The car market has been one of the sectors most hit by the uncertainty surrounding Britain's departure from the European Union. The great worry for firms across the supply chain is that in the event of a "no deal" Brexit, buyers would see a 10% tariff levied on cars imported from the EU, from the likes of Volkswagen or Fiat. Currently all trade between EU countries is tariff-free.
Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, said the continued weakness in car sales in May, "after a dreadful April, partly reflects the decision by many consumers to complete purchases before the original March deadline for Brexit."
Britain was originally due to leave the European Union on March 29 but it has been granted an extension to the end of October after Parliament failed to pass a Brexit withdrawal agreement. Though the delay has helped reduce the immediate fears of a "no-deal" Brexit, uncertainty remains as many of the candidates running to replace Prime Minister Theresa May, such as former foreign secretary Boris Johnson, have insisted that the country has to leave the EU by the new deadline, deal or no deal.
Brexit uncertainty was further evident in the findings of a survey of economic activity from financial firm IHS Insight and the Chartered Institute of Procurement & Supply. The survey found that companies reported that activity, order books and hiring were subdued by a combination of weak demand and Brexit-related uncertainty. As a result, the so-called "all-sector" purchasing managers' index — a broad gauge of business activity— fell back to 50.7 points in May from 50.9 the previous month, where the 50-mark indicates a flat-lining in economic activity.
Without a resolution in sight to the Brexit impasse, few economists a step-change in the British economy and as a result most think the Bank of England will refrain from raising interest rates again this summer.
"With 'no deal' fears rising once again, we expect investment to continue falling, offsetting some marginally better news in consumer spending," said James Smith, developed markets economist at ING.