Car sales booming despite slide in economy

Car dealers celebrate the 10th straight month of improved sales, as consumers grab the keys to 'designer' models; corporate sales, however, are lagging

The buoyant housing market has understandably dominated talk of Britain's consumer boom but the robust performance of the UK's car sector ought to run a close second.

July's figures for car sales showed an 11.6 per cent increase in new car registrations compared with last year. And it is private buyers that have fuelled the growth with retail registrations up by 21 per cent compared with 6.9 per cent growth in company cars. The figures represent the 10th consecutive month of growth in the new car market and the second-hand market has recovered too.

The industry is expecting a further boost with the new-look car registration plate being introduced from 1 September.

Dixon Motors, which specialises in volume car marques such as Ford, Vauxhall, Renault and Citroen, says sales are up by 30 per cent on this time last year. Last weekend it took record orders for the new registration models and it is forecasting sales of 4,500 new cars during September.

It is the same story at the luxury end of the market. Pendragon, which specialises in Jaguar, Aston Martin and BMW, says sales have been strong with the new £25,000 Jaguar X-class proving a top seller. No wonder the share prices of most of the publicly-quoted car dealers are at 12- month highs.

The immediate outlook looks good with the current low level of understanding of the new plate expected to boost sales through September and into October. Trevor Finn, chief executive of Pendragon, says: "Interest rates are being used as a tool to stimulate the economy and the consumer is likely to be the champion that helps us stay out of recession."

The question though is whether the growth is sustainable in the face of an economic downturn. Weekend reports indicated Ford is stepping up its cost-cutting programme. There were also reports of stock pile-ups at MG Rover due to a shortage of parts. With job cut announcements occurring almost daily, the principle concern is that the heady acceleration the car market has enjoyed over the past year could come to a juddering halt if consumers spend less as fear of a recession grows.

There are three key factors which have driven the UK car market to its current peak. The first is lower prices. The price of new cars fell by 10-11 per cent last year as the government's rip-off Britain campaign captured the public's imagination and forced UK prices closer to those inEurope. That fall has continued, albeit at a slower rate, with figures showing new car prices in July were six per cent lower than the same month last year. Newspapers are full of adverts for special deals such as a Citroen Saxo 1.6i for £8,995 and a Hyundai Accent 1.3i for £6,999.

Simon Dixon, the managing director of Dixon Motors, says a bulge in sales has occurred as consumers have flocked back to the market they were wary of a couple of years ago. "There was an element of pent-up demand after consumers were worried about the gap in prices between the UK and the rest of Europe. But prices have dropped by 10-12 per cent and there are lots of consumer offers, such as free insurance, so the transaction price is considerably lower than last year. The used car market has strengthened too."

These trends are expected to continue in the short term as European manufacturing capacity is still too high, leading to excess supply chasing demand.

The second factor is lower interest rates. These have enabled consumers to buy a better car or to change their vehicle earlier than they might previously have done. With further cuts likely, cars should become even more affordable.

The third factor is wider choice and improved designs. The Society of Motor Manufacturers and Traders points to a competitive UK car market in which 40 manufacturers operate. The society says "new" categories such as MPVs (multi-passenger vehicles) have helped fuel demand with 4X4 versions now available as well as compact versions such as the Renault Scenic and Citroen Xsara Picasso.

Mr Dixon confirms the trend: "We've seen the fastest growth in MPVs like the Picasso and the Scenic. Diesels have been making a comeback."

Mr Finn at Pendragon adds that lower-priced versions of luxury marques have attracted new buyers. Examples include the Jaguar X-class which starts at about £24,000 and the Porsche Boxster at £30,000. Cars are increasingly seen as fashion items, to be changed regularly, he added. "Fresh products are selling well. The fashion element is coming into it a lot more. There's less brand loyalty now. People are more interested in design and styling."

Can the car boom continue? With so much talk of the twin track economy in Britain – consumers spending freely while businesses cut back – it is interesting to note the weakest part of the car market is the fleet sector. To date fleet registrations are down by 3.9 per cent on last year. Part of this is due to higher taxation on company cars leading to a fall in popularity in what was previously seen as a good "perk" But car experts say the fall may also be due to companies cutting back in the face of an economic slowdown.

So far, though, there are few signs of it. As Keith Woods, managing director of the central London Jaguar dealer Stratstone of Mayfair puts it: "The corporate customers we talk to seem to be doing OK. I guess there has to be a cautionary note at some stage so that people don't overstretch themselves. But we are certainly not seeing it at the moment."