Auto industry is driving Canada’s industrial revival: Scotiabank

Global car sales continued to strengthen in February, climbing 3% above a year earlier alongside ongoing solid job creation across developed markets, a new Scotiabank report says – and the record sales being reported in Canada are driving the country’s industrial revival.

“The gain was broad-based, with only Brazil and Russia continuing to exhibit sharply lower volumes,” Scotiabank’s latest Global Auto Report said. “Western Europe led the advance, as an improving job performance reduced unemployment in the euro zone to the lowest level in nearly seven years. February car sales in Western Europe rose 14% above a year earlier, the third double-digit advance in the past four months.”

More recent data for March point to further solid advance across North America, the report said. “Mexico led the way, with a double-digit year-over-year increase,” Scotiabank said. “Canada reported record volumes and the key U.S. market posted a 3% year-over-year advance.” Car sales in Mexico have surged 13% so far this year, one of the best performances among the world’s major auto markets, with gains supported by formal employment growth in excess of 5% year-over-year. “In Canada, car and light truck purchases surpassed an annualized 2 million units last month, exceeding the previous peak set last September,” the report said. “This year’s record-setting pace has been much stronger than we originally anticipated. Five provinces have reported double-digit year-over-year sales increases so far this year, prompting us to raise our full-year forecast to 1.955 million, up from our previous estimate of 1.90 million. Fleet volumes have been especially robust, due to increased availability of a key model and strengthening economic activity outside of the resource sector. Pickup truck volumes have surged by nearly 20% this year, garnering a record share of the Canadian auto market.”

Record North American auto sales and production, combined with the end of extensive retooling at several assembly plants and a more competitive currency, are reviving the Canadian auto industry, the report said, and also laying the foundation for a much-improved industrial outlook in 2016. “The auto industry is single-handedly lifting Canadian manufacturing activity and non-resource exports out of the doldrums experienced during much of 2015,” Scotiabank said. “The auto sector has also reclaimed its title as Canada’s largest exporter, overtaking the oil and gas industry. In fact, the auto sector’s share of overall manufacturing activity is now at the highest level since 2003, and exports have been so strong that the sector has swung to trade surplus in early 2016. This is a sharp reversal from the large deficits the industry faced since 2007, including shortfalls in excess of $16 billion in 2013 and 2014.”

Auto industry shipments surged 29% year-over-year in the opening month of 2016, accounting for nearly 80% of the year-over-year gain across all of Canada’s manufacturing activity. “Much of the increase reflects rising production at the Windsor, Ont. minivan plant following an extended period of retooling in the first half of 2015,” the report said. “However, other automakers have also boosted output alongside the introduction of several new Canadian-made models. Canadian vehicle assemblies jumped 8% sequentially in the first quarter, climbing to the highest level since mid-2012.” The rebound was driven by a 25% year-over-year surge in light truck production, Scotiabank said, with further growth on the way. “Automakers recently lifted their North American production plans an additional 3% for the second quarter, mostly due to the surging popularity of crossover utility vehicles,” the report said. “Canada is well positioned to take advantage of this trend, as CUVs account for nearly two-thirds of overall production at Canadian assembly plants. As a result, Canadian vehicle output is scheduled to jump 12% year-over-year in the April-June period — nearly ten times the increase projected for facilities in the rest of North America.”

Surging CUV demand and the launch of all-new Canadian-made models have led to hiring of nearly 2,000 new workers at assembly plants in Canada in recent months, especially across South Western Ontario. “In fact, auto plants located between Windsor and Cambridge now produce 55% of all vehicles built in Canada, with output in the region expected to approach a record 1.3 million units this year,” Scotiabank said. “Solid growth at these facilities has helped lift employment at Canadian assembly plants to the highest level in eight years, more than offsetting ongoing job losses at facilities in the rest of the province.”

The report also noted that record North American vehicle demand, combined with the hefty 28% decline in the Canadian dollar since 2011, has enabled Canadian suppliers to recapture market share across North America. “Each vehicle built in Canada, the United States and Mexico now contains nearly US$1600 of Canadian-made parts — a significant improvement from the recent low of only US$1437 in 2013,” the report said.

Canadian suppliers are also outperforming their global peers. “Canadian auto parts exports advanced by roughly 16% last year, a further acceleration from a 14% jump in 2014,” the report said. “This highlights the improved competitiveness of the Canadian auto parts industry and lifted its share of global exports to 3.1%, the second consecutive annual increase and the highest level since 2008. This solid performance has enabled Canada to retain its position as a global ‘top 10’ auto parts exporter.”

Finally, auto parts employment in Canada has advanced by 5% over the past year, the sharpest gain since 2000, and double the advance in the United States. “While auto parts employment growth in Canada had lagged gains in the United States for most of the current cycle, Canadian suppliers have been outperforming since mid-2015,” Scotiabank said. “In fact, the auto parts sector is the main driver of the recent stabilization in manufacturing employment throughout Canada. Overall Canadian manufacturing employment edged up 0.4% last year. However, if the auto parts sector is excluded, manufacturing payrolls were largely flat.”