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Cap forecasts used car market boost from growing economy

We should never forget what drives used car values - and that is the pound in the pocket of the person on the street. If their money is heading towards cosmetics, a new TV or a holiday then it will clearly not be spent on a car. And the less demand for a car the greater the impact on residual values. Similarly, if people release equity from their house then maybe.

Cap forecasts that the economy will grow by 2.4% in 2000. Economic growth is expected to slow during the second half of the year, as interest rates rise to constrain inflationary pressures.

With only a short economic downturn in 1999, economic activity levels remain high and the threat of inflation will require tighter economic policy this year. Interest rates are expected to average 6.6%, reaching 7% by the year-end.

Rising interest rates will in turn reduce economic growth, particularly during the second half, with the trend continuing next year.

During 2001, economic growth is expected to slow to 1.5%, again due to the need to keep inflation low. However, interest rates are expected to fall over the subsequent 12 months to moderate the downturn. Economic growth then recovers to 3% by 2003, before falling back to 2% in 2004.

The trade-off between output and inflation is clear, as low inflation requires growth to be held as the economy nears full capacity. Overall, the economic outlook is positive, with uninterrupted economic growth during the forecast horizon, together with low inflation and interest rates implying a favourable climate for the used car market.

However, the residual value outlook varies according to the used car sector in question. Broadly speaking, we expect that smaller, more efficient, vehicles will enjoy a better residual value performance during the next three years.

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