Latest forecasts from
the Bank of England seem to be giving some fairly stark messages to
the motor finance industry.
First of all, inflation rates are
double their target at 4 percent, and look likely to remain there
for the rest of the year at least, before sinking gradually down to
2 percent sometime thereafter.
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This will admittedly increase the
price of cars, which in turn will mean larger volumes of finance
per deal deals and more profit made over the course of
agreements.
However, it could also cause some
difficulties with residual values later down the line – the
eventual resale value of cars will be informed by a number of
global factors, and might not tally up with today’s price
increases.
Secondly, rises to the cost of
borrowing are on the way – Mervyn King says the bank rate will have
to rise to one percent by the end of the year, but markets are
pricing in anticipation of 1.25 percent or more.
Those making long-term financial plans
have been told not to expect the days of cheap borrowing to go on
forever – and this certainly applies to the funding of motor
finance operations.
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By GlobalDataHow much individual lenders decide to
let that rate rise make it through to the consumer should make for
an interesting competitive landscape in 2012.
Perhaps the grimmest indicator of all,
however, is the downward revision of growth estimates for the year,
from the 2.5 percent predicted in November 2010 down to 2
percent.
This follows a shock 0.5 percent dip
in the economy recorded during the fourth quarter of last year –
something that both King and Chancellor George Osborne have blamed
squarely on an early round of snow during December.
This use of the weather as a scapegoat
feels a bit like a train operator blaming “leaves on the line” for
crippling delays – or indeed someone passing off a brutal round of
spending cuts as an attempt to create a big society… but that’s
another conversation for another time.
In any case, evidence seems to suggest
that there was more than snow behind 2010’s dismal fourth quarter.
In a recent survey by market research firm GfK NOP, consumer
confidence took a huge plunge between December and January, driven
by huge anxiety over making major purchases.
Either consumers are expecting a vast
amount of snow throughout the spring, or they are genuinely shaky
about the prospect of spending while the cost of living continues
to spiral upwards – and wages fail to.
This is going to cause a real headache
for motor finance companies. It’s all well and good if car prices
continue to rise, but if people’s wages are staying where they are,
the nation’s car parc will only continue to age and new
registrations will be lucky to stay above two million.
This is where the industry is going to
find the greatest test of its sales skills, and prove itself for
what it is – the financial oil that lubricates the motor sales
process.
As Spencer Halil notes later in this
issue, finance companies will only beat consumer anxiety by
“presenting the benefits from a range of finance solutions that
make buying a car less intimidating and more affordable”.
The outlook for the business is in
some ways almost a mirror image of what it was back in late 2008.
Back then, customer demand was still there, but everyone was
constrained to some extent by the amount they could lend due to the
freezing up of the credit markets, and an urgent emphasis on
default risk.
Now, a fairly robust recovery in the
financial sector has seen liquidity free up again – but there are
serious worries about finding enough customers to sell to in the
months to come.
What’s more, with interest rate rises
now virtually a certainty before the end of the summer, funding is
only going to get pricier.
2010, it seems, was a chance to make
hay while the sun was shining – more money was coming into the
market, defaults were low due to the caution invested in lending
decisions over the previous two years, and government spending cuts
were just something to write speculative opinion columns about.
Now, three and a half years after the
first signs of 2007’s credit freeze emerged, it seems the real test
is beginning.
Let’s hope there’s no late snow still
to come this year.
Fred Crawley
fred.crawley@vrlfinancialnews.com
