UK car sales drop below two million for first time in 14 years

Annual sales fall despite sixth consecutive month of growth in December

Car sales shot up by 39 per cent in December as 151,000 new vehicles rolled out of Britain's showrooms – but sales over the whole year were still the lowest since 1995.

Only 2 million cars were sold in the UK in 2009, 6.4 per cent lower than the previous year, the Society of Motor Manufacturers and Traders (SMMT) said yesterday. But December was the sixth successive month of growth, as private buying leapt by 114 per cent thanks to the scrappage incentive and the looming end of the VAT holiday.

Last year was hugely problematic for the car industry: wary consumers put off big-ticket purchases, credit restrictions made finance harder to come by, and fleet and business buying dropped through the floor.

But private sales were massively boosted in the second half of the year by the scrappage incentive, offering buyers a £2,000 subsidy for trading in a model more than 10 years old. The scheme was so successful that it has accounted for more than a fifth of new car sales in 2009, ripping through the original £300m fund and then extended by another £100m.

But with scrappage set to run out next month, and December's sales inflated by buyers rushing to make big purchases before VAT went back up to 17.5 per cent on 1 January, the car industry's problems are far from over. And sales are forecast to fall back below 2 million in 2010.

"We expect things to be OK for the first four or five months of the year, and then to get tough again," Paul Everett, the chief executive of the SMMT, said.

Economists echoed the sombre outlook. Howard Archer, at IHS Global Insight, said: "There is a danger that car sales will fall back markedly in 2010, particularly as the upside for consumer spending is likely to be limited for some time to come by rising unemployment, low earnings growth, and consumers' need to improve their balance sheets in the face of high debt levels and a still worrying economic situation."

Despite the warm response to scrappage from the car industry, economists argue that the scheme has contributed little to the UK recovery. Most of the new cars bought under scrappage were foreign-made, which skewed the balance of imports and exports and helped to drag down GDP in the third quarter. Subsidy-induced car buying may also have diverted spending away from other goods and services.

Notwithstanding the rash of high-profile consolidation in response to this year's crisis – including Fiat's tie-up with Chrysler and GM's bankruptcy and resurrection – motor industry executives think the majority of the restructuring is still to come, according to KPMG.

Some three-quarters of survey respondents are expecting a rise in merger and acquisition activity for vehicle manufacturers in the next five years as the industry struggles to cut over-capacity and invest in next-generation energy-efficient vehicles.

Mike Steventon, KPMG's head of automotive, said: "Growth and investment are back on the agenda – but that will come at the price of continued restructuring of an industry that is still burdened by huge overcapacity. The change has only just begun."