- July’s significant growth in new car sales reinforces belief that improved consumer spending will help the economy return to clear growth in the third quarter – the EY ITEM Club expects GDP to grow around 12% quarter-on-quarter in the third quarter after likely contraction by around a record 20% quarter-on-quarter in the second quarter
- New car sales clearly benefitted in July from a strong element of pent-up demand as people who had wanted to buy new cars since March were largely able to get to showrooms. Even in June, it had been reported that one-in-five showrooms in England were still closed while showrooms in Wales, Scotland and Northern Ireland had opened as the month progressed
- Private car sales seemed to be lifted by pent-up demand in July as they led the way with an increase of 20.4% year-on-year; fleet sales were up 5.3%
- Despite July’s rise, new car sales were still down 41.9% year-on-year at 828,389 vehicles over the first seven months of 2020
- Even with July’s increase in car sales and the likelihood that pent-up demand could provide further near-term support to demand, there are still significant uncertainties and concerns over the outlook for the car sector
- The near-term fundamentals for consumer spending have clearly taken a substantial downturn as a result of coronavirus. Many people have lost their jobs, despite the supportive Government measures, while others may be worried that they may still end up losing their job once the furlough scheme ends. Additionally, many incomes have been affected
- Consumers and businesses may adopt a cautious approach to discretionary purchases given recent months and a still uncertain outlook. This could especially be the case for big-ticket items such as new private cars, while fleet purchases could be delayed
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The SMMT reported that new car sales rose 11.3% year-on-year in July to 174,877 vehicles; this marked the first increase in new sales since December 2019.
“New car sales clearly benefitted in July from a strong element of pent-up demand as people who had wanted to buy new cars since March were able to get to showrooms across the UK.
“July’s rise of 11.3% year-on-year in new car sales followed a reduced fall of 34.9% year on-year vehicles in June, when 145,377 vehicles were sold, as car showrooms were allowed to re-open in England from the start of the month on the condition that certain guidelines were met. Even so, it was reported that one-in-five car showrooms remained closed in England during June while showrooms in Wales and Scotland were not allowed to open to 22 and 29 June respectively.
“Very few new cars had been sold in both May and April as dealerships were closed. New car sales fell 89.0% year-on-year in May to 20,247 vehicles from 183,724 in May 2019. April saw a decline of 97.3% year-on-year to 4,321 vehicles, the lowest level since 1946.
“Earlier in the year, new car sales had been limited by a number of factors: consumer and business caution over making major purchases, reduced demand for diesel cars amid environmental concerns and uncertainties over policy, and stricter emission regulations affecting supply.
“Even before coronavirus, year-on-year drops in new car sales in both February (2.9%) and January (7.3%) had indicated that the sector had not benefited from any reduced uncertainties and increased consumer and business confidence early on in 2020 following December's election. There was a drop of 44.4% year-on-year in the month of March – a key month because of number plate changes – to 254,684 vehicles as coronavirus had an increasingly negative impact on consumer and business behaviour, culminating in the lockdown on 23 March when car showrooms were closed.
“Consequently, new car sales were still down 41.9% year-on-year at 828,389 vehicles over the first seven months of 2020 Despite July’s rise.
“Diesel sales fell 25.9% year-on-year in July.”
Private new car sales led the way in July, rising 20.4% year-on-year
Howard Archer continues: “Private new car sales were the strongest sector in July, rising 20.4% year-on-year to 79,929 vehicles, indicating that they particularly benefitted from released pent-up demand.
“This followed a drop of 19.2% year-on-year in June to 72,827 vehicles. New private car sales had previously fallen 83.8% year-on-year (to 12,900 vehicles) in May and 98.7% year-on-year (to just 871 vehicles) in April.
“Consequently, private new car sales were down 37.8% year-on-year over the first seven months of 2020 at 394,521 vehicles.
“The current fundamentals for consumer spending have taken a downturn as a result of coronavirus, and they are likely to remain under pressure in the near term at least. Many people have already lost their jobs despite the supportive government measures – as was highlighted by employment falling by 621,000 over April/May (according to Pay as You Earn Real Time Information data) while others will be worried that they may still end up losing their job once the furlough scheme ends in October. Additionally, many incomes have been affected (the furlough schemes covers wages up to 80% of their normal level); latest ONS data show average earnings fell 1.2% year-on-year in May.
“Recent good news for consumers has been inflation at 0.6% in June (it was even lower at 0.5% in May, the lowest level since June 2016). The EY ITEM Club suspects that inflation could get down to 0.1% over the next few months. Even so, ONS data show that real earnings fell 1.9% year-on-year in May itself and were down 1.3% year-on-year in the three months to May.
“Consumers are likely to adopt a very cautious approach to discretionary purchases given the current economic environment. Consumer confidence currently remains at a relatively low level despite coming off recent long-term lows.
“On the positive side, four months of net repayment of unsecured consumer debt totalling £15.7 billion over March-June has improved many households’ balance sheets, which will help some consumers’ purchasing ability.”
Fleet sales also saw increase in July of 5.2% year-on-year
Howard Archer continues: “New car sales to the fleet sector rose 5.2% year-on-year in July to 91,857 vehicles. This followed a still substantial fall of 45.2% year-on-year in June to 69,498 vehicles after declines of 93.4% (to 6,638 vehicles) in May and 96.6% year-on-year to 3,090 vehicles in April.
“Consequently, new fleet sales were down 45.0% year-on-year over the first seven months of 2020 at 417,371 vehicles.
“Finally, new car sales to the business sector – which are now very small – fell 11.8% year-on-year in July to 3,101 vehicles. This followed year-on-year falls of 52.6% in June, 81.1% in May and 88.3% in April.
“New car sales to the business sector were down 50.3% year-on-year over the first seven months of 2020 at 16,497 vehicles.”
Future UK-EU relationship a concern for UK car sector
Howard Archer adds: “Further out, car manufacturers will be affected by the form the UK’s longer-term relationship with the EU will take. In particular, car manufacturers will be monitoring the possibility that the UK and EU could fail to reach a free trade arrangement by the end of the year when the transition arrangement ends.
“An issue for the car sector is that while the Government wants a free trade agreement with the EU that removes tariffs and quotas, it wants less regulatory alignment with the EU so the UK is able to diverge in rules and standards. This could mean costs, new rules, and frictions at the border, which will affect businesses with integrated supply chains – notably the car sector.”