Falling rand keeps car sales on the low road

DESPITE another tough economic year, in 2016 the sales of new passenger vehicles were 40% higher than sales at the height of the 2009 recession — but 25% below the record of the 480 000 cars sold in 2006. Given the prevailing economic conditions, it is likely to be several years before we reach the fabled 500 000 sales mark, a target destroyed by the global financial crisis.

If our forecasts are correct, roughly 355 000 cars should be sold in 2017, about 2% down on last year’s number. This expected contraction in the sale of new passenger vehicles is in line with the expectation of a reduction in the household consumption of durable goods this year. However, we do expect passenger car sales to turn positive in 2018.

For the first time in 22 months, January domestic passenger vehicle sales registered an increase compared to the same period last year, up just under 5%. There have been only 12 months of growth in the past four years.

On the face of it, this is a welcome turnaround, but the numbers flatter to deceive. A large part of the improvement was driven by a surge in buying from car rental agencies — which are catering for higher tourist volumes on the back of a weaker rand — and the government, neither of which is likely to sustain this momentum in the months to come.

There has been a confluence of factors which have conspired to keep the brakes on industry growth. The primary culprit has been currency depreciation.

A weaker rand that reacted to US Fed interest rate increases and uncertainty in South African politics meant that vehicle manufacturers were no longer able to provide trade-in incentives and discounts to the same extent they had in the past. And since the majority of new vehicles sold in South Africa are imported, pricing is particularly vulnerable to currency swings.

The predicament faced by carmakers is best highlighted by the disconnect between falling vehicle sales and the price inflation of new vehicles, which was up 9.2% in January compared to the same month last year. This meant dealers had to raise the prices of new cars in an environment of declining sales.

To circumvent the increase in the price of new cars, many consumers turned to the used-car market, with 2.5 times the number of finance applications for second-hand cars for every new vehicle — a ratio which in better economic times is closer to one. The increased demand for used vehicles, however, has reduced their discount relative to that of new cars. This should make opting for a new car more attractive than it has been in the past two years.

The weak currency has not only affected vehicle prices, it has precipitated broad-based inflationary pressure, which, in turn, has seen the Reserve Bank hike interest rates by 75 basis points in 2016 and by 150 basis points since early 2014. Big-ticket items such as cars are very sensitive to interest rate changes.

While we don’t expect any further interest rate hikes this year, neither do we expect any relief from a cut in the repo rate. Moreover, the full effects of interest rate hikes usually take months to filter through to the real economy, which means we haven’t yet seen the full impact from last year’s hikes, although we are probably pretty close.

Relief for consumers and vehicle dealers will come in the form of a moderation in headline inflation as food prices ease after a prolonged drought and the rand holds steady at firmer levels.

One of the big unknowns for now, however, is the increase in taxes that will inevitably be announced in the budget this month. Another increase in personal income tax rates for middle- and higher-income earners in the form of minimal adjustments of tax brackets for inflation is likely. This could both defer and dampen a turnaround in the industry.

Nxedlana is FNB chief economist