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Standard Bank Group
Consumer Trends 25 July 2018

Q2:18 passenger vehicle sales

Domestic demand is down; a much improved labour market would drive future sales


  • The outlook for SA GDP is now less optimistic after the disappointing Q1. That poor performance would require really good GDP growth this year in order to achieve forecasts. The SARB has now trimmed growth for 2018 from 1.7% to 1.2%. We however keep our 1.7% forecast but see the risks as to the downside. Nevertheless, recent economic data, such as retail sales, mining and manufacturing, has been encouraging. Also, consumer confidence has resurged, while still subdued inflation should curb impending monetary policy tightening.  
  • Q2:18 Naamsa’s total new vehicle sales declined further in Q2, by 5.4% y/y, from a decline of 3.4% y/y in Q1:18, due mainly to a sharp decline in exports (-17.3%) and government sales (-12.1%), in line with tightening fiscal policy measures announced in the February 2018 budget. Exports suffered mainly as a result of delays from the BMW Rosslyn plant switching from 3 Series production to X3 production. However, in recent months, X3 exports have started picking up, although they’re still nowhere near historical levels. In Q2:18, X3 exports accounted for just 12% of all exported vehicles, versus the 29% 5-year average share achieved by the 3-series model.
  • Excluding exports, domestic sales were up 3.8% y/y in Q2, reversing the losses of Q1 (-3.4%). Nevertheless, the sales cycle trended down (Figure 1), showing that domestic demand went down in Q2. The up-tick in volumes was mainly due to favourable base effects, with last year’s volumes (Q2:17) representing the lowest in over a decade. Also, Q2 seasonally has low volumes. Accounting for this, we estimate that Q2 volumes were down 7.6% from Q1.
  • Volumes through dealers (households) were virtually unchanged (+0.4%) from last year’s levels, after doing relatively well in Q1 (+3.9% y/y). Clearly, the trend-cycle (total passenger sales trend) shows a market under pressure. Attractive pricing of domestic vehicles and improved affordability should have assisted dealer volumes. The 1-ton market (through dealers), which is classified as Light Commercial Vehicles by Naamsa but arguably has a significant household component, has been under pressure for some years. However, the last two quarters show some improvement. The double-cab sub-segment in particular was up marginally by 0.3% y/y in Q2:18, from -2.1% y/y in Q1:18. The estimated average price of double-cabs has over the past few quarters risen faster than the average passenger car, and thus is relatively expensive.
  • A strong labour market is crucial for car sales. In particular, we show that attractive pricing of domestic vehicles, aided by a stronger rand and aggressive incentives by manufacturers, has improved consumer affordability, as estimated by the ratio of price-to-wage per worker. As affordability improves, volumes sold per worker also improve. However, the recently moderating trend in the wage bill, coupled with the weaker rand, will likely slow down sales. 

Outlook

Consumers started the year in a reasonable financial state, and expecting some relief this year from reasonably robust real wage growth, underpinned by moderating inflation. Net employment was expected to trend sideways, while a continued gradual credit growth acceleration was underway after a decade of deleveraging. These assumptions still stand, except that the unexpectedly sharp petrol price spike is constraining discretionary spending (see Rather robust retail in May by Elna Moolman). Also, interest rates have seemingly troughed. And, domestic vehicle prices are quite attractive, which has improved affordability. We forecast inflation to average 4.6% in 2018 and 5.0% in 2019, premised on a recovery in the exchange rate to R12.70/$ by end-2018 along with a modest retreat in oil prices. The SARB is then likely to keep interest rates steady over the next 12 months. The generally subdued underlying inflation, combined with sluggish economic growth, should curb any monetary tightening if upside inflation risks materialised (see Benign CPI in June at 4.6% by Elna Moolman). We forecast the dealer (household) market to edge up by 0.7% y/y in 2018 (to 280,965 units) and a further 3.2% y/y in 2019.  

The trade war should have a relatively modest impact on global growth. However, the elevated risk premium incorporated by financial markets reflects the risk that trade tensions could weaken global confidence, and weigh on vehicle exports. We keep our forecast of R12.70/$ by end-2018 and R12.70/$ by end-2019 despite further dollar strength in the near term potentially keeping the rand slightly weaker this year than we initially anticipated


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