Oct 17

Truth or Myth: Are Car Sales Really a Good Indicator of Economic Growth?

Reports of rising car sales have had us excited recently, with growth in manufacturing and retail being traditionally regarded as indicators of a thriving economy.

Just this month, it was reported that new car sales in Northern Ireland have risen by 9% compared to last year – the fastest sales growth area in any part of the UK. Experts are saying that sales for new cars in the UK over the first 9 months of 2014 are just over 1% above the level of sales for the same time in pre-recession 2007.new-car-purchases

But what does all this mean, and can car sales really be a reason to get excited over a potential economic recovery?

Let’s look at the facts.

The Value of Car Sales as an Economy Indicator

In Northern Ireland, car sales are regarded as a good measure of economic health as there are no general retail figures. Trevor Finn, chief executive for Evans Halshaw (one of the biggest car dealership chains in the UK) says car sales have been up 20%, with car manufacturers Dacia and Maserati benefiting most from the boom. He says the increase shows “optimism” among UK consumers and that people are feeling “more comfortable” with the prospect of making big purchases as employment figures are looking up. We’re inclined to trust his judgement, as car sales crashed long before the rest of the economy in 2007.

However, its worth noting that cheap money plays a part in a lot of this, with 80% of cars being purchased on credit. Whilst this is a good thing option for consumers, it also raises questions abenefit-fraudbout the stability of the economy’s return to growth. Rather than being built on businesses investing more and exporting overseas (like the government hoped), its a result instead of people spending more and saving less.

The Other Side

Our overall economy is still 3.3% smaller than it was pre-recession in 2007/8. But the services sector – that which is reliant on consumers parting with their cash – is just 0.2% smaller. In fact. its very almost back to where it was before. This suggests that consumer activity alone isn’t enough to gauge the full health of the economy.

In addition, there are a number of other factors that act as leading indicators of economic trends, in addition to retail sales. These include the stock market (often where people tend to look first); manufacturing activity (influences GDP strongly); inventory levels; building permits; the housing market and of course new business startups.

The Role of ‘Cheap Money’

Whilst ‘cheap money’ (staggered credit and payment arrangementsĀ likeĀ Pay As You Go Car Finance) are incredibly useful to consumers, they can certainly distort the figures of new car sales. What’s more, they don’t create the strong picture that consumers are feeling better off financially (or at least, as much as we’d like to think).used-cars

What it does do, on the other hand, is serve as a catalyst for a thriving car industry. according to consumer site This Is Money. Dr Christian Stadler, from Warwick Business School, explains that the boom in new car sales is due to used cars being more expensive. With so few car purchases during the financial crisis, there are now fewer used cars around, so people are biting the bullet and opting for the new car route.

However, chief executive of HIS Global Insight Howard Archer warns that rising interest rates could soon put an end to this latest growth spurt. Speaking to the Daily Mail, he said: “A concern for car manufacturers is that current muted earnings growth threatens to be a constraint for car sales while some consumers will also be worried by the prospect that interest rates will start to rise before long.”

So whilst new car buyers have a great opportunity to jump in and enjoy the benefits of an affordable motor payment plan, it may be wise to remember that the health of the motor industry is only one very small slice of the pie.

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