U.K. Budget Seen Stanching Flow of European Vehicles

The U.K. government’s latest budget lowers the risk of a flood of unsold new vehicles pouring in from mainland Europe by putting downward pressure on the pound sterling.

Industry-data provider CAP Motor Research says fears had been growing since last summer that the eurozone economic crisis could prompt auto makers to push more new cars into the U.K., generating historic oversupply levels and in the process threatening residual values.

But CAP says Chancellor George Osborne’s downgrading of the region’s economic growth forecast, combined with his call to keep interest rates lower and for longer, can only add to weakening of the pound, potentially making new-car business less profitable for most manufacturers.

The budget’s impact on the U.K. automotive sector is neutral because of restraints on exchange rates, coupled with Osborne’s measures designed to put more money into consumers’ pockets, CAP concludes.

“From a residual value perspective it is good to have the downside pressure on sterling increased by the Bank of England and sensible to announce a downgrading of the U.K. growth forecast to prevent the pound rising,” Dylan Setterfield, CAP senior editor-forecasting, says in a statement.

“For a while last year, it seemed there was a real risk of the slump in registrations in Europe, forcing manufacturers to divert supply to the relatively strong U.K. Experience has shown us that when registrations approach levels we saw in 2005 to 2007, then residual values are severely weakened by eventual oversupply.”

Setterfield says the chances of this being repeated have declined since the pound began weakening in the second half of last year.

The pound initially weakened further as an immediate response to the budget statement, and although it recovered over the following 24 hours it remains at a level that will curb heavy discounting in the U.K.

“We will still see forced registrations, but the intensity of such activity will be limited to specific manufacturers, rather than an industrywide trend,” Setterfield says. “The budget can therefore largely be regarded as broadly neutral in terms of its impact on current residual values patterns and those we have previously forecast for the next three years.”