Spending on cars has fallen sharply since the EU referendum, and unless a Brexit deal is agreed we suspect that it will remain a drag on consumer spending growth for a few years yet.
- Spending on cars has fallen sharply since the EU referendum, and unless a Brexit deal is agreed we suspect that it will remain a drag on consumer spending growth for a few years yet.
- Since the EU referendum in June 2016, real spending on cars has declined by 5.3% and 4.2% in 2017 and 2018 respectively. (See Chart 1.) And car registrations data from the Society of Motor Manufacturers and Traders (SMMT) suggest that spending on motor vehicles has fallen by a further 6% so far this year. Admittedly, purchases of motor vehicles account for only 3.6% of total consumer spending. Even so, faltering car sales has knocked 0.6 percentage points off consumer spending growth since the referendum. (See Chart 2.) Indeed, spending would have grown by 5.4% if it hadn’t been for motor vehicles. Instead, it has grown by 4.8%.
- At the same time, in the US real spending on motor vehicles rose by 2.5% and 1.9% in 2017 and 2018 respectively. Spending on transport also rose in France in 2017 and 2018 (by 6.3% and 2.1%,) and in Germany (by 3.4% and 1.1%). (See Chart 3.) So domestic factors seem to explain a lot of the weakness of UK spending on cars. The main culprit is probably Brexit.
- Given the high import intensity of UK cars (37% of car parts are imported), the fall in the pound following the EU referendum pushed up car price inflation to a decade high of around 5.0%. (See Chart 4.) Meanwhile, Brexit has weighed on consumers’ confidence in purchasing big ticket items. The GfK/NOP major purchases balance has trended down since the EU referendum in June 2016. And based on past form, the headline GfK balance suggests the 12-month rolling number of private car registrations is unlikely to pick up soon. (See Chart 5.)
- This gives us some reason to think that car sales could shift up a gear if a Brexit deal is agreed on 31st October. After all, a rebound in confidence should help car sales. And on top of that, a deal would allow sterling to rally which, on the basis of past form, would point to a fall back in car price inflation to about 2%. (See Chart 6.)
- But this is where our optimism ends. If a deal is agreed, that may come hand-in-hand with rising interest rates, which would drive up the price of loans for motor vehicles and we are less optimistic about the prospects for car sales in our other Brexit scenarios. In our “repeated delays” scenario, in which Brexit is delayed again and again until the end of 2021, we expect the pound to stay lower for longer thus preventing car price inflation from falling back from current elevated levels. (See our UK Economics Update “Pick your own Brexit forecast”, 1st July 2019.)
- Meanwhile, in a no deal, a fall in the pound to around $1.15 could push up car price inflation even further, perhaps to 8% or so. And the fundamentals that determine consumer spending, such as employment and real income growth, would probably deteriorate in this scenario. What’s more, since car sales tend to be more cyclical than other spending sub-sectors, car sales could suffer disproportionally from any slowdown in spending growth. (See Chart 7.)
- Regardless of Brexit, the industry faces broader long-term challenges too. Concerns about the environmental impact of car usage, for instance, may lead to reduced car usage, or shared use of cars and the increased use of public transport. There has already been a substantial shift in demand away from diesel cars, of which the share of total sales has fallen by over a third between 2017 and 2018. (See Chart 8.) This has continued in 2019. And, so far at least, it has not been fully offset by an increase in sales of electric vehicles (EV) and petrol cars.
- Overall, there are some reasons to be hopeful that the car sector will stage a modest recovery if a Brexit deal is agreed on the 31st October. But with the chances of a no deal Brexit rising and long-term challenges intensifying, the sector will probably remain a drag on consumer spending for several years yet.
Chart 1: Real Consumer Spending on Motor Vehicles (£bn)
Chart 2: Contribution to %y/y Consumer Spending (ppts)
Chart 3: Consumer Spending on Motor Vehicles (% y/y)
Chart 4: Sterling TWI & New Car CPI Inflation
Chart 5: GfK Consumer Confidence & New Private Car Registrations
Chart 6: Sterling TWI & New Car CPI Inflation
Chart 7: Consumer Spending (%y/y)
Chart 8: Diesel Car Registrations (% of Total)
Sources: Refinitiv, Bloomberg, SMMT, Gfk, Capital Economics
Gabriella Dickens, Assistant Economist, +44 20 3974 7421, email@example.com