Both in Canada and abroad, new vehicle sales are on target for yet another record year.
It’s good news again, this time with global auto sales on target to set an eighth consecutive annual record. Not only that, but we’re also seeing that sales have actually started to accelerate as the global economy expands at the fastest pace in two years.
What’s important is that these gains are broad-based. Not only are we seeing them continue in developed markets such as Canada and Western Europe, but we’re seeing developing markets rebounding strongly from declining purchases over the past several years. If you look at emerging markets during the month of July, excluding China, sales jumped 14 percent year-over-year, which is the fastest growth in five years.
In China, economic growth has also been stronger than expected, a key contribution to the recent global sales acceleration. Firmer car prices and inventory normalization in China have prompted us to upgrade our 2017 sales forecast to a three percent annual gain, up from the small decline we originally thought China would experience. New-car sales in China are now projected to top 24 million units, accounting for 30 percent of global volumes. That’s up from 25 percent only three years ago.
These record global sales are in sharp contrast to the “peak auto” fears that many pessimists popularized with their headlines. While the auto industry is cyclical, declines in global car sales have historically only occurred during economic downturns, such as we saw in 2001, and again in 2008-2009. Outside of those years, global auto sales have consistently moved higher.
Sales have also jumped by 12 percent in South America, reflecting the end of the economic downturn in Brazil.
Canada is part of that global economy, and the second-quarter GDP numbers for this year were much stronger than anyone expected. Employment growth has strengthened significantly and is now advancing by nearly 2 percent year-over-year, and that’s the best performance in roughly two years.
One of the reasons for the strong Canadian showing is that we’re seeing significant improvements in the Prairies. Alberta was in sharp decline for two years, and is now competing with Ontario and British Columbia for the fastest growth in Canada. In fact, the Prairie region is the only area to experience double-digit growth in vehicle sales in Canada this year.
U.S. consumer sales temper fleet drops
In the United States, a temporary “de-fleeting” in the rental car industry has led to an 8 percent drop in fleet volumes in the United States for 2017. This will reduce overall U.S. purchases for the first time since 2009. However, stronger consumer balance sheets and an aging vehicle fleet have helped household volumes to remain resilient. This will keep American auto sales above 17 million units overall for the second consecutive year, and is expected to support higher sales in 2018.
As we have said before, the popularly perceived issue of rising subprime delinquencies is not having a material effect on U.S. new-vehicle demand. Instead, overall U.S. household delinquency rates recently declined to a decade low, while new-vehicle pricing is at record highs, and automotive credit quality has improved alongside fewer subprime auto loans.
Of course, all eyes are on Texas and the horrific flooding there. Texas is the second-largest auto market in the United States, and many of the vehicles that were damaged by flooding will have to be replaced going forward. That will likely be a significant boost to U.S. auto sales in the latter part of 2017 and in early 2018 as people in the hard-hit areas replace their vehicles.
It’s hard to say how many that will be, but there are approximately 5.5 million vehicles in the Greater Houston Area alone. If just 10 percent of that fleet is damaged, it will mean 500,000 vehicles, and it could possibly go to a million vehicles if the percentage of damaged ones turns out to be higher.
Just to put that into perspective, there are only slightly more vehicles in the entire province of Quebec than there are in the Houston area-imagine trying to have to replace 10 percent or more of them virtually all at once.
Canada’s strength in NAFTA
The other news from south of the border is the ongoing issue of NAFTA, which President Trump says he would like to renegotiate or possibly even dismantle. We don’t know how this will play out, but the auto industry is the most highly integrated manufacturing sector in North America. If there is an attempt to scrap NAFTA, it will have an enormous impact and lead to job losses in the United States.
We don’t think it’s likely that NAFTA will be dismantled. The auto industry is that line in the sand, and it’s something Canada would most likely use as a bargaining chip. The auto industry will be crucial to any outcome of attempts to renegotiate the original trade deal.
Overall, even though we’ve been positive on both the Canadian and global outlook for quite some time, the activity seems to be even better than we were expecting. This doesn’t seem like a bubble that will break. Instead, it’s healthy growth that’s lifting all boats…and automobiles, too.