand cars in the 2009 to 2013 age bracket, which is also contributing to imports from the UK. Despite the strong labour market and the generally positive economic background, consumer behaviour remains somewhat cautious. In the first 5 months of the year, the value of retail sales was up by 0.4% and volume of sales was up by 2.6%. However, weak new car sales have distorted these figures. When car sales are excluded, the value of retail sales was up by 3.6% and the volume of sales by 6.4%. The persistent gap between the value and volume metrics is indicative of a consumer sector that is still resistant to higher prices. In other words, it is still proving challenging to convert volume growth into money or value growth. Having increased solidly since 2014, consumer sentiment has levelled off in recent months. The personal sector sees the economic recovery, but at an individual level it is still not putting more money into the pockets. A wide gap still exists between the volume and value of growth in retail sales. The causal factors are likely to include: Despite the growth in employment, the Income Tax take in the first 5 months of the year was €202 million lower than expected. The most obvious conclusion is that many of the jobs being created are relatively low paid and following changes to the USC in the past couple of budgets, many of the new employees may not be in the USC net at all or are paying very little tax based on earnings; Brexit-related uncertainty is undoubtedly undermining confidence and big-ticket consumer items such as cars are suffering. Up until the general election, the possibility of a second Brexit referendum was politically impossible, but that may now have changed. Labour made strong gains in areas that voted strongly in favour of Brexit this time last year, so perhaps the overall vote can be interpreted as a nation recognising the mistake it made last year. A second referendum is now a remote possibility, but the politics of it all are still totally up in the air. Uncertainty will continue to characterise the whole Brexit process. It promises to be a very fractious affair, with Macron likely to take a very hard line approach to the negotiations as he does not want an agreement that would weaken the EU. The odds still favour a hard-Brexit, but given the politics involved at an EU and UK level, anything is possible. Meanwhile, sterling looks set to remain weak. A recent survey, Family Finances Report, conducted by Red C for Aviva insurance company, showed that the equivalent of one million adults are finding it difficult to make ends meet and two thirds of these see no prospect of an improvement in their personal circumstances over the next six months. Those with this perspective are typically in the 35 to 54- year-old age segment of the population. According to the survey and indeed it is anecdotally very obvious, this group is likely to be heavily mortgaged, to be paying exorbitant creche fees and have a legacy of debt hanging around their necks. They pay for everything and get nothing for nothing. In other words, this is the squeezed middle that requires financial assistance. As we move into the second half of the year, all of the factors that influenced the motor trade in the first half of the year will still be relevant. Growth will continue to be broadly based and strong. The global economic background is looking increasingly better. For a small open economy like Ireland, the stronger global backdrop is very important. The Euro Zone growth performance in particular is significant. The good news here is that there is still so much spare capacity in the Euro Zone, the prospect of higher growth leading to higher ECB interest rates is still some time off – late in 2018 at the earliest, based on what the ECB is saying. Overall growth prospects for the six months ahead are looking better than at the beginning of the year. Sterling, although still weak, has stabilised somewhat; the labour market is strong; and business investment intentions are promising. Real GDP could well expand by 4.3% in 2017, which is up from a forecast of 3.3% at the beginning of the year. However, imported used cars, financial pressures on the personal sector, and Brexit uncertainty are likely to weigh on big ticket items such as cars. For the full year, the likelihood is that new car registrations will be at least 10% down on last year, which would translate into total registrations of 132,000. Such an outcome would still be strong, albeit not as strong as last year. For dealers, the incessant pressure for good deals will continue to squeeze margins. For buyers, there is value out there. #JimPower #MotorIndustry #Motors