In this note, we review
some indications of a phenomenon that is fraught with importance for the auto
industry: consumers appear to be allocating a lower priority in their spending
budgets to the purchase of new cars.
Spending on the acquisition
of cars is something that normally is expected to rise as income rises. This
is true both if you look at whole countries across time, or at particular income
groups within countries at a given moment in time. As incomes rise, the effort
of meeting basic needs for food and housing is less preoccupying, and a higher
proportion of income is allocated to goods, such as cars, which provide convenience
and enhance prestige.
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In addition, the acquisition
of a new car is an event whose timing can usually be adjusted in the light of
the prospective purchaser’s financial situation and expectations. For that reason,
the proportion of spending that goes to this purpose is much more volatile than
the proportion spent on most categories of non-durable consumer good. Typically,
when total spending rises, there will be a more than proportionate rise in spending
on cars, and when spending falls, car purchase will bear more than its share
of the reduction. Another way of looking at this is to say that, when total
consumer spending is rising, we expect to see the proportion of total consumer
spending that is allocated to buying cars also rising.
Stimulated by the rather
perverse weakness of the German market this year, we have been looking at macro-economic
data on consumer budgets in Germany, France and the UK – three large markets,
the last two of which have been faring relatively well this year (though the
UK is now past the peak of this car sales cycle), and the first of which has
been faring poorly, with car sales volumes down by around 10%. Perhaps surprisingly,
the same story seems to emerge in the case of the two stronger countries as
for Germany. And that story is: consumers are spending less on acquiring new
cars than one would expect, given the macro-economic climate.
This can be seen most clearly
in the case of France. In the chart below, the continuous blue line shows the
proportion of consumer spending that has been allocated to the purchase of cars,
against the left hand axis. The dashed purple line shows the rate of total growth
or decline in consumer spending (in constant prices), against the right hand
axis. Both lines have been smoothed by taking centred moving averages, in order
to bring out the trend more clearly.
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This clearly
shows the expected relationship: when consumer spending is growing rapidly,
the proportion that is allocated to buying cars is high, and when total spending
stagnates or declines, that proportion falls.
But it also
shows a very striking change in that relationship, dating from the last couple
of years. If you had been shown the data up to 1998, and had foreseen that in
1999 and 2000 France would be enjoying a consumer boom that would lead to growth
of around 3% in real consumer spending, you would have had every reason to expect
that the proportion of that spending allocated to the purchase of cars would
rise to something like 6.5%. Instead, it never even reached its long-run average
of 6%.
In other words,
if we look at the market that is currently the most dynamic of Europe’s major
automotive markets, we reach the same conclusion that was hinted at by the performance
of the weakest one: consumers are not spending as much on cars as one might
have expected. Whether or not high fuel prices have exacerbated this tendency
in the last couple of quarters, the original emergence of this trend pre-dates
the rise in fuel prices, and indeed began at a time when they were relatively
low.
If we look
at Germany in the same terms, we get the picture below. The correlation is less
obvious than it was in the case of France, in particular because the recovery
of consumer spending in 1995 failed to have an impact on the share of cars.
Again, we have taken moving averages to bring out trends, but in the case of
Germany we have left in the observations for the first two quarters of this
year, for a reason explained below.
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Germany:
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Many reasons
have been suggested for the recent weakness of German sales, among them the
rise in fuel prices and the weakness of the used-car market in Germany. Both
of these reasons look plausible if seen within a narrow German context, but
fail to explain why other countries, faced with the same stimuli, have responded
differently (UK fuel prices are some 28% higher for gasoline, 40% for diesel
than German prices, and the decline of prices of one-year-old cars, relative
to those of new cars, has been much steeper in the UK than in Germany. Yet UK
new car sales have not behaved in the same way as in Germany).
Until the second
quarter’s GDP data were provisionally published a couple of weeks ago, the most
plausible explanation of weak German car sales was that there was nothing particularly
odd about the behaviour of the car market, given that total consumer spending
had not begun to grow (on a seasonally adjusted basis, German consumer spending
was lower in the first quarter of 2000 than in the previous quarter). However,
the second quarter seems to have brought a marked return to consumer spending
growth – yet the proportion of that spending that was allocated to car purchase
not only failed to respond, but actually dropped to one of the lowest levels
that has been observed in the last decade. It would be wrong to make too much
of one quarter’s data, and it is very likely that the original estimates will
be substantially revised. However, it is not easy, after the second quarter’s
data, to blame the weakness of the German car market purely on macro-economic
factors.
In both Germany
and France, the share of consumer spending that goes on car purchase is, as
we have seen, typically around 6%. This forms part of a total transport budget
that may account for some 15% of total spending, out of which the purchase of
motor fuel accounts for about 3% (rather higher in recent quarters). In the
UK, the proportion of consumer spending allocated to cars is rather lower, presumably
because of the higher proportion of vehicle purchases that is carried out by
the corporate sector, rather than by households. The chart below represents
a slightly different way of visualising essentially the same data that we have
been looking at in the case of France and Germany. The continuous blue line,
plotted against the left hand scale, represents year-on-year growth in consumer
spending on acquiring cars (DCarP). The dashed purple line, plotted against the right
hand scale, represents, as before, year-on-year growth in total consumer spending (DPCons).
The variations in spending on cars are much larger, and it can be seen that
when consumer spending is growing, spending on cars is typically growing much
more rapidly.
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UK:
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But, once again,
we can see a break in trend over the last couple of years, with spending on
cars not merely growing less rapidly than one might have expected, but actually
declining in the most recent quarters. Again, the break in trend occurs too
early for it to be plausibly blamed on rising fuel prices.
Summary and Conclusions
number of steps separating total consumer spending on cars from the actual number
of new cars sold. We have been focusing on data from the realm of macro-economic
accounting, rather than on actual numbers of cars sold, because this brings
out more clearly the idea that we are interested in exploring – that West European
consumers may have allocated a lower priority to the purchase of new cars in
the recent past than they have customarily done in most of the past decade.
The data presented are suggestive, and not conclusive, and changes in consumer
spending are of course not the only variable that influence the proportion spent
on cars. (Separately from the above, we have also rigorously investigated the
idea that the launch of significant new models could affect the timing of vehicle
purchase – e.g. that the bulge in German sales last year might have been mainly
due to the availability in volume of important new models, such as the Golf
and Astra, that had been launched the previous year. We found this to be only
a weak influence). Other variables, particularly monetary ones, are also important
in specific national markets.
It seems fair
to conclude from the data presented that we should take seriously the notion
that consumers may have shifted their buying preferences in a way that is unfavourable
to the vehicle industry. Oddly, it was the data from two markets in which sales
are still relatively strong – France and the UK – that seem to hint most strongly
at this possibility. Although it was the weakness of German demand that originally
prompted this investigation, it is only in the most recent quarter that the
weakness of car sales in Germany goes beyond what might have been implied by
a consumer economy that is only now beginning to gather speed.
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Charles Young Tel: +44 1865 791737 URL: www.lmc.co.uk |
