Duncan’s Economic Blog

Cars

Posted in Uncategorized by duncanseconomicblog on March 30, 2009

I was musing on Friday about the difference between structural and cyclical shifts. It occurs to me that the car industry might be a good example of this.

The recent problems have been well publicised, this BBC piece is well worth a read.

There are currently about 26.9mn private cars in the UK. According to government figures, the lifespan of a car is around 14 years (from first registration to scrap).

Given this then, to simply replace the current stock of cars (and not including any overall increase in the number cars) , then annual sales should run at about 1.92mn (26.9/14).

Currently the SMMT is forecasting that annual sales this year will be 1.72mn. Or about 10% below what they ‘should’ be for simple replacement of the existing stock .

Most observers seem to think that this is a normal cyclical downturn. But what if this is a structural shift?

What if easy credit to fund car purchases isn’t returning any time soon? One likely effect would be a fall in the absolute number of cars on the road. Currently 26% of households in the UK have 2 cars and 6% have 3 or more. Only 24% have no car.

If finance is not as available and consumers do not feel as rich as previously then it is perfectly possible that the trend towards ever more ownership will reverse. Is it really that difficult to imagine that we go back to, say, 30% of households with no car and only 20% with two cars? That was the situation as recently as the early ‘90s. Assuming 26mn households in the UK, that means the stock of cars would fall by 3.1mn to 23.8mn (roughly the level of 2001 – not a big change). If we have a car stock of 23.8mn then the annual level of replacement sales would fall to 1.7mn, roughly where we are now.

It may be the case that the fall in car registrations is simply a cyclical downturn, in which case it will bounce back quickly next year. If, however, it is structural shift, we can’t expect a quick rebound.

Public policy must be aware of the potential structural nature of this change and be guided by it. I still think people (in the industry and outside of it) are underestimating what is happening.

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