Fleet News

Budget signals reduced risk of new car oversupply in UK

Downward pressure on sterling resulting from the 2013 Budget statement could reduce the risk of new car oversupply and prevent a dramatic downturn in residual values, according to CAP.

Fears have been growing since last summer that the Eurozone economic crisis could prompt manufacturers to drive new car supply harder into Britain, pushing registrations back toward historic oversupply levels.

But Chancellor George Osborne's downgrading of Britain's economic growth forecast, together with his call to "keep interest rates lower, for longer" can only add to pressure on sterling in the medium term - potentially making new car business less profitable for most manufacturers.

Pressure on exchange rates, coupled with Osborne's measures designed to put more money into consumers' pockets, has led to CAP describing the Budget as "neutral" in terms of its impact on the UK automotive sector.

It means CAP's senior editor for forecasting, Dylan Setterfield, has not adjusted his view of residual value prospects over the next three years.

The business is therefore retaining its already published forecasts of a short-term reduction in values for 2013 and further limited price falls in 2014/15. Setterfield's view is based on forecast assumptions of:

• Increased new car registrations
• Reducing risk of high volume ‘forced registrations'
• Fluctuations in supply, coupled with ‘steady demand'

He said: "From a residual value perspective it is good to have the downside pressure on sterling increased by the Bank of England and sensible to announce a downgrading of the UK growth forecast to prevent the pound rising.

"For a while last year it seemed there was a real risk of the slump in registrations in Europe forcing manufacturers to drive supply into the relatively strong UK.

“Experience has shown us that when registrations approach levels we saw in 2005 to 2007, then residual values are severely weakened by eventual oversupply.

"The prospects of that being repeated have been receding since sterling began weakening in the second half of 2012.

"Sterling initially weakened further, as an immediate response to the Budget statement, and although it recovered in the following 24 hours it remains at a level which limits manufacturers' scope for heavy discounting in the UK.

"We will still see forced registrations but the intensity of such activity will be limited to specific manufacturers, rather than an industry-wide trend.

"The Budget can therefore largely be regarded as broadly neutral in terms of its impact on current residual values patterns and those we have previously forecast for the next three years."

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