July West European Car Sales

Summary
• July was a poor month as sales fell by 3.5% year on year. Few markets performed well. Seasonally adjusted annualised sales fell sharply from the July level.
• Sales in France, Spain and Italy were weak in July as payback from June activity, and even the weather, weighed on the market. The German market also showed signs of weakness.
• The UK market, while far from impressive, was at least relatively stable.

The striking peak and trough pattern of 2005 was expected to diminish in 2006 as car manufacturers reduced incentives as a result of action on inventories and overproduction. The spike in June and trough in July tells us that supply-side pressure is beginning to mount again in the face of uncertain demand for new cars. It is likely that rising fuel prices, excessively hot weather, the soccer World Cup and events in the Middle East may have created some additional uncertainty in buyers’ minds. But on balance, the poor July result, when taken together with the good July figure, is not yet a cause for serious concern and a slight increase in the West European market remains our core assumption.

The German market stumbled slightly in July after two solid out-turns in May and June. Consumer confidence dipped in July though remains distinctly positive relative to the last several years. Both weather and the soccer World Cup may have had some negative impact so we are not anticipating a sustained downturn. Within a few months, the first signs of the VAT pull-forward should begin to make an impact reaching a crescendo in December. Sales are expected to be up by 2-3% this year.
The UK market cooled a little from the June level as the selling rate fell to 2.36 mn units/year. This is close to our full-year expectation for this market so has had little impact on our overall forecast. August sales will not be very important (Augusts are generally very weak) so UK market watchers are now looking closely at September and how manufacturers will approach that month in terms of incentives (which remain the biggest risk factor to car market forecasts). The early August interest rate increase is not expected to alter the outlook substantially.
Sales in Italy were disappointing during July as the selling rate dropped significantly. One cannot ignore the incentive impact once again as June was so much stronger than July. Yet, taken together, the June/July two-month average selling rate of 2.14 mn units/year is still to be considered weak by historical standards. Fuel prices have been cited as a concern for buyers, and the recent heat wave may have also taken a toll, as it has in some other countries. Incoming orders point towards some softness in demand, but the underlying level of consumer confidence — and the overall consumer outlook — remains on a gently improving trend, so weakness of the kind on display in July is not expected to become entrenched. We retain a zero growth expectation for 2006 as a whole, though there is some question mark over 2007.

The French market was also weak in July as payback from exuberance in June hit the market. As the incentive reaction is so clear in this case, we do not expect to see sales to continue to languish in the coming months. Recovery is still just around the corner, though hopes of growth in the market this year have now all but evaporated.
The Spanish car market took a hit in July but we should be careful not to over-emphasise the impact of this month. July has been a weak month in each of the last two record years as it has become of smaller seasonal significance. We expect that the selling rate will bounce back in the coming months.

Belgium, Denmark and the Netherlands continue to be among the more important smaller country contributors to year-to-date growth.

Pete Kelly (peter.kelly@jdpa.com, +44-1865-207041)