In an economy that has seen many ups and downs in recent years, the automotive industry has been a consistent performer and contributor to economic growth, but will it continue? That’s the question a recent BMO Capital Markets report asks.
According to Alex Koustas, an economist with BMO in a November 12, 2015 update, the “outperformance of the Canadian market through the first half ‘recession’, as well as the manner in which the US market shrugged off a sluggish first quarter pointed to not only the underlying strength of consumer demand for autos, but the transitory nature of the economic effects at play.
“With two selling months left in 2015, it certainly seems as if the Canadian and US markets are poised for a record year, with combined sales exceeding a 19.0 million unit SAAR pace in the second half. The outlook appears to be similarly positive for 2016, as US sales continue to accelerate.”
However, he says the biggest “wildcard in the Canadian economy is the break from a trend in vehicle ownership rates, noting that rates have gone beyond the historial norms of 0.7 vehicles per driving age Canadian to 0.76.
“This is not necessarily a cause for concern. Autos are far better value than they were in the past versus other goods, as evidenced by their relative decline in the CPI basket, a factor compounded further by record low interest rates. It could also point to a change in relative tastes for Canadians brought on, in part, by shifting demographics – for instance, an aging population buying sports cars or luxury vehicles to supplement their regular drives. These factors generally align with the long-held opinion that the Canadian market was previously undersold.”
He says there are some concerns that point to a potential slowdown. For one, luxury import vehicles have driven much of the sales this year, with a 20 per cent growth rate, something that is not sustainable over the long term. Couple that with rising sticker prices “eating a bigger chunk of consumers’ dollars” leads to some concern.
“This is not to say that the Canadian market is primed for a correction any time soon; on the contrary, the Bank of Canada was likely assuming that there would be an expansion of credit and retail activity when it cut rates earlier this year. Low rates and a steady economy should support another historically good year for Canadian sales in 2016, but there simply isn’t much capacity for further growth. Rates are likely as low as they’ll go, the economy is not far from full employment and the Canadian housing market probably doesn’t have much more room to run in terms of pricing, leaving precious few levers for growth apart from a shift in preferences.”
The bottom line, says Koustas, is that “there is still plenty of fuel in the tank” because of the continued outperformance of the US market offsetting a modest retreat in Canadian sales. “Overall, we look for record North Amerian sales in 2016, lead by further US gains.”