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Mixed Bag in Canada and Beyond

A few positive scores can’t lift the overall decline.

Global sales slid in August 2019, down year-over-year by 6.0%, not far from where we initially expected to close out the year. The global economy is facing a slowdown that’s only exacerbated by persistent tensions between the U.S. and China. We see little hope for resolution in the near term, which will have an effect on the countries that primarily drive the global numbers. The United States and Japan are among the few that are propping up the global picture. The German economy is looking at a full stop, which will bring down the European market, while Brexit is making everything even tougher. Time is running out for any policy response to recover this global lost ground, particularly in China, where the slide has been pronounced.

A modest uptick in Canada, but no solid underpinnings

Canada’s sales posted a modest uptick in August, ending a record seventeenth month of y/y declines, but there wasn’t much cause for celebration. Sales numbers were artificially boosted by an early Labour Day weekend, and continued weakness in retail sales were masked by double-digit fleet sales.

We’re also not seeing solid fundamentals in the Canadian economy translating into auto sales growth, even with job growth, decent wage growth, and strengthening housing markets. It’s likely that high debt servicing costs are creating headwinds in the auto industry. High household debt is a binding constraint for many households, while a binge in housing equity cash-outs in 2017 boosted the sale of durable goods, including autos, which created high base effects for subsequent years. However, there has been a reduction in the cost of financing, along with a shift in expectations toward easing policy rates. While it will take time, this could put a cap on debt service ratios, or even possibly lower them. We are maintaining our forecast of 1.94 million units for 2019. Central Canada saw a healthy 4% y/y boost in August, with Ontario surging by almost 5%, but its economy has us anticipating lower growth for the rest of the year. Quebec rose by 2% y/y and should continue with more robust economic performance. Western Canada’s provinces generally suffered in August, with a regional decline of about 4% y/y. British Columbia had the largest losses with 4%; Alberta dropped by 1%; but Saskatchewan had another positive month with 2%.

Atlantic Canada picked up by 4%, with Newfoundland and New Brunswick leading the growth. However, the region was already well into a sales slowdown last year, so monthly gains speak more to recovery than to strength.

More strength south of the border

In contrast, the United States rose by 10.5% y/y in August. Financing costs remained low, the early Labour Day weekend propped up sales, and incentives were likely responsible for a drop in inventory in anticipation of new models. Overall, the U.S. should close the year on solid footing, and we are maintaining our forecast of 17.0 million units, down slightly from the 2018 sales high of 17.2 million.

Mexico’s sales have continued a steep slide. The country has had only one positive sales month in more than two years, and for a third of that time, there have been double-digit declines. The domestic reform agenda, a slowdown in U.S. business activity, and trade-related concerns have resulted in a weak economic outlook with growth of only 0.2% expected this year, and only a modest rebound to 1.0% in 2020.

Trade tensions and Brexit

In China, sales have continued to deteriorate, and a 7.7% y/y drop in August— measured against a year ago when they fell 5.5%—marked fourteen consecutive months of decline. Government measures, including stronger credit flows, market- driven reforms to the policy rate, and lower reserve requirements for banks, should boost growth and sales, but will take time. The year is advancing toward a SAAR (seasonally adjusted annualized rate) of 21.6 million units, but will not accelerate enough to regain lost ground in a meaningful way. Japan posted a 6.7% y/y growth in August, which brought a 1.8% y/y boost for the first eight months of 2019, but this was likely a blip in anticipation of a rise in the consumption tax in October. In India, July and August sales dropped by nearly 30% y/y, and aggressive measures by its Reserve Bank haven’t yet put a halt to the slowdown. In Germany, overall sales remain weakly positive, making it the only major European economy with an uptick. In August, France dropped by 14.1% and Spain by 30.8%. Despite a drop in August, Brazil has been trending upwards for the past two years and propping up the region; Colombia and Peru were also up. But Chile declined and Argentina fell sharply by almost 30%, and with no end in sight. If the global economy worsens, South America will certainly feel the effects.

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