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Guest opinion: Brexit’s impact will remain unclear during 2017

Mike Allen, head of research, Zeus Capital

It’s no secret that the car industry has been thriving in recent years, with the Society of Motor Manufacturers and Traders’ (SMMT) latest statistics showing a 2.3 per cent rise of new car registrations in 2016 – the fifth consecutive year of growth.

However, while 2016 will likely go down as a record year for the industry, there is perhaps a cautionary note on the horizon.

The recent announcement from General Motors that the EU referendum result has to date cost the company in excess of $300m, a total the firm expects to double before the end of 2017, acts as a warning shot to many operating in the sector.

GM raised prices by 2.5 per cent in October 2016 to offset weaker sterling rates, which is representative of the potential inflationary pressure that we could see building up through 2017.

Certainly, OEM behaviour over the coming months will be a key influence in the market and is likely to be driven by foreign exchange by some.

That said, in what is likely to remain an oversupplied market, some OEMs will see price rises set by others as an opportunity to increase market share.

The true impact of Brexit has yet to play out, and is expected to be multi-faceted. Since the result was announced at the end of June 2016, suppliers to the UK car industry have warned that there is no guarantee that they will keep their manufacturing process in the country amidst the uncertainty over trade agreements.

In addition, any new system of tariffs could have a significant effect on both the appetite from manufacturers and consumers to create and purchase the vehicles respectively.

Alterations to taxation is set to play a key role in consumer confidence. In particular, we expect to see robust consumer demand in the first quarter of the year, supported by the impending introduction of the new tax on CO2 emissions in April.

With the only vehicles exempt those that do not produce any carbon dioxide, motorists are likely to look to avoid the potentially costly new tax and purchase their vehicles earlier.

A diesel scrappage scheme could also be on the agenda from Q2 and could also provide a short term boost to new car registrations.

Despite the record results last year, the SMMT themselves have already hinted at greater challenges to come.

The organisation anticipates a more difficult 2017, with the weak pound resulting in further price increases to vehicles, which is expected to become increasingly significant as the prospect of Brexit approaches.

Nevertheless, 2017 will remain another competitive year, with almost 70 new launches planned over the next 12 months, and the competitive finance offers available to the consumer will provide a wider choice.

PCP penetration rates in new cars are at record levels and are steadily rising in used cars, which in theory should shorten buying cycles, as such agreements require the consumer to make a decision about their vehicle every three to five years.

Realistically, it is unlikely to be until H2 2017 that we get a true acid test of trading in the industry post-Brexit given current developments, and the knock-on effect that this could potentially have on the used car market.

Author: Mike Allen, head of research at independent investment bank Zeus Capital

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