(Bloomberg) -- Europe’s automakers are bracing for slower growth this year after sales fell for the first time in 17 months in December on waning enthusiasm for electric vehicles.

New-vehicle registrations declined 3.8% to 1.05 million units last month, the European Automobile Manufacturers’ Association said Thursday. Sales slumped nearly a quarter in the region’s biggest market Germany after EV incentives ran out, weighing on growth in other key countries.

Elevated borrowing costs, a sluggish economy in parts of Europe and growing pessimism around EVs are clouding the industry’s outlook. Bloomberg Intelligence is predicting sales growth this year to slow to 5%, from 14% in 2023. This will likely depress car prices and squeeze returns for automakers, according to Bernstein analysts.

“Pent-up demand has started to fade,” the analysts led by Daniel Roeska said in a note this month. Dealerships and manufacturers “will soon face the full force of sluggish demand.”

Tesla Inc. slashed prices for its best-selling Model Y in markets including Germany, France and Norway this week. The US carmaker is planning to temporarily halt production of the vehicle at its plant near Berlin, citing logistics issues sparked by the fighting in the Red Sea. Last month, Audi said it’s paring back its EV rollout.

The strong decline in Germany, where EV registrations nearly halved last month, outweighed growth in markets including the UK, Spain and France.

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EV sales rose 28% last year in the region, but slumped by a quarter in December amid falling registrations for battery-powered cars also in Sweden, the Netherlands and Croatia. The European Union recorded its first monthly drop in EV sales since April 2020, the height of the pandemic.

Slowing demand for battery-powered vehicles also poses a fleet emissions problem for carmakers facing increasingly stringent EU targets in the coming years, analysts at Citi and Jefferies said.

“In 2024, you’re going to have to see an increase in EV penetration in anticipation of emissions targets going down in steps,” said Jefferies analyst Philippe Houchois.

Some grounds for optimism remain. European Central Bank President Christine Lagarde this week signaled a rate cut this summer was “likely,” fueling hopes of lower financing costs. In Italy, where registrations rose 6% in December, the government is considering a €930 million ($1 billion) package to bolster EV sales, Bloomberg reported earlier this month.

Read More: Italy Weighs $1 Billion Package to Boost Electric-Car Sales

Automakers are also racing to improve their products. A wave of 35 new battery-powered models to be introduced this year will provide customers with a more affordable choice, possibly allowing carmakers to bolster their brand and market position, the Bernstein analysts said.

The vast majority of manufacturers managed to increase registrations in 2023 after supply of key parts including semiconductors improved. France’s Renault SA has had success selling affordable combustion-engine and electric cars including with its no-frills Dacia brand.

--With assistance from Craig Trudell.

(Updates with analyst quote in ninth paragraph.)

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