'THE year began with some nervousness, exacerbated by forecasts from some quarters of sharp declines in residual values.

However, the reality was a market which was consolidating the gains, in terms of stability, made since recovery from the pricing crisis between 1998 and 2000. As the world economy struggled, the UK comfortably avoided recession although high vehicle supply levels did enable buyers to be choosier.

This created more pressure on high mileage values, which slipped increasingly quickly, and creates further pressure on future residual values.

In terms of new car sales, September was down by 10,000 units and this year's record figure of 2.5 million will fall to 2.3 million next year. But despite this reduction to 2.3 million, the number of registrations still represents a continuation of the high supplies that will form the biggest factor impacting on residuals in 2003.

Next year will see further entrenchment in the market factors that have already begun to surface over the past 12 months. Growth in disposable incomes will be lowered sharply next year as increases in National Insurance and concerns over rising interest rates begin to take a toll on consumer confidence. This will inevitably impact on the used car market. Disposers face a tough year ahead due to the ageing profile of three-year-old cars. Most upper medium fleet cars are now obsolete, such as Mondeo, Vectra and Laguna. This means that, due to the lifecycle effect, saleability and therefore residuals will be low.

The upshot of this is that many fleets could face a portfolio value in 2003 down by more than five per cent compared with 2002.

This is due to the high weighting towards upper medium cars. Compact executive cars are also expected to decline due to a rapid build-up of supply in that sector. This is an area of the market that has traditionally been used to limited volume and a highly aspirational image.

However, numbers of BMW 3-series are now higher than many volume manufacturers and this is bringing them within reach of many more 'ordinary' buyers. The mini MPV sector has also seen a rapid increase in volumes and this too will have an impact on residuals next year.

Fuel prices will return as a major issue for fleet managers, as oil prices continue to rise in early 2003.

This will continue to force RVs down for cars with higher fuel consumption. The past year has been characterised by a massive increase in new diesel sales but this has slowed during the second half, as we originally forecast.

Sales peaked at 24.2% in July and fell to 23% in September. This reflects the end of the benefit-in-kind boom which resulted from attempts to meet the April 2002 tax changes deadline.

Diesel premiums are also starting to decline across some ranges and this will accelerate in 2003.

This will also be mirrored in the new car market by a decline in new diesel sales as the effect of the BIK legislation changes while petrol technology and efficiency improves.

New car list prices have been rising during 2002 and will continue to do so next year, at around 2-3%. However, transaction prices will continue to come under pressure due to high numbers of pre-registered cars in the marketplace.