Western European Car Sales Surge 7.6% Y/Y in February—Forecast

New car registrations across Western Europe leapt 7.6% year-on-year (y/y) to 1.08 million units, as a strong recovery in the key German car market and exceptional gains in some of the smaller markets outweighed some heavy losses in Italy and the United Kingdom. February 2008 was also a leap year leading to one extra working day, typically accounting for around 4.5% in volume terms. Changes to purchase tax regimes across many of the smaller markets, such as Denmark, are stimulating demand, particularly in the smaller, low polluting segments. For the year-to-date, February's strong rise offset a poor January and leave the region up 2.7% at 2.29 million units.

New car registrations in Germany for February rose by 24.8% year-on-year (y/y) to 228,623 units as the market was helped by the extra working day and the extremely low base comparison month of February 2007. Like-for-like annual comparison was severely skewed in February 2007, with sales being adversely affected by a rise in value-added tax (VAT) from 16% to 19%. Combined sales in the first two months of the calendar year rose by 17% y/y to a combined total of 450,000 units. However, German automotive industry figures still see a market that is performing well below what is generally expected. VDA president Matthias Wissmann said, "The current trend must not hide the fact that demand in Germany is anything but satisfactory, this has been the case for several years." One of the factors that Wissmann and the VDA are unhappy about is the government subsidy for people who use their car to travel to work. The German government significantly reduced this allowance in 2007, but the federal finance court ruled the measure unconstitutional in January and forced officials to review the policy. In response to this development Wissmann said the government must "clarify rules concerning personal mobility costs."

U.K. new car sales fell 5.4% year-on-year (y/y) on raw data terms in February to 69,610 units, from 73,019 units in the same month last year, according to Society of Motor Manufacturers and Traders (SMMT) data. February's sales on a day adjusted basis were worse than the raw data comparison suggests, as the leap year led to one extra working day, typically worth around 4.5% and equating to a 9.9% fall on a an adjusted basis. The extremely low total was expected ahead of the biannual numberplate change in the U.K. market, which will see March leap in volume terms; March 2007 accounted for nearly 19% of annual volume last year. However, March is also expected to be a poor month in comparison terms, as March 2007 was exceptional and current consumer confidence is being hit by the availability of credit and wider economic concerns. March is expected to fall in the region of 5% according to SMMT forecasts. An Automobile Association (AA) commissioned survey says that the number of people intending to buy a car in the next 12 months has fallen from 25% a year ago to 20% now, and those planning to make a purchase will spend less on their car, the survey said. Year-to-date (YTD) sales for the first two months of the year were down 3.1% at 231,707 units. Diesel registrations in the United Kingdom grew at double-digit rate again, reflecting the increase in fuel process, with volumes up 11.1% y/y to 31,287 units in February. The SMMT said: "The Budget on 12 March will need to be uplifting to sustain economic growth. SMMT hopes the motorist will not be targeted, behind a smokescreen of "environmental taxes", as a revenue-raising source."

The French market, the one bright spot in February, reported an 11.1% year-on-year (y/y) rise in car sales to 175,182 units in raw data terms. The figures on a working-day-adjusted basis show a 5.8% increase. February sales accelerated faster than expected following the expected slowdown in January, which occurred largely as a result of the pull-forward effect from December 2007, when sales jumped by more than one-fifth compared to December 2006. The strong February helped lift year-to-date (YTD) sales by 2.4% y/y in terms of the raw data, although they were flat on a working-day-adjusted basis. The CEO of the Renault-Nissan alliance, Carlos Ghosn, told reporters at the Geneva Motor Show yesterday, commenting on Renault's own sales rise in February, that, "One swallow doesn't make a spring" and that, "There could be negative surprises." The upper-medium-sized segment of the European car market is "contracting faster than we thought", he added.

Spanish new car sales rose a timid 0.7% y/y in February to 121,404 units, according to industry association ANFAC, and in working-day-adjusted terms this equates to a fall of around 3.8% y/y. YTD sales in Spain are now down 5.8% compared to the same period last year, at 223,043 units. PSA Peugeot-Citroën CEO Christian Streiff also confirmed Ghosn's sentiments regarding the European car market: "Six months ago we expected the European auto market to be flat or slightly better in 2008 [compared to 2007]…Today we expect it to be flat or slightly lower." He added: "Naturally, we're a bit worried about it…I don't foresee a disaster, but there are difficulties ahead."

Italian new car sales fell 3.9% y/y in February to 216,927 units, from 225,749 units in February 2007, according to ANFIA. On a working-day-adjusted basis, this was equivalent to a near-9% decline in sales. For the YTD period, new car sales have fallen 5.4% compared to the same period of 2007. Fiat CEO Sergio Marchionne said that 2008 "will not be a great year" for the Italian auto market. Speaking on the sidelines of the Geneva Motor Show, Marchionne said that the Italian market's problem is "tied to general instability". "Until the political issue is solved, there will remain great uncertainty", he added, referring to the upcoming Italian general election, to be held in April. The Fiat CEO also said that, "The American situation isn't helping because it's creating uncertainty and nervousness everywhere."

Outlook and Implications

February's Extra Day Comes into Play

February's highly positive results in many regions followed a rough January for the industry, when the pull-forward effect from December was largely to blame for weak sales. The data comes against the background of the glitz and the glamour of the Geneva Motor Show, widely regarded as the best showcase for the European industry. Europe's finest are trying to appease the regulators and tempt buyers at the event, but the message from the various CEOs appears to be the same: 2008 is going to be a tough year in the established markets of Western Europe.

February's registration figures for the German car market showed a 6.7% increase in comparison to mean sales figures for the month averaged out over the last five years. However, it should also be taken into account that the February 2008 figures contained an extra sales day as a result of the leap year. This usually generates a net benefit of between 4% and 4.5%. As a result this translates to only a 2% y/y increase in real terms for February's German car registrations, which suggests a somewhat stagnant market and reflects the comments made by Wissmann. The VAT increase that was introduced at the beginning of 2007 continues to be felt but the market is expected to post significantly improved sales on last year's figures, which fell by 9% for the full year and were the country's worst since reunification in 1990.

There is some brighter news for the market with major new model launches such as the Audi A4 providing a market catalyst, while the A4's D-segment rival, the Mercedes-Benz C-Class continues to sell strongly since its launch last year. As fuel costs continue to rise, German manufacturers continue to pioneer efficient engine technology such as Volkswagen's Bluemotion system and advanced turbodiesel technology, and this could also provide the market with fresh impetus over the remainder of the year. Global Insight forecasts a recovery to around 3.34 million light vehicle sales in 2007, which represents a 6% y/y rise on 2007's figures.

Meanwhile in the United Kingdom the range of economic headwinds being felt by consumers in the U.K. currently ranges from falling house prices, a squeeze on lending, huge increases in food and energy bills, and the soaring cost of gasoline (petrol) and diesel, the combination of which has unsurprisingly led to a slowdown in the car market. However, the picture is amplified by the fact that 2007 was in fact a far better year than expected, hence the base comparison is higher than was predicted. The downside is the falls this year may be harder than would otherwise be the case. Global Insight forecasts the passenger car market to shrink this year to around 2.33 million units as a consequence of the above, marginally less than SMMT's own forecast of 2.34 million.

Spain's new eco-tax system, along with 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 have an impact on Spanish new car volumes 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 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. The collapse of Prime Minister Romano Prodi's government in January has understandably caused a great deal of consumer uncertainty, which will have a knock-on effect on the car market.

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