Positive signs from motor industry
The consumer shows signs of life
Household consumption accounts for approximately two thirds of domestic GDP. For this reason the general health of the economy is closely correlated with the financial wellbeing of consumers. As the country shed jobs through recession – and with the average debt to disposable income ratio entrenched above 78% – the sustainability of the recent recovery seemed in doubt. But repeated interest rate cuts (50 basis points since December 2008) and higher than expected wage settlements have finally convinced consumers to start spending again.
The recovery is slower in some sectors than other. House prices have started to make up lost ground, albeit off disappointing volumes. Retailers – especially the food retailers Pick ‘n Pay, Shoprite and Spar – are growing their revenues at inflation or better, though they’ve been forced to expand their geographic footprints to do so. Credit retailers such as Lewis Group are noticing slight improvements too. But the real impetus in 2010 consumer activity seems to be in the new vehicle space, where the latest numbers from the National Automobile Association of South Africa (NAAMSA) point to a continued turnaround!
Flying off the showroom floor
The latest numbers suggest vehicles are once again flying off dealership floors. In June 2010 NAAMSA reported a 25.8% year-on-year surge in new passenger vehicle sales. Sales in May (+36.3% y/y) and April (+40.7% y/y) were equally impressive. As things stand the industry has sold 27.9% more cars in the first six months of 2010 than for the comparable 2009 period. It seems the latest improvement is being driven by the lower end of the market. Econometric economist Tony Twine told Business Times: “For once, entry level cars were pretty strong, which hasn’t been a pattern for the first few months of 2010.”The recovery has played out in the light, medium and heavy commercial vehicle categories too!
Before you crack open a case of your finest bubbly you must bear in mind the motor industry has been in decline for three years, and the recovery is off an extremely low base. Passenger vehicle sales contracted 20.4% in 2009, 24% in 2008 and 9.8% in 2007! Together, these three years are the worst three-year period in recent decades. To put matters in perspective NAAMSA reported 533 387 new vehicle sales in 2008. In 2009 the industry managed a paltry 395 230 units. Even if we factor in a ‘best estimate’ of a 15% improvement for 2010 the industry will only ‘move’ 454 000 units!
Total volumes for domestic consumption swing hugely on consumer sentiment, while export orders vary according to economic strength in export markets. Through 2008/9 the demand for vehicles dipped worldwide! That’s why the vehicle industry remains among the most volatile manufacturing sectors in South Africa.
Turnaround is here to stay
The good news is both passenger and light commercial vehicle sales have moved past their worst levels. Kevin Lings, economist at StanLib says the improvement is due to “the build-up for the World Cup, 30-year low interest rates and rising household incomes.” If interest rates remain low and banks ease their lending restrictions further we should see a continued improvement in new vehicle sales through the remainder of 2010, but not at the same pace! “These factors, together with easier credit criteria, should support car sales during the remainder of the year,” agreed Nedbank economist Dennis Dykes – also in the Business Times.
Lings is upbeat about the significant swing in vehicle-specific credit demand too: “In the first five months of 2009 Instalment Sales Finance declined by a very significant R2.0bn, which reflected in extremely poor vehicle sales (most cars are financed using an Instalment Sales Agreement). In contrast, during the first five months of 2010, Instalment Sales rose by R3.0bn!” This R5bn swing points to a marked change in credit momentum. Banks are lending again – and consumers are making use of hire purchase and other instalment sale agreements to purchase new vehicles.
Editor’s thoughts: It’s difficult to tell how much of an impact car rental companies have had on 2010 new vehicle sales. There’s no question demand for smaller vehicles has been driven by fleet replenishment to accommodate for the World Cup tourist influx. But individuals seem to be back in the market too. Are you ready to splash out on a new set of wheels? Add your comment below, or send it to [email protected]
