New car registrations edged down 0.3% year-on-year (y/y) in Europe (EU25 + EFTA) in March to 1,822,180 units, according to data released by the European Automobile Manufacturers Association (ACEA), which now includes sales statistics for new European Union (EU) members Bulgaria and Romania.

The decline followed a 2.5% drop in February. According to Global Insight analyst Thomas Ryard, the continued weakness of the German market in March combined with sluggish demand in other major markets such as France and Belgium more than outweighed the remarkable gains in the United Kingdom (driven in this particular case by the biannual registration-plate change) and Italy and a net volume contribution from new EU member states.

The third consecutive fall in Germany (-6.6%) in March was due in large to an increase in value-added tax (VAT) on 1 January, whilst calendar effects exacerbated the decline. In addition to the VAT increase, German motorists also face a reduction in commuters' tax benefits that may have an effect on new car sales in the opening months of 2007, Ryard noted.

On an annual basis, sales in Germany were down 10% y/y at 717,536 units. By contrast, UK car sales leapt 3.1% y/y in March to 449,287 units, driven by the first of this year's biannual change in the registration plate from 1 March. By comparison, and highlighting the significance of this effect, just 73,586 units were registered in February.

Following a strong rise in January, due to a very low base of comparison in January 2006 caused by the pull-forward effects of tax changes that boosted sales in December 2005, UK first-quarter sales were up 2.9% at 688,209 units, despite the economic headwinds being experienced.

New car registrations increased sharply in the new EU member states, but overall sales in the region only made a modest contribution to figures. In the 10 new EU markets (data for Cyprus and Malta were not available) new car sales were up 13.6% y/y in March to 100,706 units, which corresponds to just 5.5% of total sales in Europe. Still in absolute terms, the gains reported in these smaller markets (+12,026 units) absorbed the combined deficits of France and Belgium.

A considerable sales upturn in Poland, a market which is to central Europe what Germany is to western Europe, combined with double-digit growth in Romania, and the Baltic's states of Lithuania, Latvia and Estonia drove the figures up.

On a cumulative basis, European new car registrations were down 0.2% y/y to 4,220,019 units with the most salient declines in absolute terms being registered in Germany, France, Finland, Spain and Hungary while figures from new EU markets were up 13.8% at 265,249 units, Ryard said in a research note.

Toyota, Fiat out-pace european market growth

Toyota continues to outperform most established brands in Europe, with March sales advancing no less than 6.2% y/y at 110,110 units meaning that its first quarter sales were up an impressive 12.9% y/y to 262,817 units and therefore booked the largest volume gains in absolute terms (+30,079 units). Toyota's growth is supported by strong demand for new versions of the Yaris, Aygo and RAV4 sports-utility vehicle (SUV) and there is also the redesigned Auris, replacing the Corolla.

Similarly at Fiat, the arrival of a number of compact and small models such as the New Panda, Grande Punto and Bravo, and recovery of the Lancia and Alfa Romeo brands clearly helped bolster the carmaker's position across Europe.

With sales rising another 6.3% in March, the Fiat Group has almost caught up with the Renault Group in the first quarter. The Italian carmaker sold a total 350,900 units in the first quarter in the whole region compared to 350,998 units for the Renault Group.

In fact, in Western Europe (EU15 + EFTA) Fiat edged past the French carmaker, selling 131,746 units in March (against 129,975 units for the Renault Group) and was well ahead in the first quarter.

March was another disastrous month for the French carmaker, which suffered a 9.4% decline. Allinace partner Nissan was the other big loser in March with sales shrinking 16.6% y/y to 32,779 units, thus allowing Honda, Hyundai and Suzuki to move ahead.

The Volkswagen (VW) Group remained market leader despite weak sales at the core VW brand. Ford reported a 2.4% sales rise in the first quarter whereas cumulative sales at General Motors (GM) are beginning to show some clear signs of exhaustion after a 1.6% fall in March.

Outlook

According to Ryard, the European market outlook for 2007 is still difficult to predict at this stage as the pull-forward effects in the German market and pressure from the European Central Bank's (ECB) interest-rate rises translate into a slow start to 2007, but with a number of tax and legislation changes occurring in Italy and Spain, and in light of the intense competition in the region, the market is expected to recover somewhat further into the year.

He added that the sharp fall witnessed in Germany was due in large part to ripple effects from purchases being brought forward to the end of 2006 ahead of the VAT hike from 1 January 2007.

However, the March figures do not fully reflect the market situation, Ryard wrote. Sales in March 2006 were "artificially" inflated by calendar effects, which also had a negative impact on this year's results for the month. On an adjusted basis, March's figures were in line with Global Insight's estimated monthly average, indicating that the market is not necessarily collapsing and that increased momentum can be expected in the next few months.

This view is largely supported by the fact that, according to the VDA, domestic orders for passenger cars were finally showing signs of recovery in March.

After registering record sales in 2006, the Belgian market is retracting somewhat in the first quarter and overall Belgium is not expected to make a positive contribution to the European market. The same applies to France, but for different reasons. The French new car market remains highly volatile, and its structure is showing some clear signs of change, with more sales in the small- and large-car segments, while in between volumes are shrinking.

This is partly due to a supply effect as French brands' offerings in the C1, C2 and D1 segments are well advanced in their lifecycle, while the boom in the B segment is entirely down to the arrival of the new Clio and Peugeot 207 over the past 18 months.

Other factors kept the market down in March. Although presidential elections in the next month may have only a limited effect on consumer spending, the replacement of key models such as the Renault Laguna and Twingo, combined with relatively weak consumer confidence, could depress the market.

To this end, Western Europe's largest markets will continue to generate the bulk of the region's volume but sales will remain stagnant at best. Growth will be far from broad based, with Italy enjoying incentivised growth, France experiencing a mild comeback, and Germany enduring a year of VAT payback.

Meanwhile, the United Kingdom will continue to stagger along below trend and Spain will face a couple of years of a below-par TIV. Growth is expected to surface from relatively smaller markets such as Romania, Poland, Ireland and Norway, Ryard concluded.