Financial outlook remains choppy, though there are signs things are slowly improving.
There hasn’t been a dull moment over the last three years, and a recent one was our “March Madness” in the U.S. Over the course of just a few days, three smaller U.S. banks collapsed, triggered by Silicon Valley Bank, with contagion spreading to Europe’s Credit Suisse.
All of this fuelled a sudden market panic that was fortunately brief, thanks to regulators and central banks stepping in quickly to prevent a full meltdown. But it was a wake-up call that high-interest rates are hurting some parts of the market, while undiversified depositors can be flighty in the age of social media. A major crisis was averted, but credit conditions remain tight, with markets on edge as they eye potentially more instability ahead with overnight rates expected to remain high, and possibly higher, in light of sticky inflation.
No near-term relief on rates
It’s not just the high and uncertain Central Bank overnight rate that will weigh on consumers and businesses alike, but also the market spread – the risk-premium markets demand in the light of recent turmoil. This would affect how much we’ll see consumers pay on loans, lines of credit, and even dealer financing for their floor plans.
The net impact of that March Madness is that we don’t see near-term relief for dealers, or for consumers looking to buy an auto just yet. We believe we’re looking at a couple of quarters of uncertainty amidst elevated interest rates and the cost of financing.
Inflation remains persistent
There is still a fair amount of resilience in consumers, but inflation is persistent. It’s stickier in the U.S. and though it is coming down in Canada, it remains elevated. The Central Bank is looking at inflation and financial instability to see what tools to use, and we think it will be interest rates that stay where they are in Canada or rise even higher in the case of the U.S. We don’t see Canada in a position to cut interest rates until 2024, and for the rest of 2023, we will see this persistent high cost of financing in this uncertain and elevated environment.
Auto sales are sensitive to interest rates and we’re in the worst part of that cycle, so if consumers can put off their purchases until rates start coming down and they feel better about the outlook, they probably will. There are still some supply chain issues and those are feeding into the price, as it still costs a lot to produce a vehicle. Dealers still don’t have a full inventory and they really aren’t offering many incentives.
Some positive notes on sales
On the positive side, we still have pent-up demand from three years of Canadians not buying in the volumes they used to; a rapidly growing population; and household finances that are still strong overall as labour markets remain tight. We are forecasting 1.7 million vehicle sales for 2023 overall.
Sales are not expected to be great in the short term, but in the medium-term, we see them picking up in 2024 and 2025. Unexpected market shocks from global events can arise at any time, as we saw with the war in Ukraine, the bank collapses, and of course the pandemic. Still, there is resilience, and while auto sales still aren’t at their best, they’re getting better.