Industry Trend Analysis - Short-Term Sales To Improve As Consumers Shrug Off Worries - AUG 2017


BMI View: Spain ' s vehicle sales growth prospects in 2017 have improved as t he passenger car market benefits from rising consumer and business confidence, a general uptick in economic activity and borrowing, as well as a booming vehicle rental sector. Sales growth over the full forecast period to 2021, however, will slow as weaker wage increases and slower economic growth drag on demand.

We are revising up our vehicle sales growth forecast in Spain to 9.0% in 2017, up from our previous forecast of a 0.7% decline. This is predominantly due to our upward revision of the passenger car segment, which we forecast to expand 9.5%. The passenger car market will benefit from rising consumer and business confidence, a general uptick in economic activity and borrowing, as well as a booming vehicle rental sector. However, over our full forecast period to 2021, we expect vehicle sales growth to average a slower rate of growth of 3.4% reaching 1.58mn annual sales by 2021. This weak growth compared to the average annual growth of 14.5% between 2013 and 2016 will be the result of Spain's weaker long-term GDP and real earnings outlooks, which will fail to continue creating new levels of demand.

Modest Long-Term Outlook Remains Despite 2017 Revision
Spain - Sales Forecasts By Segment, Units
f = BMI forecast. Source: ACEA, BMI

Consumer Confidence Holding Up

We believe the growing consumer confidence in the country will help to buoy consumer demand for new cars in 2017. Previously, we highlighted that consumer confidence would weaken in the face of political uncertainty following two inconclusive general elections and the formation of a shaky minority government led by the centre-right People's Party (PP). However, Spain's consumers have shown a resilience to this political instability with consumer confidence once again ticking upwards and buoying car buying intentions amongst consumers ( see chart below). This resilient consumer view is also reflected in our Country Risk team's forecasts for total private consumption in the Spanish economy, which they forecast to expand 3.0%.

Consumer Confidence Indicators Holding Up Against Political Uncertainty
Consumer Confidence Indicator & Car Buying Intentions* Indicator
*Based on survey of intentions to purchase car in next 12 months. Source: EC Consumer Survey, BMI

A key aspect of this rising confidence is that it is also encouraging borrowing amongst households. Household real incomes and employment levels are still recovering to the levels they were in 2009, with real GDP per capita reaching EUR23,941 in 2016 compared to EUR24,462 in 2008. This has meant that consumers must be willing and able to ramp up borrowing in order to reach previous levels of consumption, especially consumption of big-ticket durable goods like cars. This is, in fact, playing out with consumers having sharply ramped up borrowing for the purchase of durable goods since 2015 but also having sustained higher borrowing growth through to 2017 ( see chart below). This, in turn, is supporting sustained spending on new vehicles.

Household Borrowing Likely Spurring Car Sales Boom
Household Borrowing For Purchase Of Durable Goods, % chg y-o-y
Source: Banco De Espana, BMI

This increase in consumer spending via a sharp rise in borrowing does, however, also suggest that the current boom in car purchases that began in 2013 cannot be sustained over our full forecast period, which accounts for the gradual slowdown in our passenger car growth forecast up to 2021. For such a sharp increase in consumption-focused credit to be sustainable it must be followed by robust economic growth, rising employment, or rising real wages. For Spain, however, these three factors are not likely over the long run. Our Country Risk team has highlighted that economic growth will slow to 2.0% by 2021, employment growth will be subdued with unemployment only falling to 17.0% from a forecasted end-of-year rate of 19.5% in 2017, and real wages will be hit by the return of higher inflation from 2017 onwards.

Bullish Business Attitude A Boon For Passenger Car Sales

While consumers continue expanding purchases, businesses will expand purchases at a faster rate. As short-term economic growth continues apace businesses are increasingly more optimistic on the outlook for the Spanish economy and are willing to ramp up investments. Indeed, purchasing manager index (PMI) surveys - a good proxy for business confidence - have shown a strong uptick since 2017 began, particularly in the services sector due to strong growth in tourism ( see chart below).

Business Confidence Ticking Up
Purchasing Manager Indices (Composite and Sectors)
Source: Bloomberg, BMI

This is helping spur an uptick in sales to businesses. Indeed, over the first five months of 2017, businesses have increased demand far more quickly than individual consumers ( see chart below).

Business Demand The Key Market Driver
Passenger Car Sales By Market Channel, Units & % chg y-o-y
Source: ANFAC, BMI

Rentals To Remain In Front

Finally, our bullish passenger car sales view is also based on a bright outlook for the rental fleet sector. Our Tourism team holds a bullish view on Spain's tourism sector and the growth of tourist arrivals in 2017 as travellers choose to avoid areas where safety and security concerns are rising, such as Turkey and North Africa, in favour of Spain. This will encourage rental car companies to further increase their fleet renewals in preparation for the rise in potential customers over the year. Indeed, this already began in the first five months of 2017 with sales to rental car companies having increased 12.5% y-o-y compared to the 11.6% y-o-y and 2.1% y-o-y growth in sales to businesses and individuals respectively ( see chart above).