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.

5 Responses

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  1. newmania said, on March 30, 2009 at 11:24 am

    That sounds highly likely to me . It has been bothering me for years that where-ever I look there seem to be cars that would be the reward form starting and running a successful SME owned by nobodies. Whats more the value in an expensive car is nothing compared ot the value of having one at all the whole fetish strikes me as as vulnerable .

    The last thing we should be doing then is throwing tax payers money at it ..oops

    • duncanseconomicblog said, on March 30, 2009 at 1:14 pm

      I don’t have probolem with using public money to support a transition. Indeed I think that is the right thing to do. I just think we need to be aware what is likely to happen rather than being over optimistic on any recovery.

      The auto business has loads of problems. The moment you drive a car off the forecourt it loses 30% of it’s value. With corporate fleets being cut back I suspect we’ll see a lot of supply coming onto the second hand market. In the end I think car prices are going to have to fall. Falling prices plus less unit sales equals trouble.

      However I think simply cutting the sector adrift isn’t sensible. Better to use government support to aid a managed transition. For me a lot of government policy over the coming years will be about managing change.

  2. Will M said, on March 30, 2009 at 8:13 pm

    I think you’re failing to account for (i) petrol prices, (ii) traffic (iii) anti-traffic taxation measures and (iv) pollution awareness. All of which in fact back you up – we’re definitely in an secular shift away from cars, especially polluting gas-guzzlers. GM is dead.

  3. VinoS said, on March 30, 2009 at 9:35 pm

    I think we do need some public subsidy in the short-run, since a sudden decline in the car industry could cause a fall in employment and a further fall in consumer spending and so contribute to a vicious circle in areas dependant on the car industry. Detroit is probably a good example of this.

    Newmania, do you think the gov’t shd just stand by while the recession gets deeper and certain towns go into depression? How many jobs are you prepared to sacrifice on the altar of your ideology?

  4. Tom said, on March 31, 2009 at 5:47 pm

    There’s the other point that cars are getting more reliable, so the average age of 14 may go up. It would be interesting to have stats on average-age-at-scrapping over time.


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