November saw an unexpected surge in new car sales in Europe. Previously weak markets such as Germany and France recorded impressive gains. But the apparent demand upturn has more to do with incentives and new product availability than underlying consumer sentiment. And the outlook for the car market in Western Europe in 2005 remains weak. JD Power-LMC reports.
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Summary
- Seasonally adjusted annualised sales rose sharply to over 15.2 mn units/year in November – year-on-year sales rose by an impressive 9%.
- Year-on-year gains were commonplace in Western Europe’s markets with rises reported in some of the previously weak markets such as Germany and France.
- Spanish demand continued to impress and remains at record levels.
- The UK market was solid but continued to ease back in November.
November 2004 was one of the best Novembers on record – only in 2001 was the result better and the difference is currently so small that minor revisions, as data is revisited, could easily see November 2004 increased slightly to top the 2001 result. As we note below, seasonal factors were acting positively – there were more selling days than last year for instance – but that cannot explain all of the strength. Car sales remain closely aligned to consumer confidence yet, if one looked at consumer sentiment surveys, a very strong rise in sales would not be expected. This apparent contradiction can be understood by looking at other factors which can influence car demand: one such factor is manufacturer pricing incentives; another is new model availability.
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During the recent period of sliding, or only slowly growing, demand for cars, manufacturers have employed incentives in order to stimulate demand. This can become particularly evident towards the end of set time periods, for example, the end of a quarter or the end of a year. It already looks as if 2004 will see some of this behaviour, replaying the events of last year, so December will probably be strong. (Of course this means that a weak January will be in the offing also.) On the second point there have been a number of new models launched in 2004 and buyers may well be tempted by the new Golf, Astra, Focus and BMW 3 Series, to name but a few. Even here though we also know that incentives have been required to promote sales so it is pricing incentives which we judge to be dominant at the moment.
2005 does not currently offer any great hope for a rise in car demand. A number of negative macro-economic factors are colliding (high oil price, appreciating currencies) to produce downward revisions to economic growth forecasts across the continent. Our assessment for the car market in Western Europe is that sales will struggle to grow at all in 2005 – meanwhile the issue of incentives will remain as contentious as ever with significant risk, both upside and downside, resulting.
The chart above 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. There was one more selling day in November, compared with 2003.
November was the best month of the year so far in Germany – but early indications are that this is not necessarily related to a burgeoning consumer recovery. In fact it is far more likely that incentives are the main driver behind the strong result and this implies that there is little sustainability beyond the next month or so. Consumer confidence remains weak and flat. This is reflected in the split between sales to businesses and to private individuals: the former is solid and has even strengthened slightly over the last year, while the latter is, broadly speaking, on the slide. We expect only a small volume of growth in Germany in 2005.
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By GlobalDataThe UK market continues to slowly moderate from the period of very strong sales that has been in place since early 2001 through to 2004. Yet, there has been no sharp fall in the market despite concerns that the UK consumer must soon halt spending as house prices threaten to fall and interest rates have crept up. Trends in the underlying composition of the market were a little volatile in November as retail sales bounced back sharply – business fleet (large and small) were somewhat steadier. A more concerted decline in the market is expected for 2005.
It was another relatively solid, though perhaps uninspired, month in Italy. While sales were down in year-on-year terms the selling rate showed a slight gain on the level of the year to date: sales of 2.25 mn are expected for full-year 2004. The outlook for 2005 is scarcely better than this – there are formidable macro-economic issues to be dealt in the near future with which may threaten consumer spending – though incoming orders data do continue to trend gently upwards indicating that at least the next month or two should be relatively secure.
In France, the market leapt in November – the selling rate hit 2.2 mn units/year and consumer confidence also was strongly up. Are we seeing the beginnings of an upturn in France? Our own expectations have been, for some time, that 2005 would see a recovery in car demand and this could be the first signal that the market is about to turn round its three-year decline. We project a 4% increase in sales in 2005 following the fairly depressed 2 mn unit market of 2004.
Spain remains the star performer in 2004, accounting for around half of all of the positive gains in Western Europe – and November was a particularly strong month for this booming market. A new record is now inevitable for 2004 and 2005 look set to start strongly. What’s more, there are relatively few signs of overheating, either in the economy or in the vehicle market. We expect little decline in this market in 2005.
Belgium and Greece stand out from other small markets in terms of year-to-date sales in 2004, each punching above their weights in terms of their contribution to growth. In November, Portugal showed some signs that a recovery may be finally forming, after a period of very weak demand.
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