After an incentives boosted September, the European car market fell back in October. But the German market continued to make progress and a 2005 market outcome in the region of 14.7 million units - a marginal gain on 2004 - is in prospect. This analysis is from JD-Power-LMC.

Summary

  • The strong September result, boosted as it was by incentives, was paid for in October as sales eased back in a number of countries - sales fell by 2.3%.
  • The German market, after years being the laggard, became the most supportive market in terms of volume growth in October. Italy, another market commonly in decline in recent times, enjoyed strong sales.
  • The UK market continued to descend from great heights while, in Spain, a transport strike interrupted vehicle supply producing what should only be a temporary blip in the market.

A full-year total of around 14.7 mn units is now in prospect for 2005 - a marginal gain on 2004. Uncertainty remains over how strong December will be as incentives are employed once again. October paid some of the price for September exuberence and the rolls were reversed among the large markets, with Germany and Italy producing solid gains on previous-year levels while the UK and Spain were much weaker than both last year, and the seasonally adjusted annualised rate of sales earlier in 2005. The West European market is unlikely to be able to maintain upward momentum in 2006 and a fairly flat market is in store.

The chart below shows total West European sales. The squares represent the total number of cars sold in a year, while the hollow dots represent the selling rate in individual months, and the continuous line represents a five-month moving average of these. We indicate the latest two months. The most recent numbers underlying this chart are appended in the table at the end of this note. There were the same number of selling days in October, compared with 2004.

click table to enlarge

West European Car Sales

The German market continued to make solid progress, reinforcing the good September result. We remain optimistic that sales will strengthen towards the year end, even if tax changes are not now the reason, as seems likely (what government there is appears to be in no shape to be pushing through a tax reform agenda). Nevertheless, we expect car manufacturers to offer ample support to sales in Europe's largest market giving rise to an increase in 2005 of around 3%. Next year is unlikely to see a similar gain, but rather sales should hold steady at between 3.3 and 3.4 mn units. The gain in consumer confidence in October hints at some upside risk to this assumption, though at present consumer spending growth appears to be too slow to expect anything better next year than this.

The slowing in growth of the UK economy continues to feed through to weakening car demand with retail sales, in particular, continuing their marked downturn. It is the consumer side of the economy which has been under most pressure as house prices have stagnated and confidence waned - this has had an all too predictable impact on car sales, despite the best attempts of manufacturers to boost the market with incentives. Sales should fall by around 5% in 2005, and next year may see a similar, though perhaps slightly smaller, decline.

The Italian market continues to display distinct signs of strength with a very solid 2.38 mn units/year selling rate recorded in October. Not only that, incoming orders point towards a strong end to the year, while slowly recovering consumer confidence also bodes well. This is rather positive news against a fairly weak macro-economic backdrop. We expect a full-year total for car sales in 2005 that is down by 1% or so on last year, with an essentially flat market next year.

The French market was weak in October but, given that September was almost certainly boosted by the use of end-quarter incentives, this is no great surprise. If the average selling rate over the last two months is taken together (September and October) then the result comes in quite close to the 2.1 mn units we expect for this year in total. A small gain in the market in expected for 2006, but the rate of growth is not forecast to match the 4% growth notched up in 2005.

Spanish car sales disappointed in October as sales resulted in the lowest selling rate for over two years. However, fears that this may mark a downturn from current record level of sales might be unfounded since it seems that deliveries of vehicles were interrupted by a road haulage strike. As such, November should see something of a bounce back - as the pipeline is cleared - and a record market, up by 2-3% on last year, still looks achievable for 2005. Some moderation is anticipated next year, though sales will remain historically strong.
Among the smaller markets, Holland continues to do badly while Greece is also expected to continue a steady decline.

click table to enlarge