Auto sales have been on a tear of late. According to data from the European Automobile Manufacturers Association, new passenger car registrations in the European Union rose over 12% year-on-year in the first two months of 2017. In the UK, the story is similar. The Society of Motor Manufacturers & Traders (SMMT) says the number of new cars registered in March rose more than 8% against the previous year.
At first sight, this seems like great news for manufacturers and their associated sales, financing and distribution networks – but lift the bonnet and all may not be what it seems, at least if US data is anything to go by.
Against a backdrop of rising interest rates, the number of defaults on sub-prime car loans is beginning to rise. In March, ratings agency Standard & Poor’s highlighted how losses on US sub-prime auto loans reached an annualised 9.1% in January from 8.5% in December and 7.9% in the first month of 2016. The rate is the worst since January 2010 and is largely driven by worsening recoveries after borrowers default, S&P said.
We believe the looming crisis in car finance is part of a wider global malaise. Governments, companies and consumers have continued to take on more and more debt over the past decade with little regard for the long term consequences. The recent Trump-fuelled stock market rally was based partly on a belief that deregulation of the financial services sector would free-up banks and other credit providers to lend more – and that this in turn would result in a spending boom. But we believe the rise in auto loan delinquencies are just one indicator of how weak the foundations of that rally are.
Nick Clay, Newton, a BNY Mellon Company