Brexit, German and French elections forecast to stall Europe's auto growth

After a robust 2016 surprised most forecasters, the growth of Europe's auto market is expected to slow considerably this year after three consecutive years of strong gains. The negligible increase in annual volume will be caused by an anticipated slump in UK car demand resulting from Britain’s decision to exit the European Union as well as political uncertainty caused by elections this year in two key EU markets.

Analysts currently estimate European sales will edge 1 percent higher in 2017, a sharp drop off from last year's 7 percent rise. Automaker bosses, however, are a bit more optimistic. "We see modest growth next year," Ford of Europe CEO Jim Farley told reporters at the end of November. "The key markets to watch are the UK and Germany. We have a lot of elections around Europe and a lot can change of course."

Brexit is expected to depress car buying in the UK as general uncertainty, slower economic expansion and manufacturer price hikes hurt demand. Sales in Europe's second-largest market are forecast to fall more than 7 percent this year to 2.5 million vehicles, according to IHS Automotive.

Meanwhile, France is due to vote on a new president in May to replace Francois Hollande, who will not run for a second term. Matthias Wissmann, who is president of the German automotive industry association (VDA) and a former German transportation minister, said he was hopeful that far-right candidate Marine Le Pen could be defeated in the upcoming election because of surging support for her opponent, Francois Fillon. A Fillon win would put to rest fears that Le Pen, the self-described "Madame Frexit," would pull France out of the eurozone, effectively ending the use of the single currency.

In Germany, this autumn's general election could force political parties to forge alliances with more than one junior partner to form a stable government. Such a move may cause German fleet customers to postpone major purchases in the months ahead, according to analysts.

'Treasure Island'

Despite what could happen in Germany and France, market watchers say that the overall health of Europe's car market will depend on the performance of the UK in 2017. The weak pound fundamentally changes the equation for manufacturers that spent the last five years using the UK as a crutch for profits by exporting as many vehicles as they could to reap the currency gains.

"I heard one manufacturer call it 'Treasure Island' because they could just send whatever they wanted over to the UK and it would sell like there was no tomorrow," said LMC Automotive forecaster Jonathon Poskitt, who estimates the market could slump by 5 percent this year. Others see an even greater drop, such as the 8 percent cited by the VDA's Wissmann, who is also president of OICA, which is only non-governmental car and truck global manufacturers' organization accredited to the United Nations.

It may take until the end of March to get clarity on the UK market. That is when the UK government has said it would begin formal two-year negotiations with Brussels over an exit by invoking Article 50 of the EU Treaty.

Throughout the second half of 2016 the UK market remained strong, giving some experts hope for this year. "Our expectations of the severity in 2017 have been moderated since the initial Brexit decision, particularly given that the unknowns with regards to what will happen once Article 50 is triggered and when that will actually take place," IHS Automotive forecaster Ian Fletcher said.

Ford of Europe's Farley added: "We have been very encouraged by the strength of the UK market over the last couple of months. We all thought after the Brexit vote it would shrink."

Fortunately, underlying economic indicators across Europe have pointed to a continued expansion. Euro area unemployment fell to its lowest since July 2009, and gross domestic product (GDP) growth for countries sharing the single currency dropped back down to 0.3 percent over the past two quarters, for example. Analysts at Barclays also cautioned that carmakers continue to rely on discounts, with the three largest car markets, the UK, France and Germany, all at "historically elevated levels," amounting to roughly 20 percent off the base price.

New product

Automakers know the best way to keep their sales numbers up, even in a tough market, is by offering new products in hot segments. Some of the new arrivals that should help automakers offset the forecast slowdown include the BMW 5 series sedan that will reach European markets next month; the Opel Insignia Grand Sport, which launches in May, the Ford Fiesta subcompact hatchback and Volkswagen's replacement for the CC, dubbed the Arteon, both of which arrive this summer. On the SUV side, the Skoda Kodiaq, Toyota CH-R, Volkswagen T-Roc and Mini Countryman are scheduled to go on sale in Europe later this year.

Those models should help the overall European market from recording its first full-year decline since 2013, but the growth will be subdued.

"We've been in a good, solid recovery phase back toward pre-Great Recession levels and are on much firmer footing, but the upside potential is therefore more limited as we move further forward." LMC's Poskitt said. "We expect to see growth dramatically slow to about 1 to 2 percent. While that means an absolute volume level we have not seen since 2007, it is still below the volumes seen in each of the previous 10 years."

Nick Gibbs contributed to this report