Regional Uptick Set To Continue As BMI View Plays Out

Passenger car sales in the European Union (EU-27) increased 5.4% year-on-year (y-o-y) in September, to 1,156,066 units. Over the first nine months of the year, however, the regional market has declined 3.9% y-o-y, to 9,000,629 units. BMI has long maintained that the declines in the regional market would continue to moderate over the course of 2013, and this has played out, with sales growth for some months entering positive territory. As highlighted below, several of the larger Western European markets have posted strong improvements in sales in recent months, and this has driven the regional resurgence.

Generally, the macro outlook for much of the region remains poor, although our view on private consumption in some markets is improving somewhat from last year. Much of the moderation in declines has been down to pent-up demand in the market following several years of sustained declines. We expect many of these markets to bottom out in 2013, before posting modest sales increases in 2014. In many markets, sales volumes remain far below their pre-global financial crisis peak, and we expect this to remain the case for some time to come.

Bearish Western Europe Outlook

Sales Prompt Upward Forecast Revision Despite Consumer Weakness
France Monthly Passenger Car Sales, units

Regional Uptick Set To Continue As BMI View Plays Out

Passenger car sales in the European Union (EU-27) increased 5.4% year-on-year (y-o-y) in September, to 1,156,066 units. Over the first nine months of the year, however, the regional market has declined 3.9% y-o-y, to 9,000,629 units. BMI has long maintained that the declines in the regional market would continue to moderate over the course of 2013, and this has played out, with sales growth for some months entering positive territory. As highlighted below, several of the larger Western European markets have posted strong improvements in sales in recent months, and this has driven the regional resurgence.

Generally, the macro outlook for much of the region remains poor, although our view on private consumption in some markets is improving somewhat from last year. Much of the moderation in declines has been down to pent-up demand in the market following several years of sustained declines. We expect many of these markets to bottom out in 2013, before posting modest sales increases in 2014. In many markets, sales volumes remain far below their pre-global financial crisis peak, and we expect this to remain the case for some time to come.

Sales Prompt Upward Forecast Revision Despite Consumer Weakness
France Monthly Passenger Car Sales, units

Bearish Western Europe Outlook

Across Western Europe, we generally forecast a continuation of the declines in vehicle sales witnessed in 2012, albeit at a slower rate, with some markets entering positive territory this year. We have previously highlighted that we 'expect such declines to moderate somewhat from the sharp fall in Q113', and this is playing out. However, vehicle sales in many markets continue to drop, and the consumer outlook is still generally poor across the region, despite modest improvements.

In Germany, passenger car sales fell 1.2% y-o-y in September, to 247,199 units. Over the year to date, sales declined 6.0% y-o-y, to 2,217,019 units. On the back of sales figures over the year to date, and our expectation of a modest improvement in the German consumer story in the latter part of the year, we are forecasting this 6% decline in the passenger car segment to be sustained rather than worsening in 2013. Recent retail sales figures suggest that improving consumer confidence readings are feeding through to consumption patterns. Further, we expect consumer spending to continue to rise over the year on the back of both higher wages and the positive wealth effect of rising house prices. This has partly informed our sales forecast.

Passenger car sales in Spain increased 28.5% y-o-y in September, to 45,175 units. There are base effects at play, however. In August 2012, passenger car sales increased 4.3% y-o-y ahead of a VAT increase from 18% to 21% on September 1 2012. Following this, the market declined 37.6% y-o-y in September 2012, to 35,148 units, as consumers brought forward their purchasing decisions to August to take advantage of the lower tax rate. This low September 2012 figure partly explains the strong growth seen in September 2013. Over the first nine months of 2013, the market declined 1.6% y-o-y, to 546,435 units. We maintain a bearish view on the Spanish consumer story, and we expect this to continue to impact the passenger car segment. We believe that the government's vehicle scrappage scheme may buoy the market somewhat, but we expect this to remain fairly limited. Accordingly, we maintain our forecast for a 4% drop over the full year.

BMI View Playing Out
Germany Passenger Car Sales, units

Passenger car sales in France increased 3.4% y-o-y, to 142,166 units. We believe this modest increase has been driven by low base effects and pent-up demand in the market ( see graph). Over the first nine months of the year, sales in this segment declined 8.5% y-o-y, to 1,309,813. BMI believes that rising unemployment, low consumer confidence, stagnant real wage growth, and the increasing likelihood of a slowdown in the housing market have kept private consumption subdued in 2013. That said, the weakness in the broader consumer story seems to be impacting the passenger car segment less than we had previously envisaged; we are revising our 2013 sales forecast for this segment to an 8% decline, from a 12% drop previously.

Sales in Italy declined 2.9% y-o-y in September, to 106,363 units. Over the year to date, sales in this segment declined 8.3% y-o-y, to 1,000,032 units. We forecast a drop of 10% over the year. BMI believes that private consumption will continue to contract in 2013, although likely at a slower pace from the sharp declines witnessed in 2012, as Italian households are hit by ongoing austerity measures, including higher taxes and cuts in social spending. Unemployment remains elevated, and real wage growth is fairly tepid. This outlook has partly informed our 2013 passenger car forecast.

In contrast, passenger car sales in the UK increased 12.1% y-o-y in September, to 403,136 units. Over the first nine months of the year, sales in this segment have increased 10.8% y-o-y, to 1,794,924 units. The UK market has seen a resurgence over the year on the back of modest improvements in private consumption, price cuts from car sellers, and pent-up demand from several years of sustained declining sales volumes. This is revitalising the segment more than we had initially envisaged; we are revising our 2013 sales forecast to a more bullish 10% increase, up from 7% previously.

The declining sales volumes witnessed across many markets across the region have led to substantial overcapacity problems for a number of auto manufacturers in the region, prompting job cuts and factory closures. We expect this trend to continue into 2014, despite our view of a modest uptick in sales growth, as volumes are set to remain low and profitability impacted by ongoing price-reduction and other purchasing incentives.

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