Car dealers – and the UK Treasury – will miss PPI payouts

February’s car sales were up 3% on the same month last year, according to the Society of Motor Manufacturers. That sounds like a healthy increase – until the January figure is taken into account. In the first month of the year car sales increased by 7.6%, and the average increase across last year was 10.8% on the year before. So February marked a dramatic slowdown in car sales growth.

Carmakers are putting on a brave face now there are signs of a broader recovery. While the market for private cars has calmed down, the appetite among Britain’s business community to replace their ageing car fleets is increasing, albeit slowly.

Evidence from the sales data shows Mondeo man/woman is making a comeback. And these people provide a fillip to the industry, not only because the cost of sale per car is lower (though the discounting might be higher), but also because Mondeos are roomy cars with chunky price tags. When Britain’s biggest selling car is the compact and unfussy Ford Fiesta, shifting a few Mondeos off the forecourt will mean gin and tonics all round for the garage sales staff.

Analysts at IHS Automotive reckon the fall in private demand will ultimately prove such a large drag on sales that last year’s sales total of 2,264,737 vehicles will rise by only 1.5% this year before falling back in 2015.

One reason is the slowing stream of high street bank compensation payments for PPI mis-selling. There has been widespread speculation that people have used their PPI payments, which average £3,500, as down payments on new cars, for which the average deposit is – you guessed it – £3,500.

When compensation payments began to tail off last summer, aggressive finance packages and discounting came in to maintain sales. Hopefully for the dealers, higher wages will take up the slack in 2015, but the Treasury should watch out: PPI may have had more profound effects on the economy than just pummelling bank balance sheets.