Confidence levels point to an autumn market correction

28th July 2020

Temporary factors have skewed early market price data. Consumer confidence is struggling to support current RV levels

Implications for the used car market

Confidence to spend is naturally a primary factor in the consumer decision to buy a used car. With insufficient confidence to spend, consumers either postpone the decision or put it out of mind;

The regular indices of consumer confidence have fallen sharply since March to levels comparable to those last seen during the financial crisis of 2008;

Consumers are very wary of making major purchases. When it comes to attitudes to major purchases, including used cars, consumer confidence has been at an all-time low;

Unless there is some compensating constraints on market supply, this lack of consumer confidence will put significant downward pressure on RVs in the final months of the year.

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Consumer confidence is a primary driver of used car demand, at times even more influential than consumer affluence. But confidence is more volatile and shows much larger swings across the economic cycle, as the lockdown experience has shown.

Consumer confidence to spend, especially on expensive, occasional-purchase items like used cars, is easily punctured by bad news. Over the last twenty years, consumer confidence has been highly sensitive to changes in employment prospects, surging price inflation, higher borrowing costs and, in the short term, to political change.

Confidence can improve quickly, too. Perceptions of more stable government, tightening labour market conditions, low inflation or real-term disposable income growth have lifted reported confidence levels almost immediately.

Consumer confidence swings can explain much of the used car market’s history, not only RVs but also the shifts in demand across the car market segments.

Reluctance to make major purchases

The recovery in consumer confidence since March’s low-point has been limited. So far, consumer spending has out-performed the levels of confidence reported by the regular surveys. This should be a prime concern for remarketers, RV analysts and asset risk managers.

GfK’s overall composite consumer confidence index fell very sharply in March but not quite to the depths plumbed during the financial crisis in 2008. GfK’s composite index has been supported by more upbeat consumer perceptions of their personal finances.

Ipsos MORI’s economic optimism index shows a very similar path – a very sharp fall in March with modest recovery in June. However, the Ipsos MORI data for the current downturn are not as low as the data for the 2008 financial crisis.

Compared to 2008, consumers have certainly reported a keen awareness of the risks to the economy since March. But they have not related this risk to their own personal financial circumstances as directly as they did in 2008. Moreover, June’s data showed that consumers were markedly less pessimistic about their future personal finances compared to March and April.

However, consumers are extremely wary about making major purchases, like used cars. When asked whether now is the right time to make major purchases, consumer responses since March have been at record lows, below the levels recorded during the 2008 crisis.

Fears over the economy

This reluctance to make major purchases is rooted in consumers’ fears for the future of the economy. Consumers had been losing faith the prospects for the general economy before lockdown.

But in March and April consumer expectations for the economy’s future prospects fell to all-time lows by GfK’s data. Ipsos MORI’s economic optimism index shows a very similar path – a very sharp fall in March with modest recovery in June.

This consumer reluctance to splash out partly explains the very poor take up of consumer credit. Car loans for both the new and used markets form a large proportion of the ‘other’ category of consumer credit by the Bank’s of England’s classification which excludes credit cards and anything secured on property.

This category of consumer credit has fallen away badly. In February it totalled £7.55 bn (seasonally adjusted). In April it was £2.21 bn and it was £2.95 bn in May. Consumers might have sensed some financial insulation from the downturn. But they are very much less inclined to borrow to finance major purchases.

The calm before the storm

The RV stability in June and July reported by the market data providers will have assured remarketers, RV analysts and asset risk managers that their markets haven’t entirely collapsed. But these early data do not represent the underlying market.

Temporary factors like pent-up demand, people looking to avoid public transport, consumers trading down to release cash from their cars and the problems getting stock to market and enticing buyers to sales locations could still support RVs into August.

But the market will be constrained by the consumer reluctance to spend on major purchases. The autumn months will be difficult for the economy. The government’s Coronavirus Jobs Retention Scheme is being wound down from August and terminated in October.

Unemployment is very likely to spiral up as companies across the economy will be forced to assess their post-lockdown viability. Household incomes are set to continue to contract.

It seems highly improbable that consumer attitudes to making major purchases will improve in this fast-moving recession environment. Demand for used cars seems set to contract in the final months of the year.

Unless there are compensating movements in used car supply, prices will have to fall for the market to clear.

The new market was in gentle decline in late 2017 through to 2019. But in rolling annual terms, the new market contracted from 2.65 million registrations in mid-2017 to 2.37m in the final quarter of 2018 to 2.32m in mid-2019.

These volumes do not suggest any significant supply tightening in the near future, unless fleet managers choose to delay replacement in large numbers and private sellers steer clear of the market.
Price expectations on the parts of both buyers and sellers will continue to offer some buoyancy to RVs over August and perhaps into September. There will be buyers and sellers simply unwilling to accept market prices beyond their own bounds.

But these pipeline supply volumes in combination with the consumer reluctance to make major purchases will put downward pressure on RVs in the final months of the year.

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