“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things we know that we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.” Donald Rumsfeld
As is customary at the turn of the year, predictions abound from commentators as to what the next 12 months might have in store. In relation to the wider economic environment, the consensus among the vast majority of economists appears to be that the Bank of England has not only reached the end of its hiking cycle but that the pivot is clearly in sight. Financial markets are now pricing in four quarter percentage point reductions to the base rate by the end of the year, with the first reduction currently expected to come in May.
Of course, this assumes that UK inflation will continue its path steadily downwards towards the 2% target. Recent outlooks published by three leading forecasters – Oxford Economics, Deutsche Bank and Investec – even suggest that this could be reached as soon as April. But no matter the eminence of their source, no forecast can ever anticipate the unknown unknowns. After all, virtually every historic market crash or event preceding some significant economic turbulence or other was not forecast six months in advance. Who would have seen, for instance, the pandemic coming? Or 9/11? Or (aside from a few shrewd short-sellers) the 2008 subprime mortgage crisis and subsequent global credit crunch?
The impact of any global instability – whether foreseen or otherwise – may yet, therefore, weigh heavily on these predictions.
Zooming in on the microcosm that is the credit hire market, that is probably even more so. Only a week or two ago, one might have cheerfully predicted that the worst of the unprecedented levels of inflation impacting the credit hire space so severely throughout 2022 and 2023 was over. Taking basic hire rates for instance – arguably the most significant single factor impacting hire spend, both directly in terms of settlements and indirectly through upward pressure on protocols – unique inflationary factors which drove rates to eye-watering levels never before seen appeared to be firmly in the rear-view mirror.
As a result, over the last six months, the industry has seen a sharp decrease in BHR since a seasonal mini-peak in July 2023 to levels which, as of November 2023, are on a combined average basis back to levels not seen since February 2021. While some groups remain problematic and are likely to remain at elevated levels – very high-end prestige and most of the M category for instance – there is every reason to expect that BHR might stabilise in 2024 with a reduction in the huge levels of volatility seen over the last two or so years. Moreover, with the lag between the BHR and settlement usually being in the region of 6–18 months, there may well even be reason to speculate that 2024 may bring meaningful deflation in credit hire spend, as opposed to steady disinflation.
The recent escalation of the Red Sea crisis, as the UK and US seek to protect a vital route for world trade, may yet jeopardise this. While retail hire company fleets appear now to be finally back in balance with demand following the post-Covid vehicle manufacturing crunch, many manufacturers – including Volvo, Tesla and Suzuki – have already temporarily ceased production as a result of the inability to ship essential parts from Asia via the Suez Canal. Given that it is reported that approximately 70% of components in the European vehicle manufacturing sector traverse the Red Sea waters from Asia, should the crisis persist for any length of time there is a real prospect that this could impact new vehicle supply and, in turn, result in increased fleet costs and – ultimately – renewed BHR inflation.
Further, with parts delays already still impacting claims significantly following the well documented post-Covid shortages, any further meaningful and ongoing impact on shipping parts from Asia – whether that be increased costs, delay or a complete inability to source – is far from welcome and likely to further impact key to key times and hire durations to some degree as we head into 2024.
In relation to vehicle damage, there does not appear to be an ABP pricing menu uplift currently scheduled for 2024, although this cannot be ruled out. Whether this happens or not will have a large bearing on what repair inflation ultimately looks like, although the continuation of a steady creep upwards is in any event likely in this space, as more subrogation models begin to adopt the previous ABP uplift and even more electric vehicle repairs feed into the mix.
Further, many analysts seem to expect that used car prices are likely to remain at elevated levels throughout 2024, particularly for newer used vehicles manufactured during the Covid years of 2020–2021 as demand continues to outstrip supply here, causing prices to remain particularly elevated. This again has the potential to be exacerbated significantly by any ongoing escalation of the situation in the Red Sea.
With all that said, given the propensity for known unknowns, and indeed unknown unknowns, to scupper even the best thought-through forecasts, those among us more inclined to believe such things may consider it just as worthwhile to look to Nostradamus for a steer. Reportedly, his predictions for 2024, as well as the dethroning of King Charles and a naval war, include storms and extreme weather – another ‘Beast from the East’ anyone?!
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