Forecast for 2008

Andrew McKellar, Chief Executive of the Federal Chamber of Automotive Industries, has a background advising federal government industry ministers and has worked for the Australian Industry Group and PriceWaterhouseCoopers.

Therefore, he's exactly the right person to prognosticate on how the Australian automotive market will perform in 2008.

McKellar (pictured), addressing journalists for the announcement of the final sales figure for 2007, listed the market's fundamentals which will stand it in good stead for 2008.

These include "labour market strength", "vehicle affordability" and "rising asset values".

McKellar said "Looking ahead, we see no reason to doubt that these fundamental strengths will be maintained through 2008.

"There are some risks, which need to be acknowledged, and which may weigh on the future growth of the market.

"In particular, there is a possibility that we will see some further increases in official interest rates, in response to inflationary pressures. And equally, there is a risk that Australia will bear some of the brunt of a more general tightening in global credit conditions, flowing from difficulties in the US sub-prime mortgage fund.

"In view of all these factors, the strengths and the risks, FCAI has forecast that new motor vehicle sales for 2008 will again exceed one million units.

"We see a market underpinned by continuing strong consumer demand, but we are cautious about projecting continued growth along the lines of what we have seen in 2007.

"The Australian car market has grown in six out of the last seven years. Since 2001, the market has expanded by 277,000 deliveries -- or 35 per cent.

"Last year, the vehicle market grew at approximately twice the rate of the economy as a whole.

"So while economic fundamentals remain strong, and consumer confidence is proving to be very robust, the FCAI's forecast reflects a sense of realism.

"Future growth in the market will be more closely aligned with trends in overall domestic demand."

In essence, the FCAI sees domestic demand slowing, but remaining strong enough to carry the market over the one million sales threshold again, in 2008.

Not everyone believes the glass is half full.

Nick Johnson is CEO of FleetPartners, the fleet management and leasing company formerly owned by the ANZ Bank. In his view, the year ahead is likely to be tougher than the FCAI expects.

"While 2007 will certainly go down on record as one of the best years for the vehicle and fleet industries, the outlook for 2008 is more complex," he said.

In the context of the 2007 result, Johnson said: "Several factors are behind the result but our relatively low interest rates environment has certainly played a part.

"Employment levels are high and house prices have shown incredible robustness, all of which reinforces people’s sense of wealth and confidence."

As far as 2008 is concerned, Johnson warned that the US sub-prime mortgage fund issue is yet to hit hard in Australia. When it does, it may influence the housing market negatively, one of the three strengths ("rising asset values") mentioned by McKellar in his speech.

"Australia has not seen the full impact of the global credit crunch and we believe this will have an effect on borrowing rates and the availability of capital. A key factor will be the extent to which the housing market becomes subdued as a result of the recent interest rate rise and further forecast rate rises.

"We expect there will be more pressure on available finance and that will ultimately have an impact on the fleet industry and vehicle sales more broadly."

"Vehicle affordability" -- another of the strengths listed by McKellar -- is also in doubt. With the continuing strength of the Australian dollar, prices of imported vehicles should adjust downwards in accordance, but the car companies usually don't reduce pricing.

Johnson says that the importers will not reduce prices of their products, preferring to optimise the available profit and/or adding features to the specification as an incentive.

"We won’t see prices come down and that is because of the tendency for distributors and importers to hold back margin if they can. Rather than reducing prices we may see vehicles with higher features and specifications, particularly in the safety areas."

McKellar is cautiously optimistic that the market will hold steady, just over a million sales for the year.

Johnson is perhaps needlessly pessimistic, since the sub-prime mortgage situation doesn't yet appear to be as far-reaching for us in Australia as was anticipated.

Vehicle affordability may not improve, but it shouldn't worsen either, in this current period of relatively low inflation and favourable currency exchange rates.

One factor that also counts heavily in any question of vehicle affordability is the level of unemployment, which has dropped to historic lows -- again, thanks largely to the resources boom.

Finally, with the strong Aussie dollar, we're insulated from inflationary pressures and the escalating price of oil that might change our vehicle buying patterns.

So although McKellar is hopeful that the market will stay where it is, Johnson is anxious that the market will not grow. But essentially, it's the same thing.

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