UK economy under worst strain for seven years as car sales slump

Finance options are displayed on new cars at a dealership in Bristol

 The global car industry has been hit by a decline in demand for diesel vehicles. Photograph: Matt Cardy/Getty Images

The British economy is showing the greatest signs of strain for seven years amid a continued decline in car sales and as the service sector struggles to grow with Brexit looming.

According to the latest snapshot from the beleaguered UK motor industry, car sales dropped for the fifth consecutive month in July. New car registrations fell by 4.1% to 157,198, the weakest sales in July since 2012, the Society of Motor Manufacturers and Traders said.

The automotive sector has been battered over the past year as rising political uncertainty serves as a brake on consumer demand, and as carmakers are pushed to put in place contingency plans for repeated no-deal Brexit deadlines. Slowing global demand during the US-China trade dispute has also dampened factory output.

At the same time, the global industry has been hit by the slump in demand for diesel vehicles after emissions cheating scandals prompted bans of the fuel in some cities. Diesel sales slumped by 22% year-on-year, while petrol sales edged up.

The weakest month for UK car sales in seven years comes as City economists expect official figures due on Friday to show the economy either stalled or contracted in the three months to June. Should GDP have fallen, it would mark the first quarterly slide in economic output since 2012.

Economists regard two consecutive quarters of falling GDP as recession. The Bank of England has warned that Britain faces a one in three chance of dipping into recession at the start of next year, as Brexit uncertainty and the slowing global economy weigh on Britain.

Closely watched surveys of business activity in the service sector, which accounts for about 80% of the UK economy, showed that output remained subdued in July as firms became increasingly concerned over Brexit.

The survey of the sector that includes hotels, restaurants and banks by IHS Markit and the Chartered Institute of Procurement and Supply showed a modest improvement on the previous month.

The IHS Markit/Cips services purchasing managers index (PMI) rose to 51.4 in July from 50.2 in June, on a scale where 50.0 separates economic growth from contraction.

Despite the increase in activity, analysts said the UK economy was only just managing to skirt recession, with July’s performance among the worst since the financial crisis a decade ago.

Duncan Brock, the group director of Cips, said: “While services activity grew in July, this marginal improvement on last month is a smokescreen. Fundamental weaknesses remain in a sector pinned down by Brexit uncertainty and increasingly stagnant global economic growth.”

Demand for new cars fell among business and private buyers. Sales of cars to smaller firms, with fewer than 20 vehicles, slumped by more than a fifth year-on-year, continuing a precipitous 37.9% decline this year.

The one bright spot was the continued acceleration in sales of battery electric vehicles, which do not emit carbon dioxide. In July, 2,271 electric cars were sold, compared with 880 sold in the same month last year.

Despite the government’s claim that electric vehicles are the future of the industry, they represent only 1% of total car sales. The dominance of internal combustion engines is subsidised by about £9bn per year thanks to the government’s freeze on fuel duty, according to the Institute for Fiscal Studies.

Mike Hawes, the SMMT chief executive, said it was encouraging to see a strong increase in electric car sales amid a struggling broader market, but added that the government needed to spend on longer-term incentives and infrastructure to bolster sales.

The industry has previously been heavily critical of the government’s inconsistent policy towards plug-in hybrid cars that combine an internal combustion engine with a battery that can be charged separately. In October it removed a £2,500 subsidy for the vehicles: sales of plug-in hybrids duly halved year-on-year in July.

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