New car sales hit 17-year high but slowing growth causes worries

UK car sales in March reached levels not seen since 1999, with 5.3% growth in the new car market, though growth in private new car registrations has slowed.

The Society of Motor Manufacturers and Traders said that almost 519,000 cars were registered in the key industry month when number plates change, which was made a bi-annual event in 1999.

In welcome news for the motor industry, this was only the third time the market has surpassed half a million units in a single month, with top selling models being the Ford Fiesta, Vauxhall Corsa and Ford Focus.

Private car sales increased 3.8% year-on-year in March to 262,215 units, following year-on-year gains of 22.6% in February and 8.2% in January.

March's figure was also below the 12-month average for private new car registrations, which caused consternation among some economists.

Samuel Tombs at Pantheon Macroeconomics noted that as around 20% of all new cars are registered in March, the slowdown will have a major bearing on this year’s overall growth rate.

Along with consumer confidence at its lowest level since December 2014 according to the recent GfK survey and borrowing costs flattening off, he said this sharp slowdown in the year-over-year growth rate was "another sign the economy recovery is losing momentum".

He added: "The key drivers of the recovery in car sales are weakening. Unsecured borrowing costs, while still falling, are not declining as sharply as they did in 2015.

"Meanwhile, consumer confidence has deteriorated this year and the intensification of the fiscal squeeze in the new fiscal year, which began this week, likely will depress sentiment further."

As car sales last year contributed 0.3 percentage points to the 2.8% year-over-year rise in overall household spending, Tombs observed that the slowdown will be discernible in the headline consumption numbers.

While noting some positives for the car industry, IHS Global Insight economist Howard Archer also saw some bumps in the road, including from uncertainties over the UK economic outlook which could cause fleet operators and consumers to be more cautious in their purchases of new vehicles.

Both group's confidence could affect big-ticket purchases, with "the danger that sentiment will slide further over the next few months as uncertainty over the outlook intensifies ahead of the 23 June referendum on UK membership of the European Union".

"It is also notable that the positive gap between earnings growth and consumer price inflation has diminished appreciably recently, thereby diluting consumers’ purchasing power even though it is still decent."

Positives Archer identified included that car sales will likely continue to be buoyed by attractive offers and finance packages – especially as it now looks highly improbable that the Bank of England will be raising interest rates in 2016.

Furthermore, employment is high and rising, while consumer price inflation seems likely to remain low for some time to come.