‘Cost of Living Squeeze 2.0’ warning light flashing

For almost 5 years, during the period late-2009 to mid-2014, UK consumers experienced an intense squeeze on their disposable incomes. Consumer price inflation outpaced wage growth over this period which became known as the “cost of living crisis”. Fast forward three years and once again pay growth is lagging behind inflation. We are now in what could be dubbed the ‘Cost of Living Squeeze 2.0’.  Whilst it is not expected to be as severe or last as long as its predecessor, the second iteration of the cost of living squeeze will hit consumer spending and those sectors sensitive to it.

New car sales are often viewed as a barometer of consumer confidence. However, changes to taxation can distort consumer behaviour. For example, back in 2009/10, the temporary reduction in VAT coupled with the ‘cash for clunkers’ government scheme saw new car sales rise in the midst of the economic downturn, as consumers brought forward their spending plans to purchase a new car.

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The introduction of new Vehicle Excise Duty (VED) rates has had a similar effect on car sales in 2017. Consumers brought forward their spending plans into Q1 to avoid the increased VED rates in April.  As a result, Q1 marked the best first quarter new car sales figures in 7 years.  Indeed, the March figures represented a 10-year high. However, there has been considerable payback with weaker sales in Q2. Sales volumes fell by over 13% y/y in Q2 to 13,160 – which represented the worst second quarter sales figures in 5 years.

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Looking beyond the distortionary effects of the VED changes reveals that the underlying trend in new car sales appears to be one of decline too. 2015 and 2016 were uneventful years for new car sales (broadly flat) despite the favourable inflationary / consumer environment. 2017 looks set to be even weaker. Sales for the first half of 2017 were 5.4% (-1,847) lower than the corresponding period last year. 2017 H1 represented the worst start to a year for new car sales since 2013.

The new tax year also heralded the start of a multi-year period of benefit freezes. Households will increasingly feel the inflationary squeeze on both earned and unearned income.  The latest SMMT new car sales data for Northern Ireland can be viewed as a flashing warning light for consumer spending. Against the unfavourable consumer environment, we can perhaps expect new car sales to be stuck in reverse gear for some time yet. Unless of course we see a ‘cash for clunkers 2.0’.

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