Brexit Begins, U.K. Car Market Feels Impact; Uncertainty Ahead

Brexit Begins, U.K. Car Market Feels Impact; Uncertainty Ahead

It is difficult to be optimistic, at least in the short term, with the negative impact on economic growth, employment, inflation, fuel prices, the pound and, of course, consumer confidence.

Only a short time has passed and it appears the dark clouds haven’t just gathered but already unleashed a storm that is battering the U.K.’s automotive sector.

According to data released by the Society of Motor Manufacturers and Traders association earlier this month, new-car registrations declined in June, albeit only 0.8%. However, this is still the first market contraction since October 2015, which came after 43 consecutive months of growth.

It is impossible to quantify accurately the impact of last month’s Brexit vote on the U.K.’s car market, but demand undoubtedly was weakened in June as consumers were distracted by the coverage and uncertainty leading up to the referendum – as well as the Euro 2016 football championship.

However, the fact of the matter is fewer cars were registered than a year ago. 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, one could argue the car market actually grew for 51 consecutive months until the newly infamous landmark Brexit month of June 2016.

Looking ahead, it is difficult to be optimistic, at least in the short term, with the negative impact on economic growth, employment, inflation, fuel prices, the pound and, of course, consumer confidence.

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 European Union citizens residing in the U.K., with no assurances from the government their status is secure. It is certainly difficult to imagine any of these consumers investing in big-ticket items such as cars while they’re essentially in limbo.

Similarly, it is unlikely many U.K. 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 £1:€1.30 immediately prior to the Brexit result to just 1.17 at the time of this writing.

A side effect is that many U.K. consumers may opt for a staycation holiday this summer instead of travelling to Europe. This even could prompt some to purchase a new car for their road trip, but with so much economic uncertainty and job insecurity permeating the British psyche (not to mention the unlikelihood of getting the vehicle in time for the journey), I don’t see this having any tangible positive effect.

So, what is the outlook?

It is widely reported financial markets have more liquidity than during the financial crisis and so credit availability should not be restricted in the same way it was during that period. Similarly, the latest forecasts for unemployment and economic growth in the U.K. 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 not expected, but I have revised my growth forecast downwards to 0.9% for 2016 and now predict a 1.8% decline in U.K. car sales in 2017.

In fact, I had provisionally pushed up the car-registration 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 0.8% in June, the lag effect from order intake to registration means we may not see any noticeable change in the figures until August. But August is such a weak, skewed market due to the holiday season and the run-up to new age-identifier license plates that are released in September, that it’s not necessarily a reliable indicator.

The key figure to look out for is the September sales result, due to be released by the SMMT Oct. 6. Nevertheless, the results for the coming months really will determine the magnitude of the decline in 2016, and we could even see U.K. car sales already turning negative in 2016.

In a worst-case scenario, I could even envision sales falling up to 5%. As it is though, I am cutting my U.K. car sales outlook for the 2016-2019 period 500,000 units compared to a pre-Brexit forecast.

All of this of course hinges on whether the current uncertainty prevailing in the U.K. can be positively addressed and how markets and consumers react.

However, the only real certainty is that the U.K. faces a prolonged period of uncertainty, and this will be greatly reflected in the autos sector.

No wonder SMMT CEO Mike Hawes 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.”

Neil King is an automotive analyst for London–based Euromonitor International, a strategic market research firm with offices around the world.

TAGS: Industry
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