The seasonally adjusted annualised rate of car sales in Western Europe hit 14.8 million units in October, consolidating the firm result in September. Sales were level with October last year. "The West European car market in October was strong reflecting aggressive incentives from car manufacturers, low interest rates and the beginnings of a return of confidence in some key markets such as Germany - but there remain some potential weak spots which could hamper growth next year," said Pete Kelly of JD Power-LMC.

Summary

  • The October seasonally adjusted annualised rate of car sales in Western Europe, at 14.8 mn units/year, consolidated the broadly positive result from September, providing further evidence that the market has stabilised. In year-on-year terms sales were level.
  • The German market continued its recovery, picking up speed a little from a very poor start to the year - the selling rate hit 3.4mn units/year. Italian car sales also gained ground while demand in the UK was strong, though slightly reduced from mid-year highs. The Spanish market remains a star performer but may be being positively influenced by the scheduled end to a government incentive scheme in December.
  • Manufacturer incentives continue to be a theme in explaining the level of demand in most countries, while low interest rates have also helped boost sales - the current unsupportive economic backdrop is being, to some extent, offset by these positive factors.

October new car sales were level with the previous year as the market continued its recovery from a spell of pronounced weakness earlier in the year. In terms of behaviour, the year can be roughly split in half: the first five months were characterised by an average selling rate of 13.86 mn units/year; in the subsequent five months, from June to October, the selling rate improved by almost 1 mn units to 14.72 mn units/year as buyers moved up a gear.

The use of incentives by car manufacturers to boost sales during the current weak spell in underlying demand, while not a new phenomenon, is changing the way that expectations for vehicle sales should be assessed. It is increasingly clear that aggressive incentives are the preferred option for car makers when the alternative is falling volumes resulting from an economic slowdown - manufacturers have responded this year to the poor level of underlying demand, resulting from slow growth in consumer spending and the wider economy, with great success and have effectively put a floor under the market, even boosting it slightly in recent months. In future periods of stronger underlying demand the widespread use of incentives will no doubt be scaled back.

Pan-European light vehicle sales, including cars and light commercial vehicles with GVW<6t across Western and Central Europe, are slightly down (-1.4%) year to date with sales of 17.6 mn units.

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. The number of selling days in October of this year was the same as in 2002.

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The selling rate in Germany, at first estimates over 3.4 mn units/year in October, marked a further improvement on those gains already staged in the year so far. Consumer confidence continued to improve in October and, as with seasonally adjusted annualised car sales, notched up the strongest reading for a year. Clearly, there remain obstacles to growth in this key market, such as the high level of unemployment but, with positive economic signals coming from the broader economy, there seems to be room for optimism.

The UK market continued its strong performance in October with a selling rate of just over 2.5 mn units/year. This remains a very good result but represents a slight slowdown from the previous four months when the selling rate was over 2.7 mn units/year. The question of sustainability remains utmost in our minds in assessing the future path of this market, which has been crucial in supporting the wider West European total in 2003. The UK's private buyers have been the primary locomotive in the market and the fact that consumer debt is at record levels and interest rates are expect to rise should be a cause for concern and underlies our expectation that sales must ease back soon.

The French market continued on its path towards stability in October with a selling rate a little in excess of 2 mn units/year. This is a fairly mediocre level of sales by historical standards but it should be noted that during the last serious economic downturn, in 1993, sales were 14% below our expectation of about 2 mn units for this year in total. The combination of manufacturer incentives and low interest rates are helping support demand at this crucial time - this is indeed the case in many other countries. Consumer confidence remains weak and the outlook for growth in consumer expenditure over the coming year remains relatively unsupportive of demand so prospects for car sales, while not seriously negative, look flat.

The Italian car market consolidated the mild improvement of September as the initial October selling rate came in at over 2.3 mn units/year. Aside from the ubiquitous manufacturer incentive schemes, new model activity has been cited as a major driver in the current market - these factors are offsetting the rather negative contribution to demand being made by the poorly performing economy. In Italy, of course, new model activity refers primarily to Fiat Group model launches. While there have been improvements in the recent past, incoming orders remain weak, so casting a shadow over the outlook the final months of 2003 and early 2004.

The Spanish buyer is shrugging off the concerns of the early part of 2003 when sales to businesses and consumers were consistently lower than in the previous year. Luckily, at that time, growth in the tourism industry boosted demand for rental vehicles and explosive growth in that element of car demand helped offset falls in the core market. Now the situation has reversed and, even though rental sales are falling, the improved level of confidence in the economy is generating real demand. The scheduled end to the Prever incentive scheme, a scheme that in fact may yet be extended, is also helping boost sales.

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Of the smaller countries in Western Europe, Finland and Belgium were the strongest positive contributors to car sales in October - and, year to date, Finland continues to remain slightly ahead of Spain in terms of volumes added to the West European total. The Netherlands, a country in which there is currently an acute economic recession, accounted for a major drop in volumes in October.