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Uncertain future despite optimistic start to yearBy Mike Allen, analyst at Panmure Gordon As we exit results season, most UK-listed plc companies have indicated that order books for March are at least 10% ahead of last year, which has had a positive impact on their respective share prices. Has this sector therefore now turned the corner and can we look forward to a geared recovery from here?Looking at the glass half-full scenario, we might have just averted a double-dip recession with general inflation starting to ease, taking some much needed pressure away from the consumer. Interest rates are also low and look set to stay low until at least 2014, putting consumers in a stable job in a strong position. According to the Finance & Leasing Association motor finance sales were plus 42% year-on-year in January driven by promotions, low-rate deals and motor dealers providing lower deposits. However, let's take a more pessi­mistic view for a moment. Has consumer confidence really turned the corner? Buying or changing a new vehicle remains the second biggest deci­sion most consumers will make. Household disposable income is forecast to be flat this year, after a circa 8% fall over the previous three years, according to Longview Economics. But low wage growth and rising mortgage and fuel costs are likely to put downward pressure on this forecast in our view. The average UK consumer is, therefore, not getting any richer at present. With new cars increas­ingly reliable can this decision not be delayed until the economic outlook becomes clearer? If consumer confidence is improving from here, what is certain is that this recovery at best remains very fragile. The threat of unemployment is still a key issue for many con-sumers, and with this likely to remain structurally high for years to come. At current levels this is above 8%, not quite the early 1990s peak of 11%, but certainly well above the trough point of 4.7% seen in 2005 when the new car market was comfortably over two million registrations. Improving confidence is therefore likely to be slow in our view. With Government austerity measures also in full swing, public sector unemployment is likely to gather further pace, especially as we move into start of the new fin- ancial year. Fuel prices are our primary concern following the recent Budget. They have risen 5% since the start of the year and the confirmed 3p increase in fuel duty in August will likely bring about the £100 tank of fuel. We see two impacts from this. Firstly the negative impact on household finances which reduces income available for discretionary purchases. Secondly, the psycho­logical impact of a £100 tank of fuel or 150p per litre (as will be the case for diesel) may make more consumers think twice before using the car. What does this all mean for the prospects for motor retailers in 2012? Q1 trading certainly appears to be ahead of expectations, March data from the SMMT showing a 0.9% increase year-on-year. Does this Fuel prices remain a key concern as pressure continues on household budgetsAM PROMOTION Economic assessmentCar Volume Trends2.32.42.12.02.07.47.16.76.36.601234567820062007200820092010MillionsNewUsed"What is certain is that this recovery at best remains very fragile" Source; SMMT Demand for new cars has been on a rollercoaster ride since the start of the UK's economic turmoil. Although fleet sector registrations picked up last year, the retail sector has only recently shown any stability Source: BCA Used Car Report 2011Data from motor auction group BCA revealed a steeper decline in annual UK used car sales volumes, partly due to reduced supplies. However sales are recovering as consumers seek greater value for their spendNew car registrations, rolling year total, Jan 2007 to dateCar volume trends

mean pent up demand is returning to the new car market? If this is the case, we see a geared recovery on plc profitability especially with driving cost efficien­cies being the primary focus in recent years. In terms of the used car market, we see a shortage of new cars during the last few years, which should ensure margins remain robust for those dealers that have the correct stock. The used car market is also about three times larger than the new car market in volume terms. Therefore the oppor­tunities for growth are greater and we can see why this has become strategically more important for dealers in recent years. However, volume can sometimes come at the expense of price, which is why we analyse gross profit per unit trends closely.Using history as a guide, a sustained recovery in new and used car demand has only occurred when UK GDP growth was was at plus 2%. Official consensus UK GDP forecasts are closer to the 0.5% mark for 2012 rising to 1.7% in 2013, albeit the range of forecasts remains very wide. Despite the encouraging start to date, we believe the outlook will remain uncertain with much work to be done before we can safely say the industry has turned the corner and looking to shift up a couple of gears.AM PROMOTIONI think it's fair to say that one of the main concerns and biggest challenges that dealers face at the moment is a lack of consumer confidence. Upgrading a vehicle is still regarded by many as a discretionary purchase. Although this, combined with the latest unemploy­ment figures and lowered disposable income are all still a major concern for consumers, there is a wide range of techniques that can be used by the dealer to encourage the customer to buy from their dealership, one of which is point-of-sale finance. Despite consumer reservations, the latest motor finance penetration stats from the FLA show an increase in PoS finance, illustrating that it is probably still one of the most opportune ways for a dealer to encourage consumers to purchase a vehicle, at a time where disposable income for many is still less.For those people who are in a favourable financial position and in secure employment the continued low interest rates mean that the purchase of a car on finance has never been easier, which we are seeing evidence of with our lowest ever levels of bad debt. Although fuel prices will probably be a major concern for many following last month's Budget announcements, the fact that plans have been set in motion to reduce tax for lower earners plus a larger than expected cut in corporation tax over the next three years means that eventually we may see the light at the end of the tunnel. The fact of the matter is that borrowing money is still cheaper to do now that it has been historically and although on the whole, banks are still reluctant to lend, PoS finance companies like Close Motor Finance still have a lending appetite, allowing dealers to continue to offer flexible and affordable finance options to their customers for the benefit of all parties. INDEXWATCHBy James Broadhead, Close Motor Finance60DecemberJanuaryFebruaryMarch90120DieselSuper unleadedUnleadedLPGPence per litre1500302008200920102011Nationwide Consumer Confidence IndexPresent Situation IndexExpectations IndexSpending index20126090120150Index valueSource: TNS-RI research for NationwideNationwide Consumer Confidence IndexThe high cost of fuel is a concern for many motorists, but this can play into the hands of some franchised dealers able to offer more efficient new cars for similar monthly payments to customers' current vehicles.Fuel price movementsConsumer confidence indexResearch by Nationwide indicates that consumer confidence has suffered a double-dip as initial optimism of early economic recovery proved unfounded. Nevertheless, the past few months have seen a small uplift in expectationsIn association with