Ironically falling UK car registrations are impacting on French manufacturers

Yesterday afternoon saw some good news for my topic of the day. It came from a sector of the UK economy which over the past decade has seen an extraordinary boom which is premiership football. From the BBC.

Crystal Palace’s chairman has unveiled plans to increase Selhurst Park’s capacity to more than 34,000.

Steve Parish said the expansion, expected to cost between £75m-£100m, would be an “icon” for south London.

The full revamp is expected to take three years to complete, and work could begin “within 12 months”.

KSS, the architects behind the project, have previously redeveloped sporting venues including Anfield, Twickenham and Wimbledon.

If you travel past the ground then without wishing to upset Eagles fans it is to put it politely in sore need of redevelopment. But as well as a boost and if you make the usually safe assumption that it ends up costing the higher end of the estimate we see that each extra seat costs something of the order of £12,500. Is that another sign of inflation in the UK or good value.?

If we continue on the inflation beat then this morning has bought grim news for railway commuters as the BBC points out.

Train fares in Britain will go up by an average of 3.4% from 2 January.

The increase, the biggest since 2013, covers regulated fares, which includes season tickets, and unregulated fares, such as off-peak leisure tickets.

The Rail Delivery Group admitted it was a “significant” rise, but said that more than 97% of fare income went back into improving and running the railway.

A passenger group said the rise was “a chill wind” and the RMT union called it a “kick in the teeth” for travellers.

The rise in regulated fares had already been capped at July’s Retail Prices Index inflation rate of 3.6%.

We see a clear example of my theme that the UK is prone to institutionalised inflation in the way that the rises are capped at the highest inflation measure they could find. Suddenly the “not a national statistic” Retail Prices Index or RPI is useful when it can be used for something the ordinary person is paying in the same way it applies to student loans. Whereas when it is something that we receive or the government pays then the lower ( ~1% per annum) Consumer Prices Index or CPI is used.

The rail industry is an unusual one where booming business is a problem.

Here’s some examples. Passenger numbers on routes into King’s Cross have rocketed by 70% in the past 14 years. On Southern trains, passenger numbers coming into London have doubled in 12 years…….There is a push to bring in new trains, stations and better lines, but it’s difficult to upgrade things while keeping them open and it’s seriously expensive.

Ah inflation again! Of course railways suffer from fixed costs due to their nature but we never seem to get to the stage where maximising use reduces costs do we?

The economic outlook

If we look at the business surveys from Markit ( PMIs) we see that the UK economy continues to grow at a steady pace with according to the surveys construction and particularly manufacturing doing well.

On its current course, manufacturing production is rising at a quarterly rate approaching 2%, providing a real boost to the pace of broader economic expansion…….

This morning has brought the services data which you might think would be good following them but of course things are often contrary.

November data pointed to a setback for the UK
service sector, with business activity growth easing
from the six-month peak seen in October. Volumes
of new work also increased at a slower pace, while
the rate of staff hiring was the joint-slowest since
March.

So growth continued but at a slower rate as the reading fell to 53.8 in November from 55.6 in October. Also there were inflation concerns being reported.

Sharp and accelerated rise in prices charged by
service providers.

This is very different to the official data although it only covers the period to September.

The annual inflation rate in the latest quarter was above the average for the period, at 1.3%.

The average is for the credit crunch era.

This means that according to the business surveys the UK economy is doing this.

The survey data are so far consistent with the economy growing at a quarterly rate of 0.45% in the closing months of 2017.

I did challenge the spurious accuracy here and got this in response from their chief economist Chris Williamson.

Hi Shaun – October UK PMI was consistent with +0.5% GDP while November signalled +0.4%. Seemed sensible to split the difference!

Car Trouble

Regular readers will be aware that the boom in this sector has faded and perhaps turned to dust in 2017. This morning the Society of Motor Manufacturers and Traders has reported this.

The UK new car market declined for an eighth consecutive month in November, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT). 163,541 vehicles were registered, down -11.2% year-on-year, driven by a significant fall in diesel demand.

The fall was led by businesses.

Business, fleet and private registrations all fell in the month, down -33.6%, -14.4% and -5.1% respectively. Registrations fell across all body types except specialist sports, which grew 6.7%. The biggest declines were seen in the executive and mini segments, which decreased -22.2% and -19.8% respectively, while demand in the supermini segment contracted by -15.4%.

This means that the state of play for the year so far is this.

Overall, registrations have declined -5.0% in the eleven months in 2017, with 2,388,144 cars hitting British roads so far this year.

Hitting the roads? Well hopefully not but the economic consequences are ironically being felt abroad as much as in the UK. From the UK point of view there is a fall in consumption and to the extent of some business use a fall in investment. But we mostly import our cars so in terms of a production impact it will mostly be felt abroad. As it turns out the major impact will be felt in France as so far this year we see registrations have fallen by 18% for Citroen, 16% for Peugeot and 17% for Renault totalling around 38,000 cars for the sector. Individually the worst hit of the main manufacturers seems to be Vauxhall which is down 22% this year.

As to the type of car that has been worst hit then I am sure you have already guessed it.

heavy losses for diesel, falling -30.6%.

On that subject the SMMT seems lost in its own land of confusion.

Diesel remains the right choice for many drivers, not least because of its fuel economy and lower CO2 emissions.

That ( and the tax advantages) persuaded me to get what I thought was a new green and clean diesel only to discover that instead I have been poisoning the air for myself and other Londoners. So I guess more than a few are singing along to the Who these days.

Then I’ll get on my knees and pray
We don’t get fooled again
No, no!

We await to see how this impacts on all the car loans and note that the UK is not alone in this if the Irish Motor Industry is any guide.

New car sales year to date (2017)131,200 (2016) 146,215 -10%

Comment

There is a fair bit to consider so let us start with the car market. Whilst there is an impact on consumption and perhaps a small impact on production ironically the impact on our trade and current account position will be beneficial as explained by this from HM Parliament.

The value of exports totalled £31.5 billion in 2016, but imports totalled £40.3 billion, so a trade deficit of £8.8 billion was recorded.

So the impact on UK GDP is not as clear as you might think especially if we continue to export well.

UK car manufacturing rises 3.5% in October with 157,056 cars rolling off production lines.Exports up 5.0% – but domestic demand falls -2.9% as lower consumer confidence continues to impact market.

The main problem for the UK would be if the current inflation surge continues so let us cross our fingers that it is fading. Otherwise 2017 has been remarkably stable in terms of economic growth driven by two factors which are the lower Pound £ and the fact that the world economy is having a better year.

Meanwhile I will leave the central bankers and their acolytes to explain why a development like this is bad news. From Bloomberg.

Among the coconut plantations and beaches of South India, a factory the size of 35 football fields is preparing to churn out billions of generic pills for HIV patients and flood the U.S. market with the low-cost copycat medicines.

 

 

 

 

 

 

 

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Will car loans be the canary for UK unsecured credit?

Yesterday the news hounds clustered around one piece of economic news as they caught up at least tangentially with something we have been looking at for some time. From the Society of Motor Manufacturers and Traders.

UK new car market falls for sixth consecutive month in September – down -9.3% to 426,170 units. First time the important September market has fallen in six years.

This will have had an impact in various areas as for example if you happened to be an unreliable boyfriend style central banker looking for a reason to cancel a proposed Bank Rate rise for the third time you might think you have struck gold. However we were expecting trouble because as I pointed out on the 22nd of August there had to be a reason why manufacturers were offering what they call incentives but we call price cuts?

Ford is the latest car company to launch an incentive for UK consumers to trade in cars over seven years old, by offering £2,000 off some new models.

Unlike schemes by BMW and Mercedes, which are only for diesels, Ford will also accept petrol cars.

That issue has been added to by the uncertainty over what is going to happen to older diesels of the sort I have.

Confusion surrounding air quality plans has inevitably led to a drop in consumer and business demand for diesel vehicles, which is undermining the roll out of the latest low emissions models and thwarting the ambitions of both industry and government to meet challenging CO2 targets.

Back in the day I was told my Astra was efficient and low emission but let us move on whilst noting that official credibility in this area is very low. Registrations had been falling for 6 months compared to the year before so that we now find we have stepped back in time to 2014.

Year-to-date, new car registrations have fallen -3.9%. But, overall, the market remains at a historically high levels with over 2 million vehicles hitting UK roads so far this year.

What does this mean?

This is more of a consumption issue for the UK economy than a production or manufacturing one. You see in the year to August some 78.4% of UK car production was for export so whilst there is a downwards impact it is more minor than might otherwise be assumed. Ironically a fall in UK demand affects producers abroad much more as this from the European body indicates.

The other way round, the EU represents 81% of the UK’s motor vehicle import volume, worth €44.7 billion.

For example Germany exported 809,853 cars to the UK in 2015 according to its trade body. Actually it may not be the best of times to be a German car manufacturer. From Automotive News Europe.

FRANKFURT — New-car registrations in Germany fell 3.3 percent in September as continued uncertainty over the future of diesel-powered cars hit demand.

The issue is complex as much manufacturing these days is of parts rather than complete cars. For example the UK engine industry has had a good 2017 but it is more domestic based so it will need more months like August if it is to carry on in such a manner.

Engine production rises 11.9% in August with more than 150,000 made for export and home markets. Overseas demand drives growth in the month, up nearly 20% compared with last year.

So we advance on knowing that there will be an effect on consumption and a likely smaller one on manufacturing although the latter is more unpredictable. What we will see is a reduction in imports which will boost GDP in an almost faustian fashion as the other factors lower it.

Car loans

So far there is nothing to particularly worry a central banker as after all it is not as if manufacturing or consumption are as important as banking is to them. However there is a catch and maybe the car manufacturers have been brighter than you might otherwise think. From the 18th of August.

That is partly because car manufacturers and their finance houses are increasingly stimulating private demand by offering cheaper (and new) forms of car finance. As amounts of consumer credit increase, so do the risks to the finance providers. Most car finance is provided by non-banks, which are not subject to prudential regulation in the way that banks are. These developments make the industry increasingly vulnerable  to shocks.

Now if we return to the real world the concept of prudential regulation is of course very different as after all it was not that long ago that so many banks needed large bailouts. But have the car manufacturers been very cunning in making themselves look like “the precious” as in the banks?

So much of the car market has gone this way that you could question what registration actually means? It used to mean a car was bought but these days is vastly more likely to mean it has been leased.

The FLA is the leading trade association for the motor finance sector in the UK. In 2016, members provided £41 billion of new finance to help households and businesses purchase cars. Over 86% of all private new car registrations in the UK were financed by FLA members.

Today we were updated on how this is going?

New figures released today by the Finance & Leasing Association (FLA) show that new business volumes in the point of sale (POS) consumer new car finance market fell by 8% in August, compared with the same month in 2016, while the value of new business was up by 2% over the same period.

So in nominal terms they are doing okay so far but the real numbers are down. The response has been the normal “extend and pretend” of the finance industry where trouble is on the horizon.

finance providers have responded by lengthening loan terms and increasing balloon payments rather than upping monthly repayments.

So as the Bank of England Financial Policy Committee Minutes observed earlier this week if we look back there has been quite a party.

Growth in UK consumer credit had slowed a little in recent months but remained rapid at 9.8% in the year to July 2017. This reflected strong growth of dealership car finance, credit card debt and other borrowing, such as personal loans. Growth of consumer credit remained well above the rate of growth in household disposable income.

So that is now slowing and likely will be accompanied by falling used car prices as time progresses. Whether the price cuts for new models have been picked up by the inflation numbers I am not sure as I wonder if the scrappage schemes are treated separately but the truth is prices are lower. Ironically this could easily be the sort of deflation scenario that central bankers are so afraid of as we note the risk of both falling volumes and prices. That is bad for debt which of course the car companies are carrying plenty of.

Term Funding Scheme

The problem is that the bubble in car finance has been fed by the easy credit policies of the Bank of England. Last August it gave all this another push with its Bank Rate cut and extra QE. But personally I think the real push came from the Funding for Lending Scheme of the summer of 2013 which is now the larger Term Funding Scheme. It went into the mortgage market and some washed into the car market and here we are. Unless we were all going to have 2 cars each there had to be a limit.

Comment

So we see issues in the real economy of a nudge lower to consumption and a smaller impact on production with ironically a fall in imports. However as we see lower prices and lower volumes the real issue is how the credit market which has built up copes. We are of course told it is “resilient” and that the Bank of England is “vigilant” and the latter may for once be true as after all it hardly wants word to get around that it was there 3/4 years ago with some matches and a can of petrol! How about QE for car production? Oh and a government scrappage scheme for diesels as well…….