Western European Car Sales Slip 7.7% Y/Y in July—Forecast

Western European passenger car sales fell sharply in July, according to IHS Automotive's latest forecast. The rate of decline increased to 7.7% year-on-year (y/y) in July, a sharp increase from the moderate 1.8% in June. However, July is a slow selling month in the region with just 911,786 units sold in the month and this lessens the impact on the year-to–date (YTD) January to July figures, which now run at 7.1%, down on 2011 with 7.399 million units. The ongoing poor SAAR rates show the true moribund nature of the market despite the moderated rate of decline in June. The SAAR rate has hovered between 12.1 and 11.8 million units since February this year, but has sharpened its downward curve of late and registered just 11.677 million units in July, leaving it lower than it was even during the depths of the financial crisis in 2008. The ongoing financial turmoil and fiscal tightening witnessed across the region are hitting consumer confidence and squeezing household budgets. With little respite on offer, the general mood and trend of decline is expected to continue in the near term.

German passenger car demand slipped back into retreat in July, as the market continues the fluttering in recent months. Demand during the month fell by 5% y/y to 247,680 units. This has hit the YTD figures, and growth over the past seven months has returned to negative territory with demand down by 0.1% y/y to 1,882,131 units. Nevertheless, these figures would suggest that the market is returning to a pattern of normality after the high gains and payback recorded in recent years.

The French passenger car market suffered a further setback from the more recent moderate rates of decline, registering a sharp fall of 7.0% y/y to 148,966 units in July. The sharp decline in July further contributed to the grim reading for the YTD, during which registrations are now down by 13.5% y/y at 1,197,429 units.

The Italian passenger car market continued its trend toward heavy declines as customers desert new vehicle purchases in response to the difficulties in the economy. Passenger car sales during July fell by 21.4% y/y to 108,826 units. This has added to the steep declines seen already this year, and has resulted in YTD sales of 923,739 units, down some 19.9% y/y.

Passenger car demand in Spain shrank further in July as the country's economic problems continue to keep customers away from car dealers. Demand fell by 17.2% y/y to 65,322 units in the month, leaving the contracting YTD figure at 471,393 units, a decline of 9.5% y/y as the market inexorably shrinks in the face of the multiple economic problems facing the region.

Passenger car sales in the UK have continued their upward trajectory in July, as registrations during the month increased by 9.3% y/y from 131,634 units to 143,884 units. The improvement this month was once again driven by private consumers, increasing this month by 26.4% y/y to 63,941 units. Demand from fleets contracted slightly, as unit sales dipped by 1.6% y/y, but it still remained the largest proportion of the market with a share of 51.6%. However, business customers have also witnessed a mild improvement during the month, up 2.1% y/y to take 3.9% of the market. The improvement in July has in turn offered a further positive contribution to the YTD, which now stands at 1,201,564 units, up 3.5% y/y.

Outlook and Implications

The poor economic data flooding out of the Eurozone continues to have an impact on vehicle demand there. Although the French market has now passed a high base of comparison period, lacklustre demand remains the order of the day. French GDP stagnated during the first quarter of 2012, but short-term indicators show that the economy is likely to have suffered a contraction during the second quarter of the year and forward-looking indicators suggest that it is entering the third quarter with a worrying lack of momentum. Going forward, IHS Global Insight expects the economy to remain under pressure as a result of a worsening labour market and tighter fiscal policy. While the latter should be enough for it to achieve its fiscal cuts in 2012, more measures may need to be put in place, if France wants to meet its target of a deficit 3% of GDP by 2013, particularly given that economic growth is still likely to be relatively muted then. Furthermore, weak economic conditions and still low business confidence levels will keep employment creation muted, meaning that the unemployment rate will remain relatively high over the medium term, which is likely to make new Socialist president François Hollande's plan to balance the books by the end of his term difficult to achieve. It now remains to be seen whether the French light-vehicle market will see any real benefits from the new measures introduced in July 2012 or whether it will just see a change in vehicle mix (see France: 26 July 2012: French Government Unveils Support Measures for Ailing Automotive Sector). For now, IHS Automotive anticipates that its sales in the market will decline by around 11% y/y this year, to around 1.96 million units, taking it below the pre-crisis annual average of around 2 million units, and is expected to stay stagnant at this level before rising again in 2014.

Demand in the Italian market since the beginning of the year has fluctuated, partly due to strike action in the first quarter orchestrated by vehicle transporters in the country. However, the overwhelming trend has been one of decline as the economic situation in the country continues to influence demand. One of the major problems is a dormant household economy, with nervous consumers continuing to refrain from non-essential spending, and the near-term outlook for household spending is poor at best, with consumers struggling to cope with uneven real income developments, deeper fiscal austerity, and an unpopular structural reform drive making for dismal levels of confidence. Poor economic data and reinvigorated contagion from the Eurozone debt crisis point to a painful and prolonged recession in Italy. Furthermore, despite IHS Global Insight assuming that the EU and European Central Bank will undertake a strong policy response in the event of a Greek euro exit, we expect some contagion to fall on Italy that could prompt a period of deep uncertainty around the exit event, resulting in a considerable hit on business and consumer sentiment. At the moment, IHS Automotive expects the Italian passenger car market to slip to 1.46 million units in 2012, another 18.3% y/y decline and taking it well below the 2.3-million average registered between 2003 and 2007. We also anticipate that the market will not show much semblance of a recovery until 2014, and even then it will take some time for the market to finally return to over 2 million units.

Although the situation in the Spanish passenger car market had initially appeared more stable, the continuing recent contractions indicate that the country is still heavily affected by its soft economic foundations. Indeed, it is the fourth country in the EU to request assistance after 10-year bond yields have risen aggressively and Fitch downgraded its long-term sovereign debt. This has led many to anticipate that a full sovereign bailout is increasingly likely to take place and the economy will also be in the firing line from some contagion from a Greek exit from the euro, despite the efforts of the EU and European Central Bank. This could prompt a period of deep uncertainty around the exit event, resulting in a further spike in domestic bond yields, some financial market disruption and a considerable hit on business and consumer sentiment. Given these expectations, IHS Automotive anticipates that Spanish passenger car sales will retreat even without the influence of a high base of comparison to contend with. We now expect that the market will reach just 691,299 units this year, well below half from pre-crisis levels, with an extremely slow recovery set to follow

The improvement this month in the UK is in contrast to the situation in other major markets in Europe, and comes despite figures for the second quarter showing that GDP contracted by a surprisingly steep 0.7% quarter-on-quarter (q/q). Even allowing for an appreciable hit to activity from an extra day's public holiday as a result of the Queen's Diamond Jubilee and very wet weather, this is a significant concern. IHS Global Insight sees that the economy is struggling amid squeezed consumer purchasing power; relatively tight credit conditions; tight fiscal policy; and muted global growth. This buoyancy is likely to have been driven by automakers and dealers in the UK offering a wide array of incentives including cash off the list price of the vehicle to favourable credit and leasing terms. However, events in the Eurozone are also weighing down on the UK economy and pose serious downside risks to the outlook. Although the UK economy is expected to return to growth in the second half of 2012, helped by reduced inflation easing the squeeze on consumers, a Greek exit from the Eurozone around mid-2013 is expected to lead to further weakness. Indeed, the chief executive of the SMMT Paul Everitt has said in a statement that, "International economic stability remains a concern for vehicle manufacturers and the UK market". Despite the growth this month, demand remains very much down on the levels recorded during the five years before the downturn begun 2008. When looking closely at the figures, average sales for July between 2003 and 2007 stand at almost 181,000 units making demand still down around one-fifth. IHS Automotive expects sales to hold firm in the full year compared to 2012 at 1.94 million units, rising to 1.96 million units in 2013 before finally returning over the 2 million unit mark in 2014.

The German passenger car market is gradually returning to more normal sales patterns after the volatility of the global credit crunch and the subsequent stimulus of scrappage. This trend is evidenced by the market's modest performance that has been a feature since the beginning of the year. Nevertheless, newly deteriorating leading indicators in recent months strongly suggest that encouragingly robust first-quarter GDP growth will be followed by approximate stagnation in the two subsequent quarters. Notwithstanding supportive factors such as a persistently robust domestic labour market, receding inflation pressure, rock-bottom interest rates, and weakening of the euro in May, the dampening effect of worries about economic ramifications of the Eurozone debt crisis is taking its toll. However, the market is benefiting from the best employment and wage growth conditions of the past 20 years, and part of these higher incomes are partly flowing into savings, reflecting consumers' concerns about the tax and other implications of the Eurozone sovereign debt crisis and the high uncertainty levels associated with this event. By the same token, this further boosts pent-up demand, which can be released once current concerns are assuaged.