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Evidence Will Soon Show If Brexit Negative Predictions Right

Evidence Will Soon Show If Brexit Negative Predictions Right.

“(October) might begin to answer whether the impact of the Brexit vote will start to reverberate”

The doom and gloom forecasts for Britain’s car industry and Brexit haven’t materialized, but some experts worry that the European sales figures for October published early next month will reveal for the first time if the plan to leave the European Union (E.U.) has undermined consumer confidence.

Data so far has shown Europe continued to power ahead with E.U. sales rising 7.2 per cent in September, but analysts are busily ratcheting down forecasts for 2017 and wondering when and if the Brexit issue will finally start to undermine the European market in general and Britain’s in particular.

Britain’s Society of Motor Manufacturers and Traders (SMMT) CEO Mike Hawes pointed out to those seeking evidence of Brexit’s impact on sales that orders for September, a registration plate change month in the U.K. which spurs sales, were placed many months in advance.

October sales next week will provide the first solid evidence of any Brexit impact.

IHS Automotive said its latest data showed Europe is returning to normal after a bumpy summer, and for the year, E.U. sales will grow by almost 6.0 per cent to 14.58 million, but flatten in 2017 to about 14.59 million.

IHS Automotive’s Carlos da Silva finds it hard to find evidence of much impact from Britain’s vote to leave the E.U.

Picture positive
“(October) might begin to answer whether the impact of the Brexit vote will start to reverberate into a depression in private and corporate demand, as well as heightened tactical sales to compensate. However we see the general picture as remaining positive for the near term. We do not see the market reaching a tipping point shortly, and a general deceleration was already embedded in our forecast before the Brexit decision. Furthermore, the environment remains quite supportive in terms of purchasing power, energy prices, no inflation and low interest rates, which allows for great deals for customers in the position to take advantage,” da Silva said.

Investment bank Morgan Stanley is not quite so sanguine, saying the European auto market is very exposed to the U.K. consumer, which represents 20 per cent of Western Europe demand.

“With the uncertainty regarding the Brexit vote and pound sterling weakness, we continue to believe a slowdown in the U.K. market remains a key risk for 2017. We forecast an eight per cent decline (in U.K. sales in 2017) which impacts also on Western European growth forecasts,” Morgan Stanley analyst Harald Hendrikse said.

Ford Motor, in a presentation to investment researcher Evercore ISI, agreed Brexit impact has yet to be seen but it is a significant market risk and it is a question of “when” not “if” sales fall from today’s levels.

It’s not just sales that might be impacted by Brexit. It’s the viability of foreign car makers in Britain. Nissan CEO Carlos Ghosn visited British Prime Minister Theresa May earlier this month after warning that Nissan might halt investment in its huge British car plant after Brexit. Nissan will decide in early 2017 whether to continue building the big selling Qashqai SUV in Britain.

“Following our productive meeting, I am confident the government will continue to ensure the U.K. remains a competitive place to do business,” Ghosn said.

No details emerged from the meeting. Speculation centered on a reassurance that skilled E.U. workers in the industry would be allowed free movement, and worries about the after Brexit tariff regime.

Professor David Bailey of the Aston Business School in Birmingham, England, said the question of whether Nissan would continue making the Qashqai at its Sunderland plant provided the first test of Britain’s attitude to crafting a deal with the E.U. when Britain formerly leaves.

“Obviously Nissan is exploiting the issue to bring pressure on the government. They may be looking at some sort of compensation guarantee if Britain left the Single Market if there were tariff barriers, or maybe the ability to hire skilled workers (from outside the U.K.). Maybe there was agreement on future launch aid support, there’s a whole range of things,” Bailey said.

The E.U. imposes strict rules on the amount of government subsidy allowed for new plants. Outside the E.U., Britain would be free to raise inducements.

Would the agreement with Nissan form a template for other manufacturers in the U.K. like Honda, Toyota, and BMW’s Mini?

“We simply don’t know what has been agreed,” Bailey said.

Single Market
The E.U. has a so-called Single Market which member states belong to. This allows free trade between the member states, and guarantees freedom of movement of labor. It also sets standards for consumers and manufacturers. Outside countries can also trade freely with the E.U. if they agree separate deals. British government politicians are resigned to leaving the Single Market because Brussels insists members uphold free labor movement, but hope to agree a free trade deal.

Foreign car makers in Britain fear a free trade deal might not be possible. Tariffs would undermine their freedom of trading, and hurt the bottom line. Restrictions on the movement of labor would also stop car makers from moving skilled staff to various locations in Europe.

Britain will start formal divorce proceedings from the E.U. before the end of March. 

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