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Analysis: Britain's ills on display in rising car sales

A man passes cars on a showroom forecourt in west London November 6, 2008. REUTERS/Toby Melville
A man passes cars on a showroom forecourt in west London November 6, 2008. REUTERS/Toby Melville

By Olesya Dmitracova and Rhys Jones

LONDON (Reuters) - One of Britain's few economic bright spots - a 13-month run of increased car sales - may actually say more about the country's ills than it does about its growth prospects.

Much of the rise has been caused by a banking scandal, high fuel prices, erosion of savings and widening income inequality.

"A perfect storm of factors have come together to create a real buyers' market at the moment," said Keith Lewis, a spokesman for the British car industry body, the Society of Motor Manufacturers and Traders (SMMT).

First, the numbers. In the 12 months ending in March, car registrations in Britain rose 7.2 percent compared with the same period a year earlier.

During that period - or an approximation of it, given different reporting schedules - there has been barely any economic growth and unemployment has averaged 7.9 percent.

By contrast, new car registrations in Germany - Europe's biggest auto market - fell 13 percent in the first three months of 2013, and sales in France fell 15 percent.

So what's driving car sales in Britain? Microeconomics. Start with the behavior of savers.

In a bid to boost the economy by encouraging spending and investment, the Bank of England has kept the main interest rate at a record low of 0.5 percent, meaning most savers are losing more to inflation than they are earning in interest.

That results in little incentive to save rather than spend.

Carmakers and dealers have, in the meantime, pushed cheap financing deals and discounts. Keen to shift stock, some have even done so at a loss.

"There are cars now which are available for less than the monthly cost of a TV subscription package," said Tom Barnard, a director at Japanese carmaker Nissan's <7201.T> UK business.

Carmakers, especially those that have traditionally catered to well-heeled customers, are also luring hard-pressed Britons in another way - by introducing new affordable models to appeal to a much wider range of buyers.

These include several Mercedes C-Class and BMW 3 Series models which can be purchased for a monthly payment of less than 300 pounds ($460).

While a few years ago "blue-collar" workers would have bought a car from a mass-market maker, such as Ford or Toyota <7203.T>, they can now buy a Mercedes, said Gordon Haining, franchise director at car dealer Lookers.

PUSHED TO BUY

There are a number of other factors behind the rise in sales, which admittedly does come from a low base.

Since the start of 2011, British banks have paid out 8.9 billion pounds in compensation to hundreds of thousands of their customers who were mis-sold Payment Protection Insurance (PPI), averaging almost 3,000 pounds per payment.

Three times as much was paid out last year as in 2011.

PPI was meant to protect borrowers against sickness or redundancy but was often sold to people who didn't want or need it or who were ineligible to claim.

Given the lack of return from savings, this has proved to be a windfall for car sellers.

"What do I do with that money?" said SMMT's Lewis. "Do I put it in the bank and get nothing on it? Is it enough for me to move house with or build an extension to my current property?

"No. The options are to go on holiday or to replace a car."

Strangely, analysts say the latter option is also being boosted by something that at first glance should put people off cars - rising petrol prices.

Tax rises and higher oil prices pushed the average cost of a tank of petrol in Britain to about 90 pounds in 2012 from 70 pounds two years earlier.

This sharp rise has persuaded motorists to splash out on newer and more fuel-efficient cars in order to save money on the running costs in the long term. Newer engines can cut as much as 15 pounds off the fill-up of the average car.

A GOOD RECESSION

For others, fuel prices are less relevant. Although wages have been shrinking in real terms, relatively benign inflation to date and lower borrowing costs have meant that many in work have not felt the real bite of Britain's downturn.

This is especially true for the top end of earners.

"There is an element of the population that rides above the highs and lows of the economy," Lookers' Haining said at an outlet in west London.

It specializes in upmarket Jaguar and Land Rover cars, with prices for the most expensive model on sale - the Range Rover Autobiography - starting from around 100,000 pounds.

He added that London's thriving property market was providing some support to sales of high-end cars, noting that foreign buyers of expensive homes in the capital would often also buy a car to use when in the country.

Last year many premium carmakers, such as Bentley and Porsche , enjoyed far stronger sales growth in Britain than the 5.3 percent rise in overall new car sales. And this trend is set to continue, analysts say.

DIMMING PROSPECTS

The prospects for the broader car market in Britain look less bright, as it remains tied to the economy's fortunes.

Some of the microeconomic drivers, notably the PPI windfall, will dissipate.

On the macroeconomic level, this year's pick-up in unemployment and rising inflation mean last year's sales growth - the best in more than a decade - is unlikely to be sustained.

"2013 is going to be a year to forget for consumption," said Rob Wood, economist at Berenberg Bank. "Wages are being outpaced by inflation."

The months of increases also mean sales figures will soon start to be judged against a higher baseline. Car registrations plunged between mid-2011 and early 2012.

But at least one factor behind the demand for new cars in Britain should remain: a relative shortage of second-hand cars.

"You don't have the movement of used cars between markets like you do in continental Europe," said Colin Couchman, automotive analyst at IHS Global Insight.

"We drive on the different side of the road."

(Graphics by Vincent Flasseur Editing by Jeremy Gaunt; Editing by Jeremy Gaunt)

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