UK consumer confidence is at its lowest level since 1974. Paul Everitt, chief executive of the Society of Motor Manufacturers and Traders says the UK is not alone in facing difficult economic conditions and that a more urgent political response is now required.
The UK automotive industry is a source of high value employment and is critical to the long-term success of the economy. Government needs to use the pre-Budget report to set out its response to these challenging times and the measures needed to rebuild consumer confidence.
The UK is the third largest car market in the EU with 2.4 million new cars registered in 2007. Nine major car makers and six commercial vehicle manufacturers are producing 1.75 milllion vehicles in the UK every year. Over 850,000 people are employed by the motor industry, which has a manufacturing turnover of £51billion, exports 75 per cent of manufactured vehicles and sustains a competitive automotive retail market.
The strength of the UK market in new vehicle sales and production is highly important for the profitability and competitiveness of Japanese, US and European vehicle manufacturers alike.
The current economic climate has negatively impacted on new car demand and the first warning signs of lower assembly activity among manufacturers in the UK are starting to be seen. New car sales fell by 10.7 per cent in the three months to August; private sales were down 15.1 per cent.
The August new car market was down by 18.6 per cent, with only 63,225 registrations, and our members expect worse ahead. The purchase of a car is the second largest expenditure item for consumers, after buying a house. The car market is highly vulnerable to changes in discretionary spending and falling consumer confidence is damaging demand.
The industry’s consensus forecasts for new car registrations have been substantially reduced. SMMT expects to see a 10 per cent fall in new car demand over the remainder of the year, reducing the 2008 new car market to an expected 2.26 million total registrations and a further fall to 2.16 million in 2009. UK vehicle makers are facing the most challenging market conditions since the early 1990s.
The dramatic falls in new car registrations are now being mirrored in the market for light commercial vehicles. Total van registrations have fallen by 13.8 per cent in the last three months. Heavier commercial registrations have not yet been impacted but companies are reporting a rapid decline in new orders.
SMMT believes government must consider the long-term impact that a falling vehicle market would have on UK manufacturing and its contribution to the economy. Boosting consumer confidence is essential to sustaining the new vehicle market and there are a number of specific measures that would help support the sector.
Budget 2008 announced radical motoring tax changes for 2009/10 and 2010/11 which created uncertainties and confusion among private and business car buyers at, possibly, the worst time in the economic cycle. New car purchases should not be deferred or penalised as a result of motoring tax policy, thereby delaying economic recovery and undermining the achievement of the Government’s own road transport CO2 and emissions targets.
To provide a boost to new car sales SMMT recommends policy makers to:
* Review Budget 2008 VED changes: Abandon plans for a new “first year rate” for VED from 2010/11, which is a hidden sales tax; mitigate the impact of VED rises and retrospective rebanding from 2009/10, which significantly increase motoring costs for families and lower income groups.
* Incentivise fleet renewal: Additional revenue raised through VED changes should be hypothecated and used to aid consumers with the transition to lower CO2 emitting cars. One measure could be the introduction of a scrappage incentive scheme that would encourage owners of older, less efficient cars to replace them with new, more environmentally friendly vehicles. During the current economic difficulties it is essential that public authorities (national, regional and local) continue to renew their vehicle fleets
* Energy and fuel prices: fuel prices have a significant impact on spending by manufacturers and households. Government should ensure that price falls are passed onto industrial energy consumers and motorists swiftly and use its discretion over the timing of fuel duty rises appropriately to boost consumer confidence in an economic downturn.
SMMT is concerned that the reliance on falling inflation and interest rate cuts by themselves may be too slow and limited in their impact to stimulate demand. It asked the Centre of Economic and Business Research (CEBR) to investigate the measures that might have an earlier impact and help boost consumer confidence and spending in the UK.
CEBR has identified a number of areas that could play a role in boosting consumer confidence:
* Increasing disposable incomes: This would enable consumers to spend more and enjoy a better standard of living. Disposable incomes can be boosted by government through wage growth or reductions in tax or tax rebates. A fresh look at tax reductions and rebates should be considered. This means that the current fiscal rules need to be redesigned to allow an effective fiscal stimulus package (1.0 per cent GDP) beyond the recently announced small scale injection.
* Creating the conditions to allow the Bank of England to reduce interest rates: A series of sharp interest rate cuts by the Bank of England would send a powerful message to consumers, reducing debt servicing costs, increasing disposable income and making spending and borrowing more attractive. This could be done without putting undue pressure on prices as the Bank’s latest inflation report forecasts that inflation and economic growth are to weaken over the next two years.
* Decreasing cost of living/inflation: Immediate price pressures on consumers could be relieved through measures to boost consumer confidence. A more flexible fuel duty system would keep the price of fuel close to the environmentally optimal price and reduce overall taxation levels when oil prices are high. This would insulate consumers from the double impact of higher fuel prices by retailers and higher tax charges. Government should also take measures to ensure that falls in energy costs and interest rates are passed on quickly to the consumer.
* Stabilising house prices and liquidity: Specific housing market measures need to address the current exodus of house buyers from the market. The measures need to stimulate demand, increase mortgage availability and reverse potential buyers’ expectations of future price declines.
Keeping consumers confident has to be the priority for policy makers in the UK. Too deep a cut in consumer spending may lead to lasting structural damage to the economy and the automotive sector.
The pre-Budget report 2008 provides an opportunity to send clear fiscal and political signals that help boost confidence among consumers and businesses during this extremely difficult period.