While West European car demand in July was not as high as in the previous month, with a Saar (seasonally adjusted annualised rate of sales) of 14.4 mn units/year versus the 15 mn units/year in June, it was stronger than any of the first five months in 2003.


“For the first time since late 2002, when Italian incentives artificially boosted sales, July represented more evidence that a combination of aggressive marketing and gradually returning confidence are bringing an end to the decline in underlying demand which afflicted the early part of this year,” said Pete Kelly of J.D.Power-LMC.


There are a number of notable points:


1. There was continued strength in the UK, where year-on-year sales fell by only a small amount. But July 2002 was a strong month in a record year and this July is therefore a continuation of unprecedented strength in UK demand. Furthermore, it was retail sales which drove the market, proving that while the consumer boom may be long lived, it is far from over.


2. Increased German and Spanish sales, coupled with mild improvements in consumer confidence, paint a picture of recovery from marked weakness earlier in the year. An early appearance of recovery in Italy is welcome but may not be sustainable.


3. A poor result for France, while not unexpected, bodes ill for this market’s contribution to the European market this year.


Summary:




  • Car sales ran at a seasonally adjusted annualised rate (SAAR) of 14.4 mn units/year. This was the second highest result in the year to date. While well behind last month’s exceptionally strong (15 mn) result, it was well above the 13.8 mn average of the five preceding months. In absolute numbers of vehicles sold, the result was essentially unchanged from the year-ago level.
  • While difficult to quantify, evidence from a number of markets, including Italy and Germany, suggests that the strength of sales owes a great deal to aggressive marketing and low prices.
  • Weakness in France was the strongest negative influence on the July result. While the UK result was strong on any long-term comparison, it was somewhat below the year-earlier level.
  • Offsetting the year-on-year declines in France and the UK (and some smaller countries, notably Portugal), were year-on-year gains in Spain and Germany, both of which seem to have recently ended a period of declines in the SAAR. Italy also produced a result, which, so soon after the end of the incentive programme, was unexpectedly strong.

July was a relatively strong month for West European car demand, having a SAAR better than any month but June, which looks like an aberration when set against the backdrop of the pronounced weakness in the first five months. The 14.4 mn selling rate seen in July compares adversely with last year’s 14.5 mn out-turn, but was well above what we saw in earlier months. It will help to understand this outcome if we subdivide the region into three groups of countries, since the automotive cycle is at different stages in different countries. In Finland and Sweden sales continue to rise. One measure of the contribution from the tiny Finnish market is that the increase in what Finland contributed to the 14.4 mn SAAR in July was sufficient to offset as much as half of the decline in the French market.
 
In another set of markets – which constitute the majority – there was a tendency to decline in the selling rate during the first quarter of this year, but recent results show a stabilisation of demand, and in some cases even hints of a return to growth. Spain, France, Germany and many of the smaller countries fall into this group, though in France there is as yet no hint of any upturn. Of the larger countries, only the UK appears to be on a negative part of its cycle, though even at this late stage of the cycle, sales continue to be sustained much better than might have been expected.
 
When wider Europe is considered, encompassing Western and Central European car markets, year-to-date figures are down by only 1.7%, compared to the 2.5% shown for Western Europe, indicating healthy improving demand in Central Europe – Turkey and Poland are recovering from profound weakness in 2002. LCV demand in Western Europe is down by almost 5% year-to-date and, with business confidence not enjoying its own version of the mild improvement in consumer confidence, prospects for the latter part of 2003 look ominous.
 
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. July had the same number of Saturdays and Sundays (4) as last year, so calendar effects were neutral.







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click the chart to enlarge

We expect German sales to come in at around 290,000 units. The May-July period shows a cluster of sales with an average seasonally adjusted annualised selling rate of 3.3 mn units/year, representing a clear improvement since May in Europe’s largest market over the 3.1 mn average in the January to April period. Consumer confidence remains low, but is improving, and disposable income is about to be boosted by tax cuts. Incoming orders for new cars had until recently been showing no clear trend. That has changed: the evidence of an upward trajectory in new orders now looks convincing.


The UK remains one of the bright spots on the European horizon in terms of its vigour and, in all likelihood, short-term future performance. The July selling rate, at 2.67 million units/year is historically strong and only a negative comparison with an even stronger result in July 2002 can take off some of the shine. In fact, if we compare the data on dealer sales reported by the SMMT, we find little signs of a year-on-year decline in July. That is misleading. A year ago, non-dealer sales were still an important component of the UK market. Now, following the decline in sterling vis-a-vis the Euro, they have all but vanished. The UK consumer’s prolonged spending spree has yet to come to an end, despite many warnings from economic forecasters that it must. Car demand continues to be sustained by relatively strong growth in consumer expenditure, albeit financed by rising debt. It is a positive sign that the outcome in July owed more to growing private sales than to the fleet market, which contracted year-on-year.


French car sales dropped by a substantial 6% in July; there have been bigger drops this year, but when the selling rate is examined (2.04 million units/year in July), then it is clearly no better than the preceding six months. One encouragement that can be taken, of course, is that at least the selling rate is not falling further. Consumer confidence remains very weak, although it has improved slightly from a six-year low in March, but incoming orders have been very weak in the second quarter. Furthermore when consumers were asked about intentions towards major purchases in the next 12 months the response was flat, indicating that there is little likelihood of a pickup in demand in the near future.


The Spanish market, so often a source of strong sales over the past few years, did not disappoint in July. The selling rate remained above 1.5 million units/year, thus proving that the strong out-turn in July was no fluke. These two months have now moved the year-to-date sales figure into positive territory but the interesting thing to note is the source of this strong demand: the rental vehicle sector. Strong gains in demand from this small sector, which so far this year has accounted for less than one fifth of the total car market, have just managed to offset a fall in demand from private and company buyers. However, the rate of growth of rental sales does not appear sustainable and, in future, without this source of demand the gradual decline in the core market may come to the fore.


Italy’s 220,600 registrations in July represent a selling rate of almost 2.2 mn units/year, which was more than expected so soon after the end of the incentive scheme. The UNRAE press release indicates that buyers are more insistent about taking delivery of new vehicles before the summer holidays, suggesting lower sales in August and September. The market was clearly being “forced” by heavy pre-registrations (Km 0 sales, as they are known in Italy) and a major push on rental companies. One knowledgeable observer commented, with respect to the July results: “crazy market, crazy dealers, crazy carmakers. The Holy God is the quota, and for that reason everybody is losing money”. Incoming orders, at 189,000 units, were not bad in comparison with the recent trend, but, combined with the high level of deliveries, it looks as though the backlog of unfilled orders is beginning to fall sharply.


Greece and Portugal were among the poor performers in year-on-year terms but in both cases it may now be the case that the worst of the damage has been done. Belgian sales were moderately encouraging with July consolidating the strong June result (same selling rates), while the steady growth in Swedish demand continued.







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click the chart to enlarge