When will the UK car market recession end and what comes next?
If we define recession as a decline in GDP, the UK recession is already over. Why? Because the rate of decline is slowing very rapidly. One estimate is that the UK economy is growing at its usual rate – about 2.5% – which is why the decline is slowing. You can see that it the chart on the right.
Car dealer’s should take heart, because GDP and the New Car Market are closely linked and the Used Car Market is linked to them both.
But what if this rosy picture is wrong?
To begin with, many expert economists are far from convinced.
Nouriel Roubini, an economics professor famous for predicting the global economic crisis when all his peers said it wouldn’t happen, says even if there is economic growth of between 1% and 2% in 2010 – which is the least that the Bank of England predicts, but the most that independent’s are forecasting, the UK will still bump along the bottom. The reason is that there is so much economic slack – unemployment and mothballed factories and machines – that more growth than that will be needed to mop it up.
Another expert says the UK economy has simply moved from a raging crisis into a silent one. The Budget Deficit in FY2008/9 was £101.3BN, 7.1% of GDP. By March 2009, the debt had soared to £796.9BN, 55% of GDP. Observers point out that this is an under-estimate, as it excludes pension and PFI liabilities which takes the public debt above £1,250BN. At the same time, government bail-outs and guarantees have induced an unfounded feeling of well being. Just as importantly, there is no evidence that politicians can solve the concrete problems that triggered the crash in the first place: proliferation of poorly understood structured financial products, excessive risk-taking by banks and a contagious, US led low interest rate regime that fed a global property bubble.
Not all pundits are downbeat. Some point to the sentiment underlying the stock market – the so called ‘Fear Factor’ or Volatility Index. This has been steadily falling since March 2009 – see chart on the left. As the stock market goes up, the Fear Factor goes down – and vice versa.
In September 2009 the British Chamber of Commerce (BCC) also suggested that the UK economy was improving. Accepting that UK recovery will start sometime late in 2009, they forecast growth in 2010 which strengthens in 2011. But, they remind everyone that the chances of a relapse are high. Downside risks are unemployment at 3MN or more, unsustainable government debt getting to 80% or more of GDP, over-indebted consumers may rein in spending and fragile bank lending, to name just a few.
Last but not least, the venerable academics at the UK’s National Institute for Economic and Social research (NIESR) have been tracking this recession in comparison to the other’s from the UK’s economic past. The 2008 recession is the black line. It shows the cumulative drop in the UK economy since January 2008.
While history may not repeat itself, it’s hard to escape their concern that there may still be some way to go. Every previous recession had its share of ‘false dawns’. Their analysis points out that financial and professional services haven’t shrunk much at all – about 5% – and the Public Sector, not at all. But the ‘real’ economy has been hit much harder: Industry and Construction are both down 14% or more since January 2008.
The outlook for car dealers.
If the view of the ‘optimists’ prevails, New and Used Car volumes will rise in 2009 and again in 2010. Profits will still be elusive, as car makers produce cars as fast as possible to get their capacity beyond break-even. Sadly, the scarcity of profits, coming after this lean financial period, will see a continued decline in the number of SME dealerships if car makers decide to re-build their profits at the expense of their dealer networks.
If the ‘pessimists’ prevail, it will be exactly the same – but worse!