Canadian Plastics

Canadian auto sales “disappointed” in 2019, report says

This marks a second consecutive year of auto sales declines following the 2017 high, a new report from Scotiabank says, and auto sales are in for another bumpy ride in 2020.

January 22, 2020   Canadian Plastics

Canadian auto sales closed the year on a low note in 2019, a new report from Scotiabank says, with a sales decline expected to continue in 2020.

On a seasonally adjusted basis, fourth-quarter auto sales contracted by almost 8% year-over-year (y/y),” Scotiabank’s “In the Rear View Mirror” report for 2019 said. “As 2019 advanced, hopes for a solid auto sales rebound slowly evaporated. Year-end sales totaled 1.92 million units, a 3.2% decline over 2018 and 5.7% below 2017’s all-time high of 2.04 million units.”

Auto sales broadly follow the economic growth cycle, the report noted, and the last two major downturns eroded auto sales peak-to-trough by 24% and 12% respectively, bringing levels well-below trend growth. “Major downturns in auto sales have always been accompanied by economic recessions, whereas weaker-but-still-positive economic growth has also temporarily sent auto sales into negative territory,” the report said. “There is similarly a correlation to the output gap with sales expanding as the gap narrows and moves into excess territory – often supported by accommodative policies – and contracting as policy conditions tighten and excess capacity is worked off.”

Over the long run, Scotiabank said, Canadian auto sales are driven by national wealth, household income, and credit conditions. “Auto sales in 2019 are still working off the 2017 high following an eight-year expansion. In this latest peak, sales surged above trend replacement rates for several years; in fact, 2019 levels still sit modestly above fundamental levels,” the report said. “The peak was fueled by an environment of strong economic growth, recovering oil prices, easing policy rates and escalating house prices in 2017.”

But a subsequent tightening monetary stance, an oil price decline, and a policy-induced housing cool-down all put the brakes on auto sales in 2018, Scotiabank said, and this slowdown continued through 2019 as consumers faced a variety of headwinds.

Looking ahead, Scotiabank said that Canadian auto sales likely face another year of volatility. “Economic growth is once again set to slow to 1.5% of GDP, albeit marginally from an estimated 1.6% in 2019,” the report said. “This is well-shy of the estimated 40 basis point drop in economic growth from 2018, but potentially persistent softening of domestic sentiment and consumption would weigh more heavily on auto sales….We presently forecast another decline in auto sales across Canada next year to 1.91 million units.”

Scotiabank also noted that consumer confidence and spending remain the biggest downside risk, with no shortage of factors that could knock off these traditionally lagging indicators. “With the Canadian job market dynamic shifting in the fourth quarter of 2019 and wage growth moderating, further softening in consumption ahead can be anticipated,” the report said. “While policy rate cuts may have already worked through the Canadian yield curve, preemptive easing could potentially underpin waning confidence that has so far held back Canadian auto purchases.”


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