UK car sales hit record high in 2016 but dip predicted

LONDON (Reuters) - A record 2.69 million new cars were sold in Britain in 2016 despite fears that the Brexit vote would hit demand, but the industry predicts sales will fall this year as the weaker pound drives up the cost of imported models.

Full-year car registrations beat the previous record of 2.63 million set in 2015, dashing some analysts' expectations that Britons' June vote to leave the European Union would lead to a slump in 2016.

However, demand in December fell by 1.1 percent, only the third year-on-year drop in nearly five years, the Society of Motor Manufacturers and Traders (SMMT) said, pushed down by the first fall in fleet car demand for nearly a year.

Car sales in Britain, Europe's second-largest auto market, recovered more quickly than in other major economies from the 2008-9 financial crisis, offering a bright spot to automakers who encouraged sales with attractive deals.

But in recent months, several firms have raised prices to offset the fall in the value of the pound against the euro and dollar since the June 23 vote, affecting many of the 85 percent of cars sold in Britain that are imported.

The SMMT said it expected registrations to fall by 5 percent this year as it becomes harder to keep beating record sales and said the fall in the pound could also hit demand.

SMMT CEO Mike Hawes said the weaker pound had reduced the margin for manufacturers to offer incentives "so the really attractive offers won't be as readily available and that is more likely to flow through to the purchase pattern."

The erosion of Britons' buying power could weaken consumer confidence in 2017, also undermining the strength of the new car market, some economists believe.

Consumer spending in Britain has been the main motor of economic growth since the Brexit vote, although car sales to individuals ended the year down 0.2 percent, the first annual drop since 2011.

In recent weeks, surveys have suggested Britons are more downbeat about the prospects for the economy with expectations that the cost of living could rise.

"The stagnation of households’ real incomes this year, mainly due to a burst of inflation, likely will weigh further on car purchases," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

"The latest car registrations data illustrate that consumers have become less willing to make big financial commitments since the Brexit vote," he said.

(Reporting by Costas Pitas, editing by David Evans and Adrian Croft)

By Costas Pitas