New 2023 forecasts offer hope for stability in the used market

According to Cox Automotive, retailers will need to use every trick at their disposal to navigate the coming months and it believes the sector has already shown innovation and resilience to put itself in a strong position. As a result, there is cause for optimism, with a period of stability expected, which should see retailers through until at least 2024.

In the seventh issue of its quarterly AutoFocus automotive insight update, the company shares its updated 2023 forecasts for the used vehicle sector, which have been adjusted in line with the current supply and demand constraints affecting the market.

Q4 2022 and Q1 2023 focus

Upside scenario. The upside scenario sees Q4 2022 end on 1.68 million transactions, a 2.6% increase year-on-year, a 2.0% increase on the 2001-2019 average, and a -6.7% down compared with the most recent pre-pandemic 2019 performance.

In this scenario, Q1 2023 ends on 1.90 million transactions, a 7.6% increase year-on-year, +1.7% up compared to the 2001-2019 average, and -5.5% down compared to 2019.

Baseline scenario. The baseline scenario sees Q1 2023 end on 1.59 million transactions, a -3.0% decrease year-on-year, -3.5% down on the 2001-2019 average, and -11.7% down when compared with the most recent pre-pandemic 2019 performance.

In this situation, Q1 2023 ends on 1.76 million transactions, -0.5% down year-on-year, -6.0% down compared to the 2001-2019 average, and -12.6% down compared to 2019.

Downside scenario. The downside scenario sees Q4 2022 end on 1.55 million transactions, a -5.5% decrease year-on-year, -6.0% down on the 2001-2019 average, and -14.0% down when compared with the most recent pre-pandemic 2019 performance.

In this environment, Q1 2023 ends on 1.65 million transactions, -6.9% down year-on-year, -12% down compared to the 2001-2019 average, and -18.2% down compared to 2019.

2023 full year

Upside scenario. The revised upside scenario for 2023 sees the year end on 7.51 million used car transactions, a 9.2% increase year-on-year, 1.8% up on the 2001-2019 average, and -5.4% down when compared with the most recent pre-pandemic 2019 performance, resulting in a -3.8% downgrade on our previous forecast due to the market factors previously mentioned.

Baseline scenario. The revised baseline scenario for 2023 sees the year end on 7.07 million used car transactions, a +2.8% increase year-on-year, -4.1% down on the 2001-2019 average, and -10.9% down

when compared with the most recent pre-pandemic 2019 performance. Resulting in a -5.8% downgrade from our previous forecast.

Downside scenario. The revised downside scenario for 2023 sees the year end on 6.66 million used car transactions, a -3.1% decrease year-on-year, -9.7% down on the 2001-2019 average, and -16% down when compared with the most recent pre-pandemic 2019 performance. Resulting in a -6.2% downgrade from our previous forecast.

Low supply high, demand continues. Amidst the anticipated wave of economic pressures impacting consumer purchasing power, rising operational costs, and no significant influx of used stock on the horizon, Cox Automotive believes that used car retailers will continue to face the low supply, high demand market dynamics that have pummelled the market for close to three years now.

A lack of new car supply, predominantly impacting the zero to 12-month and 12 to 24-month sectors, remains equally cumbersome for the used market, with the same impact expected in the three-year-old sector too. The situation is undoubtedly an improvement on 2021 but is still some way off pre-pandemic levels, with increases in supply limited to specific models and derivatives.

Philip Nothard, Insight and Strategy Director at Cox Automotive, commented: “The question remains – how much will consumer demand be weakened by the cost-of-living crisis, rising interest rates, and the willingness to purchase big-ticket items such as cars? Unfortunately, it’s impossible to predict the extent of this today.”

Used values holding out. The impact on used car values is clearer: consumer confidence may dip, but it’s unlikely to be at the level that will create an oversupply of used car stock.

In addition, the shortage of end-of-contract and other used vehicles entering the market, alongside continued new vehicle shortages, indicates many of the same supply and demand fluctuations will continue to play out for most of 2023.

While under increased pressure, used values will remain at their inflated levels for some time, eschewing the dramatic prices of last year, which produced astronomical heights in the sub-12-month and one to two-year market.

“There is extreme volatility as product becomes available and constraints return; used prices have plateaued as a percentage of the cost of new, but make no mistake, these values are still very high and unsustainable in the long term,” explains Nothard.

“Used vehicles are perpetually depreciating assets; unprecedented rises, even to levels close to or above the original cost of purchasing new, will always come back down, so the question is when will seasonal depreciation return, and to what extent?

“For now, retailers can rest assured that residual values will remain reasonably stable until at least 2024, given the current economic climate and limited new car supply.”