Record global auto sales expected in 2017: Scotiabank

Global car sales accelerated sharply in the final months of 2016 and gains are expected to continue over the coming year, lifting purchases to an eighth consecutive annual record, a new report from Scotiabank said.

“Increased replacement demand in the United States and Western Europe will be complemented by a renewed sales upturn in most emerging markets after several years of declining sales,” Scotiabank’s latest Global Auto Report said. “However, China is the exception, with an expected slowdown in the world’s largest auto market likely to limit the improvement in global sales to only 1% this year, compared with a 6% jump in 2016.”

The global economy gained momentum in the second half of 2016 and several leading indicators point to continued acceleration over the coming year, the report said. “We project global growth to improve from 3.0% in 2016 to 3.4% in 2017, after a couple years of slowing global activity. In particular, employment growth – the key driver of the auto market – in OECD-member countries is now advancing at the fastest pace in more than a decade. This has helped to lift workers’ incomes and strengthen household balance sheets, which has spurred several months of double-digit, year-over-year gains in global car sales for the first time in nearly five years.”

Increased replacement demand, growing consumer confidence, and attractive financing options are expected to lift sales in the United States to a third consecutive annual record. “We expect purchases in the world’s second largest auto market to climb to 17.8 million units as households continue to replace their ageing vehicles,” the report said. “The average age of the US fleet has jumped to a record 11.6 years, and will likely continue to move higher through the end of the decade.”

There are still more than 100 million vehicles on the road in the United States that are at least 12 years old – representing 40% of the entire US fleet. “Financing conditions remain supportive, with many financial institutions gradually loosening their auto lending standards late last year in response to healthy credit quality,” Scotiabank said. “In addition, the share of subprime volumes has been declining since mid-2015.”

In contrast, after several years of record vehicle sales in Canada and Mexico, Scotiabank expects purchases to edge lower in 2017. “In Canada, volumes will be undercut by recent price hikes for new cars and light trucks, as well as lower replacement demand than in the United States,” the bank said. “In population-adjusted terms, volumes are already at the last peak achieved in 2002 and unlikely to increase further.

Meanwhile, slowing economic growth combined with fiscal restraint, rising interest rates, and a weak currency are expected to reduce car sales in Mexico. “This follows eight consecutive annual increases, including record volumes in each of the past three years,” Scotiabank said. “More than 40% of the vehicles sold in Mexico are imported and the 26% plunge in the Mexican peso versus the US dollar since the first half of 2016 will likely induce some sticker shock for many potential car buyers.”

Turning to Western Europe, Scotiabank predicts that an ageing vehicle fleet and economic growth of 1.5% year-over-year will boost car sales to above 14 million units this year for the first time in a decade. “Western Europe has been the top performing regional auto market over the past three years with annual sales gains averaging 6.5%, more than double the global average,” the report said. “The average age of Western Europe’s car fleet has, however, increased to more than 10 years, up from less than 8.5 years a decade ago. More than 42% of the fleet is now more than 10 years old, up from one-third in 2006. Only 2.6% of the car fleet in Western European is currently being replaced each year, down from an annual average of nearly 3% prior to 2008. We expect replacement rates to increase in 2017 even if political uncertainty intensifies this year around Europe’s electoral cycle.”

Volumes will likely come down, however, in the UK following record unit sales last year, Scotiabank said, but the British market accounts less than 20% of overall car sales in Western Europe.

Although purchases are expected to decline in China for the first time since 2008, sales in the rest of the emerging world, which represents about 20% of the global auto market, will lead sales gains in 2017 and reverse four consecutive years of decline, Scotiabank said. “This improvement reflects nearly a full percentage point increase in the pace of emerging-market economic growth (ex-China) over the coming year, as well as firmer commodity prices,” the report said. “We expect sales in emerging markets to advance by 3% this year, the first increase since 2012. Gains should be widely distributed, with growth expected in every region for the first time in five years.”

Eastern Europe is likely to lead the sales gains among emerging markets, Scotiabank said. “Purchases in Russia are down more than 50% since 2012, but look set to rebound as oil prices firm up and Russian growth strengthens,” the bank said. “Sales will edge higher in Asia, despite lower volumes in China. Purchases in China surged 18% in 2016 – the fastest gain in three years – in response to the Chinese government’s reduction from 10% to 5% of its sales tax on small vehicles for the period October 2015 to the end of 2016. We estimate that this incentive pulled forward purchases of at least 1 million vehicles into 2016 – roughly one-third of China’s overall sales increase. The tax will be restored in phases: it has been increased to 7.5% for 2017, and will likely climb to the original 10% rate by 2018.”

Volumes in South America will also begin to reverse the nearly 40% slump of the past three years, Scotiabank said, as double-digit declines come to an end in Brazil and purchases begin to move higher in the region’s other markets. “Peru has been the most stable auto market in South America in recent years owing to a cushion provided by the expansion of the mining sector,” the report said.