Minouche Shafik: UK tyre sales showing recessionary behaviour

Bank of England deputy governor Minouche Shafik suggested the UK tyre industry is in the grip of recession-based consumer behaviour during a speech given to the Institute of Directors where she also suggested interest rates could rise faster than initially indicated.

In addition, Dame Minouche Shafik highlighted how consumers are delaying changing their worn car tyres as a prime example of the way the economic downturn has shifted purchasing decisions.

The trend has been identified through data compiled by Micheldever Tyre Services Limited. It was presented to the deputy bank of England governor at a recent visit to the group’s Micheldever Station facility, the busiest tyre fitting centre in the UK. It shows since 2008 the number of tyres that are below the legal limit at the point of replacement has grown from 15.3 per cent to 56.4 per cent.

Micheldever managing director, Duncan Wilkes, welcomed the opportunity to turn the spotlight on a dangerous trend. He said: “Bad habits that initially evolved during the financial crisis have now become ingrained and the drivers who have formed them are now negatively influencing the next generation of motorists. As a result more drivers are allowing the tread on their tyres to fall below the legal minimum of 1.6mm before replacing them.

“Whilst there are advantages to consumers in becoming much more spending savvy, it is very worrying to see it having manifested itself in a purchasing decision that is paramount to road safety. Although people will ask about safety features on their cars and review NCAP ratings, they should remember that there are only four parts of a vehicle that actually touch the road.”

Treading carefully

Dame Shafik refered to tyre business from the start of her speech, highlighting the uniqueness of her example: “In what is likely a first for a monetary policymaker, I would like to begin my speech today with a chart of the depth of tread on car tyres – as measured by the busiest tyre fitting station in the UK whom I recently visited in the South East. Generally speaking, the deeper the grooves are on a tyre, the better is its grip, performance and safety. When the recession hit in 2008, people began to delay replacing their tyres, implicitly accepting a deterioration in quality in the hope of saving on costs. What is surprising, however, is that although we are now into the seventh year of the recovery, the frequency with which drivers replace their tyres has not returned to pre-crisis levels.

“This illustrates quite nicely that although the economy is thankfully returning to normal, we cannot blithely assume that relationships which held in the past will automatically revert. Several stylised facts in macroeconomics – such as the idea that deeper recessions are followed by stronger recoveries, and the idea that productivity can be relied upon to increase over time around a long-standing trend – have been long since disproven by the nature of the recovery in the UK. And questions remain about the how the economy operates in the wake of the Great Recession that make the setting of monetary policy more challenging.

“In the rest of this speech I would like to put forward some thoughts on how one should approach decision taking in the face of such uncertainty. I will highlight three themes: proceeding with caution, considering all of the outcomes and retaining flexibility. I do so as a member of the Monetary Policy Committee, though you should note that what follows are my own views and may not necessarily represent the views of the committee as a whole. I don’t think other members place quite so much weight on tyre tread depth as an indicator, and they probably wouldn’t thank me were it to be deemed a bellweather for interest rate decisions in the future.”

Referring to interest rates, Dame Minouche Shafik added that they could rise faster than the path implied in the Bank of England’s most recent Inflation Report. However, she also suggested that the current rate of 0.5 per cent was not the absolute lower limit , adding “it could go lower if we have to”.