After the strong incentive driven end to 2004, especially in Germany, the European car market was always expected to be weak in January. The seasonally adjusted annualised sales rate (SAAR) duly declined to 13.9 million units after hitting a bumper 16.5 million-unit level in December. But JD Power-LMC says that the recovery from January’s market ‘payback’ could appear as early as February, although the prognosis for the year remains for an essentially flat European car market.
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Summary
- West European car sales grew by a very small amount, 0.2%, in January, in year-on-year terms. Payback from a strong incentive-driven December result took place again, as it did in early 2004.
- Seasonally adjusted annualised sales were down sharply from December at 13.9 mn units/year, though a rebound in February is anticipated.
- Payback hit in Germany, Italy and the UK, while car markets in France and Spain appear to have been less affected.
- Spain continues to stand out as one of the best-performing markets in Europe, while sales in the UK look increasingly vulnerable.
We already suspected, from the explanation of the very strong December result a consequence of the liberal use of manufacturer pricing incentives that January would be weak. The only way that strong sales could continue would be if the manufacturers felt the need to continue to boost the market strongly with incentives, but the December result was more about achieving year-end targets so incentives were bound to be reduced. The resulting drop in the selling rate in January was merely payback from this action, and so is not as alarming as it might appear at first glance. We should expect to see the selling rate recover, and perhaps quite strongly, as soon as February. So, if January is not to be taken as a gloomy indicator of what’s to come, what is the likely direction of the market in 2005?
Our view is that sales will struggle to match the level set in 2004. Before December, we had expected perhaps a slight gain in sales in 2005. Now that December has effectively pulled a chunk of sales forward, into 2004 and at the expense of January 2005, it is possible that there might even be a small fall in sales in 2005.
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By GlobalDataThe 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 fewer selling day in January, compared with 2004.
German car sales fell back sharply in January after the very strong incentive-driven December result. In year-on-year terms the fall was around 3%, though on a seasonally adjusted basis this January was fractionally better than last. We do not expect a sub-3 mn units/year selling rate to persist for long this is even weaker than the already low level of demand might imply but there is now a real likelihood that sales in 2005 will be less than 2004.
UK car sales came in worse than expected, even though payback was anticipated, falling by over 8% year-on-year. Remember that January 2004 was also afflicted by incentive payback from the previous December so like-with-like comparisons are not that unreliable in judging the level of demand. We have been expecting a decline in UK sales it has been evident in certain parts of the market for some time, particularly retail sales and the January result, supports this view. We continue to expect the UK market to fall in 2005, and perhaps by as much as 7%.
In Italy, sales fell back in January as predictably as they did elsewhere in Europe: the near 3 mn units/year selling rate in December was totally at odds with the underlying picture of consumer confidence so the explanation provided by official sources in Italy that demand had been strongly stimulated by manufacturer incentives was clearly accurate. There should be some recovery in the selling rate as the year progresses, though a poor level of incoming orders and weak macro-economic fundamentals both point in the direction of market deterioration in full-year 2005.
The French market, having not been strongly impacted in December by the incentive activity in many other countries, was correspondingly stable in January there was little pull forward in sales so there need not be any payback either. The selling rate of around 2 mn units/year was almost identical in both months, revealing a calmness which has been absent in many other markets. With a slow but steady improvement in the economy we expect that sales in France may rise by a couple of percent this year.
The Spanish market continued to boom with the selling rate easing off only marginally from very strong 1.8 mn units/year in December to 1.7 mn units/year in January. We remain conservative with respect to the outlook the market is at such a high level it is difficult to imagine the circumstances under which further growth can come but watchers of the UK market over the past few years will understand all too well that sales can defy gravity for an extended period if demand conditions remains strongly supportive. Only a slight easing in the Spanish market is therefore projected for 2005.
Belgium, Ireland and, early estimates indicate, the Netherlands were among the more prominent smaller countries making a positive contribution to the market falling year-on-year sales in larger countries such as Germany, Italy and the UK offset much of these gains of course, resulting the relatively flat overall year-on-year total.
