Fleet costs will soon be on the increase as a result of a plummeting pound linked to concerns over the UK’s access to the EU’s single market.
Fleets are being warned that transaction prices could move closer to list prices as manufacturers resist pressure to raise published prices substantially, while even brands with plants in the UK will not be immune from exposure to the exchange rate.
Although sterling took a tumble following the referendum result in June, it had remained relatively stable since then, with some arguing it had been ‘overvalued’.
The pound had been close to $1.50 before June 24, but fell to below $1.30 following the referendum result.
Since the Conservative Party conference in September, the pound has lost further ground against other currencies reaching a 31-year low against the US dollar, as rhetoric suggested the Government was preparing to stay outside the single market.
Some analysts are now predicting that if the UK is preparing to survive outside the single market, by the end of 2017 the pound could fall to a typical $1.10 against the US currency and parity against the euro.
Essentially, investors are betting against the UK market and sterling as a so-called ‘hard Brexit’ seems more likely.
Most of the cars sold in the UK are imported, and manufacturers will find it difficult to resist increasing prices, while fleet costs are already scheduled to rise from April 2017, with higher benefit-in-kind (BIK) tax rates, national insurance contributions and a new regime for vehicle excise duty that will see many new cars that previously would have avoided road tax because of low CO2 incurring a charge.
In a Fleet News poll in mid-June, a clear majority of readers came out in favour of leaving the EU, with 51.6% for and 42.8% against.
Industry leaders pointed to the competitiveness within the UK market ensuring transaction prices remained low for as long as possible, but conceded higher costs were now likely.
Gerry Keaney, chief executive of the BVRLA, said: “An extended fall in the value of the pound will have an impact on vehicle manufacturers, but they are operating in an increasingly competitive environment.
“I am confident they will try to protect their customers by absorbing the additional foreign exchange costs within their existing pricing structures, or perhaps by reducing the differential between their list prices and actual transaction prices.
“They will want to protect the embattled company car driver from a double whammy increase in car list prices that would just add to the incoming rise in BIK charges.”
Even cars produced in the UK will not be immune from a weaker sterling, as some components are sourced from overseas. And, in future, if tariffs are imposed on foreign goods, some UK car parts may make more than one trip across the channel before being fitted to the finished product.
Manufacturers whose model line-ups include a mix of UK-built and foreign-built vehicles, such as Toyota, Nissan, Honda and Mini, might be forced to increase the price of domestic cars to try to minimise the increase on imported models.
Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders (SMMT), said: “The recent drop in sterling will inevitably put pressure on margins and transaction costs may increase as the ability of brands to offer incentives is curtailed.”
One of the UK’s leading economists has predicted new car prices will rise and vehicle sales will drop as the Brexit fall-out continues.
Jacob Nell, chief UK economist at Morgan Stanley, told an ICFM conference at Mini’s Oxford plant that the UK’s vote to leave the EU heralded an economic “slowdown, not a recession”.
He predicts total sales of new cars and light commercial vehicles could fall by around 8% in 2017 to 2.7 million units from around the 3m registered in 2016 and predicted a further 2% fall in 2018.
The SMMT says it expects new car registrations to fall for the next two years, with volumes down 5% in 2017 to 2.54m units and down 1.3% in 2018 to 2.51m units.
LCV registrations, it said, would drop by 5.9% in 2017 to 355,500 units; followed by a 0.3% rise in 2018 to 356,500 units.
A former economist at HM Treasury, which included a stint with the Prime Minister’s policy unit, Nell, like many other economists, had predicted a vote to leave would result in the country entering recession.
However, despite all the signs in the immediate aftermath of the vote suggesting that the economy was going to contract, it bounced back.
He said: “We thought firms would hold back on investment and training due to uncertainty. We thought consumers would hold back on major purchases, increase their savings because of the uncertainty, and that there would be a short contraction in the economy. It didn’t happen; we sailed through.”
Nell admitted economists have now changed their thinking after being “mugged by reality”, but insists that the UK still faces some challenges, especially in negotiating an exit deal with the EU.
Even if the Government loses its appeal around the triggering of Article 50 at the Supreme Court, it will be able to pass a Bill in the first quarter of 2017 and keep to the announced timetable. However, Nell has serious concerns over the UK’s ability to complete its negotiations within two years.
He said: “When I was at the Treasury I led the negotiations on the Treaty of Amsterdam, which was a really minor treaty. That took 44 months. The two years allowed under Article 50 are just not enough.”
He continued: “Just think about the car industry and how complex that is going to be; how many interests there are; how slow that could be to negotiate and then multiply that by all of the industries in the UK.”
If by March 2019 the UK exits the EU and does not have a trade agreement in place, it would transition to World Trade Organisation (WTO) terms of trade. That would involve a customs border between the UK and the rest of the EU, with tariffs where applicable.
“We hope there will be transitional arrangements, some kind of continuation of current terms, until we get to a final agreement, but that’s a real risk,” said Nell.
In the meantime, there will be a more immediate impact on fleet costs from rising fuel prices. Crude oil is bought in US dollars, and weakness in sterling against the dollar leads to increased prices at the pump, even when the price of oil is stable.
As a result petrol rose more in October than in any month in the past three-and-a-half years.
But the more recent fall in the cost of oil and a slight recovery in the value of the pound are cancelling out some of October’s rises, with some retailers cutting pump prices early in November.
Further wobbles in the currency market are expected as the Trump presidency takes shape and Brexit negotiations officially get underway.
Transport minister John Hayes said: “We certainly face change and challenge. But we step out to the new order from a position of strength.
“We spent the past six years building the strongest major advanced economy in the world. Employment is at a record high. And manufacturing growth is at its highest level for two years after surging again in September.
“Brexit is an unprecedented opportunity to reshape our future and boost our standing in the world.”