West European car sales bounced back in February from January's very weak showing as the seasonally adjusted annualised selling rate (SAAR) topped 14.7 million units: year-on-year sales grew by 2.6% at the first reading. "This result confirms our view that the low figures in January were in fact a result of payback from strong year-end manufacturer incentives in December. The outlook for 2004 remains modestly positive with a small increase in sales still expected," said Pete Kelly of JD Power-LMC.

Summary

  • West European car sales staged a solid comeback in February as the seasonally adjusted annualised rate of sales topped 14.7 mn units. Sales grew by 2.6% year on year.
  • Markets in the UK and Spain were strong again and continued to outperform in relation to historical norms.
  • The French market, labouring under low consumer confidence, was particularly disappointing while the Italian market continued to lag behind year-earlier levels.
  • The German market improved following a dire result in January but the selling rate remained relatively weak at less than 3.2 mn units/year.

After a weak January result, when payback from earlier manufacturer incentives hit, February sales rebounded to over 14.7 mn units/year - in year-on-year terms sales grew by 2.6%. The West European market is continuing its process of stabilisation following the worrying falls in consumer confidence during the economic and geopolitical turmoil during 2003. As consumer spending begins to move into a position where growth may accelerate, a number of key car markets are on the verge of a positive response, notably in Germany and Spain. While, in the former case, uncertainty over when recovery will begin in earnest remains, in the latter case the market is already sending very positive signals and a record year may be in prospect. The UK market was also strong, though we must be careful not to read too much into a month with only low seasonal significance. French sales continued to languish while the Italian market also showed little sign of renewed vigour - on the positive side, neither did the February total in Italy result in any major worries going forward. For Western Europe in total the overall outlook is modestly positive with a small gain in total car sales still likely this year.

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. Despite the extra day this February resulting from the leap year, there were the same number of selling days in February 2004 as in 2003.

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At 3.18 mn units/year, the selling rate in Germany staged a modest recovery following a sharp drop in January - yet this level of demand remains below the average in recession-hit 2003. While recent demand remained very subdued, incoming orders are showing some positive movement perhaps reflecting, at long last, the steady improvement in consumer confidence which has been in evidence since the first half of 2003, but which has yet to translate into gains in consumer spending, either on cars or consumer goods in general. Consumer spending growth is forecast to accelerate in 2004 as disposable income slowly rises, though it is still likely to remain insipid. This cyclical upturn in consumer spending is behind our expectation that car sales will rise this year. And a further positive impetus could result from the possibility that Germany is to be at the centre of an intensification of the recent pricing competition.

February was another good month for car sales in the UK - the selling rate rebounded from a relatively weak result in January to over 2.6 mn units/year. Looking harder at this result, however, reveals that there are some subtleties which must be taken into account when assessing the implications. Firstly, we note that February is a seasonally weak month - relatively small changes in absolute volume during a traditionally low-selling month can give rise to large changes in the seasonally adjusted annualised selling rate. Secondly, the slight gains in volume compared with February 2003 came not from the retail side, which has been the major locomotive of UK sales over the past few years, but from business buyers. Consumer confidence remains strong so there is no reason to expect a sharp decline in sales in the near future, but we suggest that the recent high level of demand from the retail sector may not be sustainable.

The Italian market continued at a steady but uninspired level in February - as with many other countries, the selling rate improved upon a weak January result. New model activity has again been cited as a reason for the solid level of demand in the context of an otherwise relatively weak backdrop. Most expectations are for only slow growth in consumer spending this year. Incoming orders have picked up slightly, on a seasonally adjusted basis, though they remain below year-ago levels, when the end of a government incentive scheme led to a surge in demand in February and March in particular. February 2004 consumer confidence indicators worsened after a poor January outcome indicating that things may be about to get worse before they get better. Looking forward, sales in 2004 may struggle to match those in 2003.
In France car demand continued to languish below long-run averages - the selling rate of just 1.99 mn units/year in February, while better than the 1.80 mn units/year in January, was disappointing. The impression that is gained from these first two months is that last year's 2.01 mn units will prove hard to improve upon. For the time being we are sticking with our expectation that 2004 will indeed be very close to 2003 in volume terms. The official consumer confidence indicators were rebased in January, and as a result it is unclear what they are telling us in terms of an alternative view - meanwhile, projections of consumer spending growth do not bode well for the coming year, with flat sub-trend growth forecast.

Spain continued to outshine its large continental neighbours in February as the selling rate stayed strong at 1.67 mn units/year. Consumer confidence remains steady, though significantly below historic highs, while positive expectations for economic performance in 2004 must be viewed as being likely to have a positive impact on vehicle demand. In both private and rental sectors of the car market demand was strong in February while selling activity related to the Prever incentive was also robust at a little under one quarter of total car sales. With the incentive scheme scheduled to run until at least the end of 2004, and the backdrop for the consumer spending growth quite positive (an acceleration is forecast for this year), 2004 may prove to be a record year for car sales.

Among the smaller countries, recovery continued in the Netherlands while growth in the Finnish market finally appears to be slowing following last year's remarkable gains. The Belgian market staged a solid performance.

Pete Kelly (pkelly@lmc.co.uk, +44-1865-791737)

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