following which the impact of Brexit, an overheating new car market and continuing financial strains are expected to see new car sales go into decline.
However new car sales face a severe downside risk due to the potential banking crisis. The banks most perceived to be at risk are in Greece, Italy and to a slightly lesser extent Portugal and Germany. The global economy means any banking crisis in those countries will impact the rest of Europe which would bring forward our expected drop in new car sales from 2019 to potentially 2017 which means our expectations for 2017 have a downside risk of car sales actually falling by as much as 6-8 % instead of rising.
Assuming a financial crisis is averted sales of Light Commercial Vehicles“ LCVs” are also expected to continue rising on the back of the overall improving economic picture with 2017 likely to see sales up overall by around 7.5 % over 2016 which in itself is expected to see double digit growth of around 10.5 % by the year end.
Residual Values
Residual Values are also at risk from the potential new banking crisis in two ways. The first is that constraints over asset risk exposure and the need to increase margins could see RVs being set much lower which will increase the monthly costs of balloon finance and leases. The second impact is that if the crisis happens and Europe enters a triple-dip recession, used vehicle values will fall sharply. This will result in immediate losses on vehicles which went on finance over the last 3-4 years which is the period where we have seen RVs rising.
Our view is that putting aside the risk of a triple-dip bank led recession, RVs are going to plateau across most of Europe and will continue to fall in the UK. Should we enter another bank led recession RVs will undoubtedly fall by maybe as much as 10-12 % but this will be too late as these vehicles will not be coming back into the used market for 3-4 years and generally the used car market has already recovered at that point. That said as long as the asset backer is investing for the long term they should enjoy windfall profits from these vehicles post this potential recession to offset the losses that would be incurred on the sale of current used vehicles.
New car sales to rise by 8.5 % in 2016 across EU28
Slower growth anticipated in 2017 / 18 with greater downside risk due to potential banking crisis
RVs likely to plateau across Europe and fall in the UK
European Automotive Report- 2016 Quarter 2 28