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Britain’s automotive industry is braced for a 5pc drop in new car sales when annual figures are released this week – but there are warnings that 2018 could see an even steeper decline.

New car registrations data due out on Friday is expected to show 2.56m cars were sold in 2017 as a combination of growing uncertainty about the economy’s health, confusion over the government’s stance on diesel and higher vehicle taxes weighed.

The decline comes after a record year for the UK’s £77.5bn-a-year car industry, with 2.7m new cars being driven off dealers’ forecourts in 2016, the fifth successive year of growth.

New car registrations are expected to fall 5pc from 2017’s record level

Credit:
Getty

Trade body the Society of Motor Manufacturers and Traders (SMMT) cut sales forecasts three times in 2017. It is now predicting a 5.4pc annual fall in 2018 to 2.43m new registrations, with the market stabilising to an extent in 2019 at 2.39m sales.

However, some industry commentators are predicting bigger falls to come, with the UK car market having enjoyed a bubble until now that was the result of a unique set of conditions.

“Put simply, the UK market is overtrading,” said Professor David Bailey, an automotive industry expert at Aston University. “There’s a big question over how long car buying fuelled by personal contract plans (PCPs) can go, and the pick-up in European markets means production is no longer being offloaded in the UK.”

PCPs – a form of car leasing – drove the boom in car buying as the market recovered from the financial crisis and the vast majority of new cars are bought using this method.

However, PCPs rely on cars’ residual value with motorists using equity they build up in them to help finance a new vehicle after a few years.

Prof Bailey warned a tougher economy could mean to “a wave of a wave of used cars hitting the second-hand car market, in depressing second-hand values”.

There are concerns that leasing deals which have driven sales could come under pressure

Credit:
Eddie Mulholland

He added worries an economic slowdown and Brexit, rising import prices because of a weaker pound after the EU referendum and the backlash against diesel in the wake of the VW scandal have not eased.

“I can see the UK market contacting between 5pc and 10pc in 2018,” said Prof Bailey, raising the prospect of an interest rate raising further hitting sales. “None of the factors that act as a drag on car sales have gone away.”

Howard Archer, chief economist at EY Item Club, added: “Sales of diesel cars have been decimated by pollution concerns and expectations of related government action to counter this. While this contributes substantially to the weakness in car sales, the overall softness runs deeper – 2018 will be another challenging year for new car sales with another drop around 5pc highly possible.”

Pressure on domestic sales has contributed to car makers in the UK being one of the most vocal sectors calling for a EU free trade deal. Almost 80pc of the 1.7m cars built in Britain in 2016 went for export, but the latest data showed this level is now at 85pc, as car companies become increasingly dependent on foreign markets.

SMMT figures for November showed a 28pc fall in domestic demand for cars coming off British production lines and the imposition of trade tariffs would only exacerbate the situation.

Mike Hawes, SMMT chief executive, called 2017 a “challenging year” with the market “rocked rocked by major vehicle excise duty changes, Brexit uncertainty and misinformation about the latest low emission diesel cars, all of which deterred some buyers”.

While the future may look less bright, new accounts from Nissan reveal that the company’s UK business based out of its huge Sunderland plant enjoyed a strong run in the year to the end of March 2017.

Nissan’s Sunderland-based business reported record production in the year to the end of March 2017

Marking its 30th year in operation, production out of the plant rose by 41,000 vehicles to a record 519,000 models including Qashqais, Jukes, Notes, Infinitis and all-electric Leafs.

Sales rose by 22pc £6.3bn and pre-tax profit was 21pc higher at £142m, with the business growing staffing by 4pc to 7,800.

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