Brexit imports hitting new car sales head on

The motor industry provides a very good barometer for the overall economy, and particularly how business and consumers view the world, writes Jim Power.

Following the severe economic correction that occurred back in 2008, new car sales drove over a cliff and went into freefall in 2009 to reach just over 57,000.

This created serious problems for what is a very important sector of the economy, and one that provides employment in every small town around the country, not to mention the larger towns and cities.

Then, in line with the broader economic recovery, new car sales recovered strongly and almost 147,000 new cars were registered in 2016.

At this stage, the future looked bright for the market, but then the Brexit vote happened and new car sales declined by over 10% in 2017 and in the first 10 months of 2018, a decline of 4.4% has been recorded.

The decline in new car sales since 2016 has occurred despite what has been, in theory, a very supportive economic background.

Employment is growing strongly and reached a record high in the second quarter of this year; the unemployment rate has come down from 16% in 2012 to just 5.3% at the moment; and growth in GDP has been very impressive.

The key factor that has undermined new car sales has been the substantial decline in the value of sterling. The weakness of sterling has made used imports from the UK very attractive.

A car costing £14,480 in 2018 would be €3,553 cheaper in 2018 than in 2015.

In 2017, we imported just over 93,000 used cars, mostly from the UK, and in the first 10 months of this year, an annual increase of almost 9% has been recorded, taking the total to 86,418.

For 2018, as a whole, it is likely that close to 125,500 new cars will be sold and used imports look set to come close to 100,000.

For the car buyer, the savings to be made on a used import are significant based on currency and taxation differentials. However, there are a number of downsides for Ireland as a whole.

Cheaper used imports are devaluing the price of domestic second hand cars and this is widening the financial gap between the value of a trade-in and a new car. Used imports are displacing new car sales and this is squeezing new car dealers.

In addition, the cost to the exchequer is substantial.

For the average new car sold, the exchequer collects €9,348 in Vat and vehicle registration tax (Vrt), whereas for the average car imported from the UK, the exchequer collects just €3,300.

There is also a negative environmental impact. New cars typically are more environmentally-friendly than older ones, so there is a distinct risk that we are just filling up our roads with older, higher-emission vehicles.

Government is obviously oblivious to these downsides, as evidenced by the increase of 1% in the Vrt rate for all diesel cars registered from January 1.

Surely it would have made more sense to apply the increase to used cars alone.

In 2017, diesel cars accounted for 65.2% of total new registrations compared to 70.1% in 2016.

In the first 10 months of 2018, diesel cars accounted for 54.5% of total new registrations, with petrol cars accounting for 38.5% of the total.

There is a move away from diesel, but electric cars remain an exotic rarity.

On a more positive note, light commercial vehicle registrations have expanded by 5.9% in the first 10 months of the year, which is a strong and positive indicator of business confidence and investment.

Looking ahead to 2019, it remains to be seen how the new car market will evolve.

The doubt revolves around the trajectory of sterling, which in turn will be heavily influenced by that great imponderable, Brexit.

Meanwhile, the overall motor industry will continue to deal with a personal sector that is craving value for money and which is still financially pressurised due to a combination of the high personal tax burden, rising expenditure on housing and subdued wage growth.

Furthermore, consumer confidence is still quite fragile as Brexit concerns continue to dominate.

Based on what we know at the moment, it appears likely that new car sales will decline further in 2019, but at least the environment for the industry is still a lot better than a decade ago.

Apart from the ongoing pressure on new car sales, the biggest problem for the sector will most likely be posed by labour shortages and specifically the lack of technically qualified workers.

By Jim Power
Business Correspondent

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