Market to cool slightly after two record years

Share

Call it the Isaac Newton effect: what goes up must eventually come back down.

After another record setting performance for new car sales in Canada in 2014, some analysts are predicting 2015 could be another banner year, albeit with slightly less fanfare. At least on this side of the border

RCB Economics reported that with interest rates still historically low and only a gradual rise expected, sales at the end of next December could still best the tally set in 2014.

“Labour markets have shown signs of strengthening recently after a sluggish performance earlier this year with indications that economic activity is picking up suggesting that an underlying improving trend will be sustained for the remainder of this year and into 2015,” the company wrote.


“There also likely remains some leftover pent-up demand from the recession, albeit substantially less than in the U.S. Our forecast assumes minimal slowing in unit vehicle sales to a 1.82 million unit pace in 2015.”

Although overall consumer loan growth has slowed in Canada, many feel it is still likely that low interest rates have, as in the U.S., benefited Canadian auto sales.

RBC said affordability has been further aided by slow growth in motor vehicle prices, which have continued to modestly under-perform growth in the overall Consumer Price Index (CPI).

A consequence of the slow price growth is that despite vehicle sales reaching record highs, the amount consumers are spending on the purchase of motor vehicles as a share of total consumption expenditures and incomes is still well below pre-recession levels.

“We do not expect consumer loan growth to strengthen substantially going forward given households debt levels are already high. As well, we expect stronger economic growth will eventually prompt higher interest rates going forward.”

With that said, RBC’s forecast assumes the pace of increase in interest rates will be slow, which will leave unusually favourable financing conditions in place for some time, and higher interest rates are only likely to occur alongside strengthening labour markets and rising household disposable incomes.

The trend towards longer amortization periods on vehicle loans, which are now offered over periods up to eight years by some automakers, have reduced the level of monthly payments associated with a given purchase price or interest rate.

“On balance, vehicle affordability is likely to remain a support to the new vehicle sales pace through 2015,” the bank added.

Role of Production, Fuel Prices
Adding weight to the argument for a favourable 2015 is news that production from North American plants will end at an estimated 16.94 million units in 2014.

According to Wards, the sales share of domestically made vehicles versus overseas imports dropped to a record low of 72.9 per cent in 2009.

Largely aided by increased local sourcing, penetration of domestically produced vehicles has steadily risen since then and will account for 79 per cent of sales in 2015, highest since 80 per cent in 2002.

The news outlet said six new plants opened in North America from 2011 through 2014, adding a combined 930,000 units of annual available straight-time capacity.

“Overall, including increased capability at already existing facilities, available straight-time output in 2015 of 17.84 million units will be over 4 million units higher than 2009.”

According to LMC Automotive, vehicle inventory levels at the start of December 2014 were at a 71-day supply, five days lower than in November and six days lower than in December 2013.

Between Canada, America and Mexico, it is little surprise that Mexico has posted the biggest year-to-year production increase. Mexico grew by 12 per cent, topping 3 million units for the first time ever (3.3 million), while U.S. and Canada production increased by 5 percent each, to 12.7 million and 2,996,289 respectively, said LMC Automotive.

Still, there is no doubt the main driver in North America remains the U.S.

America was projected to end 2014 with 16.4 million in sales. Most are looking for that number to grow to at least 16.8 million units in 2015.

However, given a stronger economic performance in the latter half of 2014 and the plummeting price of fuel – which has further spurned larger vehicle sales on both sides of the border – Wards reports there is a “good possibility” the U.S. could hit 17 million units for the first time since 2000.

“The prospects for auto sales to overachieve in 2015 are moving closer to reality as 2014 goes out on a high note,” said Jeff Schuster, senior vice president of forecasting at LMC Automotive. “Economic bliss, driven by job creation, wage growth and low gas prices may drive consumers to showrooms at a faster pace, emphasizing the notion that this recovery may not be over quite yet.”