Western Europe Car Registrations Fall 1.5% Y/Y in January—Forecast

Western European car sales fell 1.5% year-on-year (y/y) to 1,209,829 units according to Global Insight forecasts. Positive developments in Germany (+10.5%) failed to offset heavy falls in Spain (-12.8%), Italy (-7.9%) and France (-5.6%) and a milder slowdown in the United Kingdom (-2.1%) as other markets reported some mixed results. The downward trend in most of the big five markets compounded fears of an economic slowdown brought about by the global credit crunch. Spain, France and Italy all reported impressive December results as the car companies sought to further push incentives on car sales to finish the year off in style, but it is too early to tell whether the markets will stage a recovery in the first quarter, but a strong February can be assured as the month carries 29 days this leap year, equivalent to around 4.5-5% on the individual market.

Germany

New car registrations in Germany for January rose around 10.5% y/y to 220,742 cars, as domestic brand sales rose slightly behind the headline figure at 9% y/y to 148,600 units, whilst foreign brands rose 15% to 72,200 units. The exceptional 10.5% gain was largely due to the base comparison month of January 2007 being very low, as the first month of the VAT changes that effectively flattened the market in 2007. Nevertheless, January still represented a 3% gain on January average of 214,000 for the last five years and VDA President Matthias Wissmann said in a statement that: "There is a chance for a more favourable year-over-year development than in 2007". Furthermore, January 2008 had one less working day than 2007, thus a further adjustment of between 4% and 5% can be factored in.

United Kingdom

162,097 new cars were registered in the United Kingdom last month, which was 2.1% lower or 3,500 units less than January 2007's volumes. That represents the new car market's largest year-on-year (y/y) fall for ten months, in what could be a sign that falling U.K. consumer confidence is finally filtering into new car showrooms. The SMMT noted in a statement that registrations increased steadily in 2007, bettering expectations particularly in the first quarter. Now, it forecasts a decline to 2.345 million units for the full year 2008. "Concerns remain over spending and confidence impact from the global credit crunch. The Bank of England is widely expected to follow the U.S. Federal Reserve's lead and cut interest rates [by one-quarter per cent] this week in an effort to support growth," the trade body said in a statement.

France

162,116 new cars were registered in France in January 2008, which was a 5.5% drop on the 171,651 new cars registered in January 2007. This slowdown was entirely to be expected, however, after French new car demand during the previous month, December 2007, jumped by more than one-fifth compared to the previous year, thereby pulling a considerable amount of demand forward from the early part of 2008. This skew in demand can be attributed to the introduction of France's so-called "eco-taxes", which came into force on 1 January (see France: 6 December 2007: France to Introduce CO2 Purchase Tax from January). Essentially, the new fiscal regime encourages the purchase of small and low-emitting cars by offering purchase incentives of up to 1,000 euro on them whilst heavily penalising the largest, heaviest and least fuel-efficient cars, by imposing a one-off purchase tax of up to 2,600 euro, with a sliding scale of taxes for those cars that fall in between either end of the extreme.

Spain

101,630 new cars were registered in Spain in January 2007, a 12.7% drop on the previous year and the biggest monthly fall since June 2002. As is the case in France, a new CO2-based taxation system was introduced last month which sees cars that emit less than 120 g/km CO2 exempt from tax altogether, and those emitting more than 200 g/km subject to a 14.5% taxation rate, which has distorted buying trends. Demand in December increased by 6.6% compared to the previous year as buyers rushed through their purchases of large cars, and most notably sports-utility vehicles (SUVs) before the new rules came into effect. In January, SUV sales sank by 34.5% compared to the previous year to 7,116 units although sales of both higher-end passenger cars and small cars also fell. "While the situation in December with advance purchases of top-of-the-range cars to avoid paying the new registration tax for such models is understandable, what is surprising is that in January this effect has not filtered through to the smallest cars, which benefit from the new tax treatment," El Pais newspaper quoted ANFAC's general manager, Luis Valero, as saying. El Pais also notes that whilst purchases by car-hire firms increased by 39.6% as they stocked up ahead of the Easter holiday period, sales to individuals and non-car-hire companies dropped 16.2%. However, Spain's new eco-tax system is not the only factor at play here. Wider economic factors, such as rising interest rates, a weakening of the housing market and the Europe-wide/U.S. credit crunch are all expected to make themselves felt on Spanish new car volumes in 2008.

Italy

In Italy, 232,207 new cars were registered in January, which was a 7.3% decline on January 2007's 250,385 new cars. This followed a 14.1% hike in December 2007 registrations, capping off a strong year for Italy's new car market, in which full-year demand rose by 7.1% compared to 2006 to 2.49 million units. Although Fiat brand sales dipped by 0.4% during the month, Italy's favourite car marque still managed to grow its share of its home market from 24.1% last January to 25.9% in January 2008. Fiat Auto's other brands of Lancia and Alfa Romeo fared less well, losing 6% and 55.4% of their monthly volumes, respectively. That keeps the market share of Fiat Auto's three brands broadly stable at 31.5% up from 31.2 a year earlier. The Fiat Punto was Italy's best-selling car last month, with 19,874 units sold, followed by the Fiat Panda and the Fiat 500.

Outlook and Implications

Western Europe had no seasonal adjustments necessary in the month as it shared the same number of working days across its major markets as last year. Although initial impact of pull-forward effect of December's strong results may be playing out, the fear remains that the fall (nearly 200,000 units) might be another indicator of the economic slowdown expected in some key markets in the region.

However, the regions largest market has brought some cheer as January's underlying rise in Germany was nearly as impressive as the headline figure, after seasonal and other factors are adjusted. The base comparison of the last five years puts January sales at an average of 214,026 units, meaning this month was 3% above this figure. Add to this the seasonal day adjustment, as January 2008 had one more working day (23 days), which is worth around 4.5%, and that leaves an underlying figure of 7.5% market rise in January 2008. However, January is far too early to tell whether the German market is heading for a sustained recovery. Furthermore, there are conflicting messages coming from German consumers as some fundamentals, such as falling unemployment and rising wages, leading to a gain in consumer confidence are muted by uncertainty related to a planned CO2-related tax. In addition it will take a few more months until the financial-market turbulence recedes, and further shocks could rattle this fragile confidence.

The U.K. new car market surpassed all expectations in 2007, with full-year registrations totalling 2.404 million units, their sixth highest-ever level. This was especially surprising when considering the five 25-basis-point interest-rate rises that occurred between August 2006 and July 2007, taking the base rate to 5.75%, its highest level since early 2001. This would normally lead to a cautious outlook as weaker consumer spending offsets the positive impact of new models and enticing deals. Concerns over the housing market and banking sector could also have justifiably been expected to further dampen new car demand. In December 2007, the Bank of England lowered the base rate by one quarter of a percentage point, taking it back down to 5.5%, with the possibility that it will be cut by another one quarter of a percentage point later today. Despite these cuts, Global Insight agrees with the SMMT that any gains registered in the new car market in 2007 will be wiped out in 2008, with total volumes forecast to reach around 2.33 million units, which is slightly lower than the SMMT's forecast of 2.35 million units. A combination of more stringent lending, relatively high market-interest rates (despite the cuts), slackening consumer confidence and the surprisingly high level of activity in 2007 are all likely to have an impact on new car buying trends in the United Kingdom in 2008.

In France, unemployment is falling at last, consumer confidence has improved consistently (it is running at a seven-year high), and there is a build-up of cars that need to be replaced as well as a glut of new model launches from the French manufacturers. These factors, along with a lower supply of nearly new cars on the market, should help foster the long-awaited improvement in French car sales, starting as early as the first quarter of this year. In Spain, the introduction of the new car tax regime will restore some consumer confidence as far as new car purchases are concerned after a period of uncertainty and small cars in particular are expected to gain in popularity, despite the initial response in January. Wider economic factors, such as rising interest rates, a weakening of the housing market and the Europe-wide/U.S. credit crunch will, however, all make themselves felt on Spanish new car volumes in 2008. In Italy, the extension of the government's scrappage scheme will likely keep the market far more buoyant than it would otherwise have been in 2008, helped along by Fiat's resurgence. These two factors can be expected to offset to a large degree Italy's wider economic, social and industrial woes.

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