Canadian auto sales will decline in 2017: Scotiabank

Passenger vehicle sales climbed to 1.95 million units last year in Canada amidst a record year for global sales, the fourth consecutive annual record, and accelerated further in January, a new report from Scotiabank said; volumes exceeded an annualized 2 million units last month, but are expected to move down to 1.94 million for all of 2017.

“Recent price increases for new cars and light trucks have started to dampen affordability, and will likely outweigh the positive impact of stronger economic growth in Canada this year,” Scotiabank said in its latest Global Auto Report. “Demographic trends are also becoming less supportive of further sales gains, with the number of potential vehicle buyers advancing in 2017 at the slowest pace in several decades.”

Vehicle sales in the commodity-producing provinces are finally starting to recover from sharp double-digit declines of recent years, the report said, but activity in the rest of the country is likely to trend lower alongside slowing real income growth and some moderation in the B.C. and Ontario housing markets – the key drivers of domestic economic activity in recent years.

SALES RECOVERY BEGINS IN RESOURCE-RICH PROVINCES

The sharp downturn in the Alberta auto market, which included a 30% peak-to-trough slump, has come to an end, the report noted. “Firmer oil prices and the rebuilding in Fort McMurray are expected to boost economic growth in the province to around 2% this year, reversing the first back-to-back annual economic contraction since the early 1980s,” Scotiabank said. “Drilling activity bottomed in the spring of 2016, and recently climbed above a year earlier for the first time since late 2014. The labour market has also started to turn positive, with payrolls advancing by 20K net new jobs in the second half of 2016. Consumer confidence is on the upswing and will move higher as job gains strengthen. This improving economic backdrop should lift auto sales in the province to 223,000 units in 2017, from a five-year low of 220,000 in 2016.”

Economic activity and vehicle purchases are also bottoming in Saskatchewan, Scotiabank said, with late-2016 sales largely in line with a year ago. “This represents a significant improvement from a peak-to-trough decline of nearly 20% through the third quarter of 2016,” the report said. “We expect sales in Saskatchewan to edge up to 52,000 units this year, from 51,000 in 2016, as economic activity and employment begin to reverse the weakness of the past two years.”

LOWER VOLUMES IN ONTARIO AND QUEBEC

In contrast, purchases in Ontario will likely edge down to 796,000 units this year, Scotiabank predicts, down from a peak 802,000 in 2016. “The moderation reflects slower economic growth over the coming year, as vehicle production and the province’s housing market move lower,” the report said. “Housing and the auto sector accounted for one-third of the overall increase in economic activity in Ontario last year, double their share of the economy. In fact, the contribution to growth from these sectors peaked in the first half of 2016 and has been subsiding since then. Despite the moderation, stronger export growth to the United States and a continued solid performance in the service sector will support car and light truck sales at the second-highest level on record.”

Ontario’s auto market has outperformed in recent years, Scotiabank said, with sales jumping 50% above the 2009 low. “This represents a recovery in line with past cyclical upturns, and suggests that the ongoing economic expansion may not be enough to lift sales further,” the report said. “In addition, more than 15% of Ontario households bought a new vehicle last year, the highest level since the previous market peak in 2002, and up from an average 13% per annum during the past fifteen years.”

Sales are also likely to edge down in Quebec, Scotiabank said, but purchases are expected to remain above 460,000 units for the second consecutive year, supported by stronger exports. “Manufacturing shipments are reviving from the persistent weakness since mid-2015,” the report said. “The key aerospace, food and primary metals industries, which account for nearly half of Quebec’s manufacturing shipments are on the upswing, with exports posting a double-digit year-over-year increase in late 2016. Quebec’s auto market will also be supported by the highest lease penetration rate in Canada, which limits sales volatility and provides downside protection. Leasing accounts for nearly 40% of overall retail volumes in Quebec, compared with 22% in the rest of the country.”

FLAT PERFORMANCE IN B.C. & MANITOBA

B.C. has been the second-best performing auto market in Canada in the latest expansion, and Scotiabank expects sales to remain unchanged this year at 215,000 units, as economic activity remains solid outside of a less hot Vancouver housing market.

Sales in Manitoba, meanwhile, have remained steady in recent years at 56,000 units. “We expect a similar performance in 2017, with volumes supported by stronger manufacturing activity,” Scotiabank said. “Manufacturing shipments have picked up in recent months, and are now advancing 4% year-over-year, which is a significant improvement from declining volumes during much of the previous year. While exports of food products, transportation equipment, and machinery are back on the upswing, employment remains weak and will continue to restrain sales gains.”

NEWFOUNDLAND LEADS ATLANTIC CANADA SALES LOWER

Vehicle purchases were flat in Atlantic Canada last year at 149,000 units, Scotiabank said, but are expected to decline to 135,000 in 2017 – the lowest level in four years. “Newfoundland will continue to be the source of weakness, with volumes falling to a five-year low of only 32,000 units alongside rising unemployment,” Scotiabank said. “Purchases will hold up better in the Maritimes, but will also be constrained by sluggish labour markets and weak demographic trends.”