What’s Really Behind The Boom In The UK Car Industry?

What’s Really Behind The Boom In The UK Car Industry?

The growth in the UK motor manufacturing industry has been nothing short of stunning over recent years, with British car production reaching a six year high in 2013.

More than 1.5million vehicles rolled off production lines around the country last year and the Society of Motor Manufacturers and Traders (SMMT) revealed that ‘surging’ demand domestically and abroad had led to a car leaving a production line every 20 seconds. Vehicle manufacturing increased by 3.1 per cent in 2013 and experts predict that output could hit record levels by 2017, with around two million units being produced. Analysts also believe that British car production could return to levels not seen in the UK since the 1970’s. In fact, the UK is on course to become the third biggest car manufacturer in Europe, only behind Germany and Spain.

But what is the real story behind this incredible success for the motor industry?

The media and related news agencies have often discussed the theory that some families have more disposable income because banks have paid out large sums of money in compensation for the inaccurate selling of PPI. This supposedly has meant that thousands of people have dashed out to spend this windfall on a new car, which is why the car industry is currently booming. However, Richard Forrester, Chief Executive of Vertu Motors believes that this portrayal is far from the truth, citing many other logical reasons for the incredible success and recovery of the motor retail sector.

He points to the general state of the economy being rosier and the huge efforts made by car manufacturers and retailers to change the deals offered to the public, with better value for money becoming increasingly important.

But what are the other, less obvious key elements that have helped boost the car manufacturing sector?

Before the vehicle scrappage scheme was introduced in 2009, sales of new cars had fallen to desperately low levels. The scheme proved popular and scrappage did help steady the ship. However, ongoing growth has only been achieved during the last 22 months, driven by a re-surging economy. According to figures released by the SMMT in January 2014, there were 2.26 million new vehicles registered in 2013, which equates to a 10.8 per cent increase compared to 2012.

2013 was the best year for new car sales since 2007 and during December alone, new car sales increased by nearly a quarter to 152,918. Compare these figures to the rest of Europe that saw new car sales across the continent fall by 2.8 per cent in the 11 months to November 2013, which meant our European neighbours were on track for a sixth straight annual decline in trades.

When you look at the PPI compensation payments enjoyed by many people, the Financial Ombudsman Service (FOS) revealed that the average PPI pay-out was about £2,750. The banks have had to fork out around £12bn already and expect that the total bill will actually reach in the region of £20bn. However, these reimbursement payments have been spread over four years and it works out that around one million payments have been made each year. Take into account that sales in the new car market have been increasing for only two years, now reaching about two million per year, it cannot seem correct to make a direct correlation between new car sales and PPI repayments. Mr Forrester concludes that

“The confidence has come about because the economy is growing, interest rates are low, and people are not afraid of losing their jobs.’

Confidence has returned to the economy, so whether the deposit for a new car has been paid from using PPI money or out of somebody’s savings, there is still the need for financial confidence amongst people to commit to a repayment schedule.

This confidence has emerged because the economy is growing again and interest rates have been kept low. There is also good news in the jobs sector, where the number of people in work has increased by 1.2 million since July 2010 and unemployment is at its lowest level since the coalition came to government.

It could be argued that public policy has seen more money going in to people’s pockets, with the average taxpayer now paying nearly £600 less in income tax because of the changes to the income tax threshold. The state pension has increased by £650 per year in cash terms, with changes to fuel duty leading to a real terms cut in the cost of filling up the average family car, which equates to a saving of £360 per year. However, perhaps the most significant influence on people’s increased spending power has been the record-breaking low interest rates introduced by the Bank of England. Interest rates are expected to rise again next year by a small amount, but if that is the case, many people will still enjoy living in a period of relatively cheap money.

When we compare this time to periods of historic mortgage rate trends, many families are better off by thousands of pounds a year because of the low interest rates. The amount being saved on an average mortgage is estimated to be around £1,000 a year for every one per cent rise in rates. The low interest rates have also been instrumental in helping to forge affordable and very competitive finance deals on new cars.

The motor industry can be proud of its accurate predictions in the demand for new cars and how they have been able to meet their customer’s needs. Vehicle manufacturers have been able to introduce exciting new models that come with a range of extras that are suited to modern families. This has been achieved whilst also being able to drive down prices in real terms.

In conjunction with this, the British vehicle retail industry has become one of the most sophisticated and customer-focussed in Europe. Gone are the days of salesmen pressurising people into a purchase. Instead, dealerships are now efficient and friendly.

The UK car industry is booming, something we should all be thankful for.

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