EEF blog

We’ve been saying quite a lot about the risk of policy errors at this point in the economic cycle recently.  There is still a wide range of views on whether the UK is or isn’t yet out of recession. But there does appear to be more agreement on a long and bumpy road to recovery and the need to ensure that stimulus measures remain in place until the economy can stand on its own two feet. 

So first up is the car scrappage scheme – announced in the Budget and came into effect in Mid-May.  At the current rate the cash should run out in the next month or so.  Over the summer new car registrations have picked up and manufacturing output in motor vehicles and other sectors supplying to car manufacturers has also turned a corner.  But can this trend continue in the rest of the year and into next without incentives provided jointly by government and industry. 

EEF and other manufacturing bodies reckon not.  So we’ve written to the Chancellor calling for the scheme to be extended until February next year.  Our argument – as outlined in the letter goes like this;

‘Although the current climate has stabilised, output levels are still below pre-recession levels. Wary about the prospect of a sustained recovery and ongoing concerns about access to credit and cashflow means investment intentions remain low.  Consequently any relapse in auto industry output, coupled with the expected deterioration of the UK aerospace and defence industry in 2010, could pull manufacturing and the economy back into recession in the New Year’  

Rumours suggest that we might have won this argument.

We've been having an internal debate about the VAT cut: did it work?

A study by the IFS says, yes it did, but I have some doubts about the study (I'll come back to the IFS work in another post).

A poll by PWC says no it didn't. And I have my doubts about that poll.

According the PWC survey, 88% of people said the VAT cut hadn't made them spend more; 5% didn't even know the VAT rate had been cut!

The VAT cut isn't like the scrappage scheme which provides a highly transparent, £2,000 incentive to buy a new car. But the benefit of the VAT cut on any given purchase is small and hidden.

The real effect of the VAT cut is cumulative and relative. It's cumulative because over the year, the cut will provide a boost to households' budgets. And that boost will lead to some additional spending. It's relative because buying things is cheaper this year than it will be next year, so might as well buy it now.

The PWC poll doesn't capture these effects and so you get 88% saying it hasn't affected their spending. That's probably not true. The real impact is likely to be bigger and hidden.

But that doesn't mean the VAT cut was £12bn well spent or that it should be extended.

It's been three and a half months since the car scrappage scheme was introduced and already we're seeing some signs of success.

So far, 154,927 orders have been placed. And because the government funding is enough for 300,000 new cars, that's the halfway mark.

Is that a sign of success?

Yes, and not just because half the money has been used.

I'm not looking at what individuals are doing. The 150k in new car orders represents artificial demand. Some of it was brought forward from the next couple of years, some of it new demand from people who don't mind owning a 10 yr old car.

The real sign of success comes from the car companies themselves. Take Nissan, for example. Not only are they advertising for the government subsidised scrappage scheme, their advertisements go further than the gov't offer: Nissan is willing to offer £2,000 on trade-ins on cars 8 years or older. Citroen and other dealers are also offering their own versions of the scrappage scheme, plus additional sweeteners?

What's the big deal? Well, the commentariat have been blathering on about 'What happens when the government scheme ends? Will the bottom fall out of the market?'

The answer is not likely. If car companies are healthy enough to offer their own more generous scrappage schemes, then why should it matter what happens when the government scheme ends in December?

More importantly, the sweeteners to buy new cars mean one of two things: either the companies are desparate and are cannabilising their own future sales (e.g. GM and Chrysler in 2008) or they are in a more stable position to offer the cash incentives. All signs point to the latter, rather than the former.

We're no longer talking about extended shutdowns and short-time working. New orders and extended shifts are the words being used in the same sentences as the big car makers.

And that means more about the contibution of the scrappage scheme than any numbers ever will. 

The auto industry is in the news again. But unlike the stories of layoffs and shutdowns we've become accustomed to, it's all good news.

Where to start?

Since there's no place like home, might as well turn to the fate of the UK's two Vauxhall plants. A new and last minute bidder for GM Europe has come to the fore, promising to keep Vauxhall open in return for £430m in finance from the UK government. The bidder is RHJ International, a Belgium-based company that some view as red-blodded private equity and others as a long-term industrial investor. Either way, RHJ, which has met recently with Lord Mandelson, has complicated the battle to buy GM Europe with the approval of the German government.  

And staying in Germany, BMW is starting to ramp up production in the coming months because it beleive the auto sector is turning a corner. In the UK, BMW's MINI plant has reintroduced a Saturday shift at its Oxford plant and will be rehiring contract workers it had laid off.

In Japan, Honda has launched its Insight hyrbid, its rival to the Prius. That's a relatively bullish move given the current state of the global economy.

And as no auto industry tour of the world would be complete without a stop in the US of A, the whirlwind revamp of GM and Chrysler is progressing smoothly. With both companies having been herded in and out of bankruptcy at a breakneck pace, the Treasury's 'Car Czar' is stepping down, with GM and Chrysler in better shape for his efforts.

Back here in the UK, EEF have heard that only 19 companies have applied for the government's Automotive Assistance Programme, but not one has received the money yet...

The UK car scrapping scheme seems to be working, giving a much-needed boost in the industry. The latest figures show car registrations were 7% higher in June than in May (when accounting for seasonal adjustments), and, according to the SMMT, almost 10% of new car registrations were as a result of the scrappage scheme. 

Government figures show that within a month of introducing the scheme, almost a fifth of government money has already been spent, raising concerns that the scheme will be exhausted before its proposed closing date in March.

For now, the scheme is helping the beleaguered automotive industry. But it remains to be seen if higher demand will be sustained once the stimulus is removed. Until consumer confidence picks up a sustained recovery seems unlikely.

It's early days, but the government's car scrappage scheme seems to have given a bit of a boost to automotive demand.  The government has released figures today showing more than 35,000 orders since the announcement of the £2000 scrappage subsidy. This, they argue, equates to one scrappage scheme order out of every five new car orders in this period.

Certainly every time you turn on a TV there seems to be a new car advert urging consumers to make the most of the scheme and this will provide some much needed good news for the UK automtive sector as it hold its breath and awaits the outcome of the ongoing political manoeuvring around the GM decision...an annoucement, on which, is expected at lunchtime today