Q1:18 passenger vehicle sales

Shallow sales cycle – however, the now more conducive economy should encourage further momentum

Domestic demand is recovering

• We believe that the SA economy has turned the corner. GDP growth in Q4:17 beat expectations of 1.8% q/q and came in at 3.1% q/q, from 2.3% q/q in Q3:17. This was supported partly by resilient household spending. Importantly, this pre-dates the many positive developments from the change in political leadership late last year. New boards for key SOEs, and putting on hold the proposed amendments to the Mining Charter in favour of more inclusive consultations, boosted confidence. Indeed, Q1:18 BER/BMR business confidence jumped by 11 pts (although it remains below the historical average). Increased confidence, together with the fiscal measures presented in the 2018 February Budget, averted a Moody’s downgrade. Moody’s even revised upwards SA’s outlook from negative to stable leading us to believe that SA’s credit ratings have bottomed – although we do not foresee ratings upgrades any time soon.
• From a consumer perspective, things look promising too. According to Stats SA’s Quarterly Employment Statistics (QES) survey, formal non-agricultural sector employment increased by 81k (0.8% q/q) in Q4:17, after declining by 19k (0.2% q/q) in Q3:17 (see 4Q17 formal employment up 0.8% q/q of 27 March 2018 by Thanda Sithole) . Furthermore, the SARB’s data indicates that the economy’s total wage bill grew by 8.1% Q4:17, compared to a year ago, and we expect it to have grown by 6.2% in Q1:18. Given the moderating inflation profile (currently averaging around 4% y/y for February), real wages are growing around 2%. This, coupled with lower interest rates and a stronger, more anchored rand, underpins our expectation for steady household spending – particularly in durable goods expenditure which are more rand- and interest-rate-sensitive.
• However, the Q1:18 Naamsa’s total new vehicle sales disappointed, showing a decline of 3.4% y/y, from 4.7% y/y in Q4:17. The trend-cycle (total passenger sales trend) continued to decline because purchasing activity was subdued mainly due to slowing demand from the export markets, the government and rental companies (Figure 1). Nevertheless, excluding exports, the trend cycle is still rising, indicating recovering domestic demand (Figure 2). Exports suffered given the stronger rand as well the delays from the BMW Rosslyn plant switching from 3 Series production to X3 production in March. The benign global growth environment and the introduction of the new VW Polo (in February) somewhat supported car exports in Q1:18. 

Outlook

• We believe that domestic vehicle sales will be stronger this year due to the turnaround in consumer and business confidence. Further, lower interest rates and growing real income should improve affordability, which should usher in some easing in credit conditions. We pencil in a further 25 bps rate cut, most probably in July, although this is a close call. The key will be the trajectory of the rand and the time horizon over which inflation and inflation expectations edge closer to the middle of the 3-6% target (see Mixed SA data on the cards of 13 April 2018, by Elna Moolman).
• Separately, replacement pressures persist, with the domestic sales trend now tracking along the 96-month replacement cycle (previously, the 80-month replacement cycle could reasonably explain the sales trend). Commensurately, the average age of a car on the SA roads is estimated at 9.9 years in 2018, from 9.5 years in 2013. Furthermore, attractive pricing of new cars has seen the market switch from used to new cars. Although manufacturers have been reeling in incentives, a sustained strong rand should help maintain this trend. Combined, these factors should sustain the domestic sales volumes recovery.
• Exports should benefit from sustained and synchronised global growth but the stronger rand could weigh on the competitiveness of locally produced cars. We see the rand at around R12.50/$ by end-2018 and R12.70/$ by end-2019. The near-term risks are biased to the stronger side of these forecasts. Our forecast for medium-term depreciation hinges on a, retreat in commodity prices from current levels (see Mixed SA data on the cards of 13 April 2018, by Elna Moolman).

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