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  1. Analysis
June 10, 2003

European car market chilled in May

The latest data from LMC/JD Power shows that demand for new cars in West Europe fell to its lowest rate since 1997 in May. After allowing for calendar and seasonal factors, the seasonally adjusted annualised selling rate in May fell to 13.3 mn units/year (compared to last year's out-turn of 14.6 mn). Cumulative year-to-date sales are down by over 4%.

By bcusack

The latest data from LMC/JD Power shows that demand for new cars in West Europe fell to its lowest rate since 1997 in May. After allowing for calendar and seasonal factors, the seasonally adjusted annualised selling rate in May fell to 13.3 mn units/year (compared to last year’s out-turn of 14.6 mn). Cumulative year-to-date sales are down by over 4%.

“A further decline was predictable, given the poor conditions in Italy after the ending of the incentive scheme in March” said Charles Young of forecasters J.D. Power-LMC. “In fact, I was expecting an even steeper fall in Italy. But the order intake was very weak, and sales are sure to remain depressed there. What was surprising was the steepness of the fall in French sales. Apart from Sweden and Finland, which are too small to make much difference, none of the national markets are growing, and most are declining, except for Germany, which is stable at a low level. As UK sales gradually decline, there is no other bastion of strength left in the region”.

Young added “It must be particularly demoralising for Fiat to be coming to market with three important small models – the Gingo, the facelifted Punto, and the Lancia Y – at a time when the government, egged on by industry bodies, has surgically excised a large part of Italian small car demand by its incentive schemes. These pulled demand for small cars forward into the six months to March, when Fiat had little to offer and consequently the benefits of the incentive schemes largely went to its competitors. Now the market for such vehicles is thoroughly saturated for a while to come”.

Summary

  • The temperature of the European car market clearly chilled significantly in May. Conditions in the Italian market made it predictable that this would occur. The seasonally adjusted annualised selling rate (SAAR) was 13.3 mn units/year, significantly below the previous month, which was itself the lowest since 1997.
  • The Italian outcome (discussed below) was in fact a less severe fall than might have been expected. It was the further deterioration in France that was perhaps the largest negative surprise in the latest batch of data.
  • With the UK market continuing its gradual descent, the only countries in Western Europe where car demand is growing at present are Sweden and Finland, which are too small to produce a visible impact on the total. The German market, though not deteriorating, is no better than stable, and the data on orders do not as yet suggest an immediate change in this.

It was very predictable that the trend line in the Chart overleaf would dive sharply downward, since it is no longer sustained by the inclusion of the freak December results in the moving average. It was also predictable that the selling rate, which has declined in each of the last three months, would decline again in May, because of the massive headwinds blowing in Italy. These negative results came at a time when many of the uncertainties pertaining to the Iraq war and to oil prices had receded. Yet the removal of these uncertainties failed to produce any further improvement in consumer confidence in the region (after the very modest rebound in April). It may also be significant that the component of the consumer confidence index which seems most relevant to vehicle sales – the answer to the question about willingness to contemplate major purchases in the next twelve months – has remained at a very low level since the end of last year in the region as a whole, and especially in Germany. What can be said with certainty is that there was no sign of improvement in any of the major countries in the May car sales figures.

The cumulative decline in West European car sales in the year-to-date now stands at 4.3%. However, the 5.7% decline in the final column of the Table below, which measures the difference between the average selling rate in the year-to-date and the outcome for last year as a whole, provides in our view a rather more meaningful measure of the deterioration in market conditions that we are witnessing.

The cumulative decline in year-to-date sales is slightly larger, at 4.4%, for total light vehicles (including light commercial vehicles) than for cars alone. There is no significant difference in this figure if we expand the horizon to include all countries applying to join the EU (including Turkey).

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. May this year had an extra Saturday, compared to May last year. We count Saturdays as selling days, so this does not affect our calendar adjustment. However, it might have impacted some of the early reporting countries – see the discussion on France below.

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We expect German sales to come in at around 292,000 units for May. This would represent a selling rate of just under 3.2 mn units/year, exactly in line with the outcome for April. It might be excessive to describe this outcome as an improvement (though for once the year-on-year comparison is positive), but if one wanted to put a positive spin on it, one could say that this outcome is consistent with the belief that an improvement is on the way. The selling rate is back to the January-December level, after very weak results in February and March. Manufacturers are pushing very hard – it is frustrating that there is no “incentive-ometer” that one can use to measure accurately what is happening to transaction prices, but they have probably dipped significantly. The latest data available to us on the order inflow is, however, not remotely encouraging.

The UK results were consistent with the gradual decline in the selling rate that we have been seeing since demand peaked in the final quarter of last year. The SMMT correctly points out that dealer sales were the second-best May ever, surpassed only by last year’s exceptional figures. However, with the decline in sterling, the incentive for buyers to bypass the dealer network (e.g. by personal imports) has dramatically reduced, and we believe that total sales were probably slightly higher in May 2001 and possibly May 2000. The 2.4 mn unit SAAR remains historically very strong, even if declining. The results in May showed a rather steeper decline in personal sales, and were supported by greater continued strength in fleet and business sales.

The double-digit decline in May sales in Italy looks like a weak result, and there is no getting away from the fact that it is a weak result – the worst since the deep trough of 1993-1996. However, we admit that we had expected an even lower figure. For one thing, there is a payback not just from the one incentive episode that ended in March, but to some extent even from the preceding one, both of which stimulated demand specifically for small cars. In addition, there had been a strike by drivers of car-delivery trucks in the first half of the month which prevented some vehicles getting to showrooms – though any effect of this is by now in the past. It must be demoralising for Fiat to be launching a new Gingo, a facelifted Punto and a new Lancia Y into a market from which the government (at the instigation, it must be said, of the industry lobby) has surgically removed a large proportion of small car demand by the pull-forward effect of the two incentive schemes. The inflow of new orders was very low in May, for the second consecutive month, and the bank of unfilled orders is declining.

So far this year, French sales have proceeded along a path of fairly orderly decline. The selling rate has slipped back each month, but not by much. May seemed to break that trend, with a really sharp fall in demand to one of the lowest SAARs in the last five years. The CCFA, in its commentary on the numbers, says that the number of working days was the same, and that is also the basis on which we have analysed the numbers. However, it is worth noting that the final sales of the month would have been on Saturday 31st, and these would presumably not have been included in the final count issued on Monday June 2nd. It may be clutching at straws to attribute part of the decline to this – in any event, the result would be disappointing even if there were one fewer effective day. Some manufacturers noted that the uptake by rental companies had been particularly weak.

The Spanish outcome was, for the second month running, mildly encouraging, in the sense that it suggests that the selling rate has now stabilised, after recent declines. Once again, increased sales to rental companies played an important part in sustaining demand – the cumulative decline for sales to private buyers was closer to 5% than to the 3% shown in our Table.

Among the smaller countries, Finland and Sweden continue to provide the only bastions of support amid a welter of minus signs. The Swiss market is clearly going through a very weak patch – the May results are not yet available, but the previous months tell a consistent story of decline. Results from Ireland and Portugal were particularly disappointing.

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