Route planning is always tricky. For investors, charting a path through the busy roadworks of the UK economy in 2020 can be especially hard, so markets are quick to pounce on any data that might provide a turning signal for the future.
That’s why figures released earlier this month by the Society of Motor Manufacturers and Traders (SMMT), which showed that new car registrations in the UK fell 2.4 per cent to 2.3m units last year, attracted so much attention.
Mike Hawes, chief executive of the SMMT, warns that the decline is a significant concern for the auto industry — and the wider economy.
“Political and economic uncertainty, and confusing messages on clean air zones have taken their toll on buyer confidence, with demand for new cars at a six-year low,” he adds.
So what’s the outlook for the auto industry?
“Our current forecast sees the market falling a further 3.5 per cent during 2020, which reflects the ongoing uncertainties that the market faces,” says Ian Fletcher, principal analyst of automotive at IHS Markit.
“Beyond that is still obviously a bit more of an unknown and will partly depend on what this year brings in terms of negotiations with the EU on a new trading relationship. Our current assessment is that a recovery will start to take shape during 2021 on the back of a free-trade arrangement for goods and access to the single market for some UK services based on equivalence. We also currently see the market continuing to grow, but at a far slower pace than that seen during the previous decade.”
Clearly, the recent data is a negative sign for the car industry. The sector generated £82bn of turnover in 2018, and supports over 800,000 jobs, so falling sales are bad for business. But what about its implication for the wider UK economy?
Car registration figures have traditionally been seen as a bellwether for the country’s economic health. Other than a property, a vehicle is likely to be the biggest purchase a family will make in a given year. Being able to afford to buy a car outright or commit to a financing plan is seen as a sign of consumers’ confidence in their earnings or financial security. Declining car registrations have therefore historically signalled a lack of confidence.
But does this analysis hold up today? Not necessarily.
If falling car sales are supposed to indicate a lack of consumers’ financial clout, that doesn’t marry up with the fact that UK wages have been growing steadily in recent years.
“Since the end of 2014, wage growth has been mainly positive, with a good run in 2018 and 2019 — just as new car registrations have been falling away,” notes Alastair Winter, economic adviser at Global Alliance Partners. “This points to other forces at work.”
These forces include changes in the last few years to the way that diesel vehicles and company cars are taxed, which has reduced demand for them. The sales of new diesel cars in particular fell by 21.8 per cent between 2018 and 2019, according to the SMMT data.
“The bellwether status of new car registrations has long been eroded by the tax treatment of company cars,” adds Winter. “Meanwhile, measures that favoured diesel vehicles have been reversed, which will have deterred purchases, as will the spread of traffic restrictions in cities.”
Then there’s the looming issue of climate change. Many consumers will likely have been swayed by public campaigns to convince them to switch to cycling or public transport to commute to work, and this may also have impacted new car sales.
Climate concerns can have a major impact on consumers’ purchasing decisions, especially among younger generations, who are driving less and less.
“The surge in publicity over climate change is undoubtedly influencing the attitudes of younger people,” says Winter. “Generation Z and even millennials, especially those living in cities, are turning away from learning to drive, let alone car ownership — whether they can afford it or not.”
Concerns over climate change might also help to explain one of the bright spots in the SMMT figures: demand for electric cars is accelerating, with the number of battery electric vehicles registered rising 144 per cent last year.
Of course, electric vehicles make up just 1.6 per cent of the market share at the moment. The car industry has a long way to go before sales of electric cars will offset falling demand in other categories.
But should we view falling car registration figures as a hazard light, warning that the UK economy is heading for a crash? Other signals are turning green.
Main image credit: Getty