2017…..always likely to be a tricky year for the Motor Industry
As we move into the second quarter of 2017, the global and domestic economic background is giving cause for optimism. In the second half of last year the world was pre-occupied with the possible implications of a Trump presidency and the Brexit vote in the UK. Meanwhile, a reasonably compelling global economic growth story was building momentum.
The US economy is growing at a steady pace and as a consequence US interest rates have been increased by a combined 1 per cent over the past 18 months; the UK economy has maintained steady growth despite the Brexit vote last June, helped by the weakness of sterling, which is boosting the UK export performance; but most importantly from an Irish perspective, the Euro Zone economy has been performing quite strongly over the past 6 months. It is coming off a low base after years of economic under performance, but the indications are positive.
One possible implication of stronger growth in the Euro Zone could well be a change in the historically low interest rate regime. The European Central Bank (ECB) has taken interest rates down to zero due to sluggish growth, high unemployment and the threat of deflation, or falling prices. The ECB has a mandate to keep Euro Zone inflation around 2 per cent or slightly lower. Up until recently the inflation rate had been hovering around zero and hence the Quantitative Easing programme and the zero-interest rate policy. In recent months, the headline inflation rate has hit 2 per cent, which could in theory set alarm bells ringing in the ECB. However, it remains to be seen what this Euro Zone growth recovery might mean for the interest rate policy of the ECB.
The inflation rate has hit 2 per cent largely due to the impact of higher oil prices over the past 6 months, but excluding energy costs, inflation remains quite muted. However, if the growth recovery continues in the Euro Zone, the ECB will eventually move away from its current unprecedented interest rate policy. That is more likely to be a story for 2018 and 2019 rather than 2017. However, the important point to note is that the current very unusual interest rate environment will not last forever and the turn may be approaching. Borrowers should bear this in mind and should give some consideration to the option of fixing mortgage or other lending rates, subject of course to the rates on offer from various financial institutions.
For a small open economy like Ireland, a stronger global backdrop is very important. The Irish economy grew strongly last year and this has continued into 2017. The unemployment rate fell to 6.4 per cent of the labour force in March, which is the lowest level since June 2008. Since December, the number of people unemployed has fallen by 10,100. Employment at the end of 2016 topped 2 million, a level that had not been seen since 2008. This is the most positive and important economic indicator of the lot.
Consumer spending remains somewhat cautious, with the value of retail sales up by just 0.2 per cent and volume of sales up by 2.3 per cent in the first 2 months of the year. However, weak new car sales have distorted these figures. When car sales are excluded, the value of retail sales was up by 3.4 per cent and the volume of sales by 6.1 per cent. All in all, the domestic backdrop remains solid, but issues around public sector pay pressures, the shortage of housing and the quality of public services such as health and law & order are dominating the domestic landscape. Politics in Ireland is current very difficult and unfortunately not very conducive to strong and prudent policy making.
The Brexit story is moving on. On March 29th, the UK Prime Minister formally applied to leave the EU by invoking Article 50. On April 29th, the EU Council will present the EU-27’s formal negotiation position. That is being agreed at the moment with input from every one of the 27 remaining EU members. Then in May, the formal process of negotiation will begin.
This is akin to agreeing the terms of a divorce settlement. This process must really by over by November 2018, because the UK will have to leave by March 29th 2019, two years after the invocation of Article 50. It promises to be a very difficult negotiation process, with no certainty about the outcome. It is only when a deal has been agreed, that any consideration will be given to the crucial issue for Ireland, which is the future trading relationship between the UK and the EU. There is a long way to go in this process and there will likely be many twists and turns.
The Motor Industry
2017 was always going to be a challenging and uncertain year for the Irish motor industry, and that is how it is turning out. This is not because of the domestic economic background, which is strong and supportive, but rather due to sterling weakness and Brexit-related uncertainty. New car sales are being affected by Brexit, or more particularly by the weakness of sterling, as evidenced by the latest data from the Society of the Motor Industry (SIMI).
New car sales in the first three months of the year were 8.3 per cent down on the same period in 2016, but the outcome would have been considerably worse but for a surge in registrations in the dying days of March. The cynics might suggest that this is a case of the industry pushing registrations through before the end of the first quarter. However, there are also timing issues involved. Easter was much earlier last year and registrations of hire drive cars always increase before the holiday season is effectively launched with the advent of Easter. It is only in recent days that this phenomenon is occurring due to the lateness of Easter this year.
Used car imports from the UK are soaring again this year and were up by 56.1 per cent in the first quarter. Continued sterling weakness is driving this trend, and while many of the imports are relatively old, they are still likely to be displacing some new car sales.
From the perspective of the Revenue Commissioners, there is a hit here because the VAT and VRT receipts on used car imports are just over a third of the receipts from new car sales. It is also the case that cheaper second hand car imports from the UK will tend to depress the price of domestic second hand cars, which was my personal experience in recent months. The sales of new light commercial vehicles (LCVs) were down by 10.6 per cent in the first quarter, but used LCV imports expanded by 53.4 per cent. New car sales in 2017 will be down on 2016, the only question is by how much.
The cost of motor insurance has been an issue of considerable debate and controversy over the past couple of years. The average cost of motor insurance has increased by over 60 per cent between February 2013 and February 2017. It peaked in July 2016 and has subsequently declined by 6.1 per cent. It is not clear why it has declined modestly, but presumably it is related to the Insurance companies reacting to the measures that the Government is trying to put in place to bring the cost of insurance down.
It is reasonably clear why the cost of motor insurance has spiralled in recent years. Basically, the insurance industry had written a lot of cheap and basically unprofitable business across the board in the period up to 2012 as the market became very competitive.
Loss making business is obviously not sustainable and the industry has been trying to claw back profitability in recent years. Motor Insurance is an easy target, because it is a legal requirement and consumers have no choice.
With some other types of insurance, consumers are not legally obliged so the Insurance industry would be more cautious in increasing prices. However, it is also the case that the claims culture in Ireland is becoming a real problem, and the more fraudulent claims occur, the more it is going to cost the rest of society. The legal professional needs to take a good look at itself in this regard. Meanwhile, the hope is that motor insurance costs have peaked out and relief will be gradually provided for the hard-pressed motorist.