Despite rising sales of petrol and electric cars, an ongoing collapse in diesel sales again pulled down the UK car market in February.

Overall, the number of new cars registered last month fell by 2.8% to just short of 81,000 cars, in what was the 11 consecutive month of decline for the new car market.

Sales of diesels were again hammered, down by nearly 24% last month, with diesel’s share of the market down to 35% from nearly 45% a year ago.

It’s the ongoing effects of the Volkswagen dieselgate scandal which blew up in late 2015. The scandal has cost VW dearly in fines, compensation, discounts and much more, and more recently the firm has had to reoriente investment towards electric cars.

And the whole market has been affected as a consumer shift away from diesels gathered pace.

Back to the UK new car market, and things don’t look good for March either.

March is usually a high point in the car market year, ahead of the number plate change. But last March was an even more bumper month than usual, as consumers pulled forward purchases ahead of changes to Vehicle Excise Duty (VED).

That, plus ongoing market weakness means this March is likely to be ‘on a downer’ compared to a year ago.

Diesel's decline set to continue

Sales of petrol engine cars rose by 14% last month taking their share to nearly 61%, with electric vehicles and hybrids also up by 7%.

So far 2018 has seen a 5.1% decline – in line with my own Birmingham Post forecast of a 5-10% reduction for the year, driven by Brexit uncertainty, rising import prices on the back of a fall in the Pound, the turn against diesel in the wake of ‘deiselgate’ and a big question mark over how far the PCP-fuelled car buying boom could go.

Add to the mix the Bank of England’s rise in interest rates last year, and a sustained pick up in European car markets. The latter means that car firms are no longer offloading cars on a UK ‘treasure island’ market.

I should stress that even after a 5% fall last year and my expected drop in the 5-10% range this year, the market will still be operating at historically high levels. This isn’t a ‘crash’ but rather a slowdown linked to economic factors and a market correction. Quite what the ‘new normal’ will be in terms of UK car registrations isn’t yet clear.

With real wages being squeezed by a wider pick-up in inflation, households are holding off on new car purchases, a traditional cyclical ‘big ticket’ item.

Diesels will continue to be hit amidst a ’perfect storm’ of bad publicity over air quality and concerns over tightening regulations and residual values. Diesel sales – as I’ve noted here at the Post - are set to fall by as much as 10% in 2018, and their market share could be as low as 30% by 2020 and 15% by 2025. Only a few years ago diesels accounted for 50% or more of the market.

Used Diesel prices are also down owing to the shift against diesels.

Comment: JLR - sales up, profits down

Petrol carss, petrol/hybrids and a burgeoning array of electric vehicles are set to see growth, especially as the price of the latter and their range improve dramatically.

Car sales this year are also likely to slow as the credit-fuelled new car sales boom reaches the end of the road. Over 75% of UK new car sales are financed by lenders and cheap credit has driven sales, particularly via PCP financing schemes.

While PCPs are a nifty model, their financing structure depends on residual values remaining robust so as to keep monthly repayments affordable.

Dark clouds are now looming which may dent to the ability of PCP to keep new cars driving out of the showrooms at quite such a rate: used car values and a slower economic growth.

The surge in PCP-propelled new car sales now sees a wave of used cars hitting the second-hand car market, in turn depressing second hand values (unless broader economic growth is fast enough to boost confidence and used car sales).

That in turn may impact on the collateral that lenders use to make PCP deals work. On diesels especially, car firms may take a big hit on the value of used cars being returned, and PCP rates may well start be less attractive in the future. That in turn could further slow the market.

All in all, this year will see car sales stuck in the slow lane yet again.

Professor David Bailey works at the Aston Business School in Birmingham