SA motor vehicle sales plummet

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By Kevin Lings

In May, new passenger vehicle sales (as reported by NAAMSA) plummeted by a very significant 28.1% y/y. This is the largest annual decline in passenger car sales in around 14 years, and a grave concern given the already high interest rates, record-high debt level, the cash-flow squeeze most consumers are currently facing and the distinct likelihood of at least one further rate hike. Passenger car sales are expected to remain on a severe downward trend during 2008 and most of 2009 as the weight of interest rate increases takes effect.

Given how erratic the monthly car sales data are, it is obviously important to analyse these data on a trend basis. In fact the motor industry is the most volatile manufacturing industry in South Africa over any significant time period. Overall, passenger vehicles sales have clearly weakened very significantly in the past year (see chart attached), albeit off an extremely high base. In 2007, passenger car sales were down 9.9% compared with 2006. For 2006 as a whole passenger vehicle sales grew by 13.7% following growth of 25.9% in 2005. In the first five months of 2008 passenger car sales declined by around 18% y/y.

At the start of the year commercial vehicle sales were holding up relatively well. However, most categories of commercial vehicle sales are now also under pressure. In particular, light commercial vehicle sales were down a massive 17.2% y/y in May and 8.7% y/y in the first five months of the year. Similarly, medium commercial vehicle sales decline by 33.7% y/y in May and 0.4% y/y for the year to date. In contrast, heavy commercial vehicle sales were up 7% y/y in May and an impressive 15.6% y/y for the year to date. The divergence in growth between passenger/light/medium commercial vehicles and heavy commercial vehicles probably reflects the relative buoyancy in infrastructure development, including the transport of various raw materials, earth-moving equipment and machinery and equipment. This pattern of performance is likely to continue during 2008.

One of the most important economic themes starting to gain momentum in SA is the risk of a rising consumer credit default cycle. This is owing to a combination of factors:

• SA consumers are more indebted than they have ever been, but more importantly more than half that debt has been incurred in the last four years. This means that most of the consumer debt has never faced these levels of interest rates. Furthermore, interest rates are expected to move higher this month.

• SA salaries and wages are increasing at well below inflation. The average salary increase this year has been measured at 7.8%. This is obviously expected to rise further. But inflation is expected to average over 10% this year. This implies that real disposable income growth is now under pressure. This is the reverse of a few years ago when salaries were increasing far faster than inflation.

• The cost of servicing debt has risen from around 7% of disposable income in 2005/2006 to the current level of around 12% of disposable income. This is very significant when one considers that non-discretionary spending costs such as food, petrol, electricity, and assessment rates are all on the rise. The consumer is facing an increasing cash-flow problem.

• It is expected that defaults and bad debts will continue to rise well into next year. The main positive offset is that unlike in most previous economic downturns, we do not expect substantial job losses. This is basically because of the skill shortage. Companies cannot really afford to cut skills at this time, given that they have just hired skills and will probably need these skills going into 2010.




Source: Kevin Lings, Stanlib, June 3, 2008.


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