Global auto production gains momentum in the second half of 2016: Scotiabank

Global car sales posted another solid advance in June 2016, climbing 4% year-over-year (y/y) and continuing the string of strong gains since last September, a new report from Scotiabank said.

In its latest Global Auto Report, Scotiabank noted that Western Europe and China led the way, with both regions posting double-digit advances. “While the economic and sales outlook has become more uncertain in the aftermath of the recent U.K. referendum, volumes across Western Europe have advanced a stronger-than-expected 9% y/y through May — the largest increase in nearly two decades,” the report said. “The improvement reflects increased replacement demand and a strengthening labour market, which will continue to buoy sales even as activity begins to falter in the U.K.”

Purchases have also recently turned more positive across Eastern Europe, the report continued, with car sales rising y/y in May for the third consecutive month, led by surging volumes among the new EU members. In May, eleven out of the twelve new EU members reported double-digit gains.

Passenger vehicle sales in Canada eased 2% below a year earlier in May, the report said, with activity moderating across most provinces. “The Prairies reported a double-digit decline for the first time since January, but activity softened in eight provinces due to fewer selling days,” Scotiabank said. “There were only 24 selling days last month, down from 26 days a year earlier. The slowdown was concentrated in sedans. Light trucks continued to power ahead, led by double-digit gains in Ontario and Quebec. Despite last month’s moderation, purchases remain on target to climb to annual records in Canada and seven provinces.

Global vehicle production is expected to move higher across most of the world in the second half of 2016, the report said, providing a boost to industrial activity at a time when heightened economic and political uncertainty is dampening overall economic growth. “North America is leading the way, with assemblies in the July-September period scheduled to post the largest quarter-to-quarter increase in more than two years,” Scotiabank said. “However, assemblies are also moving higher across Asia and Europe, supporting manufacturing activity which has staggered into the summer.”

While North American vehicle production and overall industrial activity has been sluggish in recent months, the Global Auto Report also forecast factory floors to become busier during the summer. “Automakers have successfully reduced inventories on dealer lots in the United States to 61 days’ at the end of May, down from a bloated 79 days’ earlier this year, and below the 65 days’ that is the industry norm,” the report said. “As a result, the North American auto industry is scheduled to build a record number of vehicles in the July-September period. We estimate that the annualized production rate in Canada, the United States and Mexico will climb to 18.9 million units during the summer, up from 17.9 million between January and May.”

Two of the Detroit Three are shortening their summer shutdowns across North America, the report also noted. “Eight assembly plants in Canada, the United States and Mexico will have their traditional summer downtime reduced to one week. Meanwhile, five other facilities plan to produce non-stop throughout the summer.”

Assemblies in the United States are scheduled to climb to an annualized 12.8 million units between July and September, Scotiabank said, the highest since the start of the millennium and 4% above the 2015 full-year production of 12.3 million. “The ramp up is entirely driven by light trucks and highlights the impact that the sharp decline in oil prices has had on household vehicle-buying patterns, especially the dramatic shift in preference towards crossover utility vehicles,” the report said. “Through May, sales of light trucks have surged 9% y/y in Canada and the United States, while car purchases have slumped 8% y/y.”

Rising vehicle output is expected to add half of a percentage point to economic growth in the United States in the third quarter, the report continued — the largest increase in more than a year. “This represents a sharp reversal from an estimated 0.4 percentage point subtraction in recent quarters,” Scotiabank said. “The impact will be even greater in Mexico. Third-quarter assemblies are scheduled to jump 5% y/y due to the inauguration of a new facility in Nuevo Leon and the restart of an assembly plant in Tolluca, following extensive retooling.”

Rising vehicle output is not limited to only North America, the report said. “New orders for vehicles from assembly plants in Germany and Spain recently jumped to the highest level in more than five years, and will buoy overall economic activity across Western Europe in coming months,” it said. “However, there is some concern about the sustainability of the rebound, as it is occurring at a time when several other industries appear to have moderated.”

Vehicle production is even outperforming in the U.K., Scotiabank continued, with assemblies jumping 16% y/y in April, roughly ten times the advance in overall manufacturing output. “Overseas demand for British-made cars is driving the improvement, and accounts for roughly 80% of overall production,” the report said. “Car output geared for export has jumped 14% this year, compared with only a 1% increase in assemblies for the domestic market. Nearly 60% of the U.K.’s vehicle exports are destined to the European Union.”

Output is also set to move higher across Asia. Passenger vehicle sales in China have outpaced production gains this year, the report said, enabling automakers to reduce inventories to only 1.4 months’ at the end of May, down from 1.7 months’ a year ago and a peak of nearly 2 months’ in early 2015. “Vehicle pricing has also been stable since the beginning of the year, allowing automakers to lift production in the second half of 2016, while continuing to extend their dealer network across Western and Northern China,” it said.

Vehicle output is also rebounding in Thailand, Scotiabank continued, with assemblies jumping 25% y/y in May — the largest increase in more than two years. “The improvement reflects strengthening demand in its key exports markets, especially Indonesia and Australia,” the report said. “Car sales in Indonesia rose 12% y/y in May, and further solid gains are likely, as Indonesia’s central bank has lowered its benchmark interest rate four times this year to spur domestic consumption. Sales have also gained momentum in the rest of Asia, with volumes excluding China, advancing in May at the fastest pace since late 2015.”