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Price and Supply Headwinds

Autosphere » Dealerships » Price and Supply Headwinds
John Fanjoy serves as an Economic Analyst at Scotiabank. Photo John Fanjoy

It’s still going to take time for auto sales to return to pre-pandemic levels.

While Canadian auto sales through the first half of 2023 are higher overall compared to the same period in 2022, a full return to pre-pandemic levels will continue to take time. Sales slowed in June and July, and that latter month was the lowest seasonally adjusted annualized rate (SAAR) since October of 2022. Monthly SAAR sales have been volatile and will likely remain that way over the short term.

Consumers are facing headwinds of rising vehicle prices and elevated interest rates. Unsurprisingly, the largest price increases in recent months have been in cars whose inventories are still recovering from their recently low levels, as opposed to SUVs or trucks. Canadians’ buying habits have been steadily trending towards larger vehicles since 2010 and faced with the supply constraints triggered by the pandemic, manufacturers focused their limited production on these popular, higher-margin larger vehicles.

Faced with elevated costs of living, rising interest rates, and pent-up demand, many consumers looked toward cars as a more affordable option. This imbalance between supply and demand resulted in car prices increasing faster than on those higher-margin vehicles that were more readily available.

Supply improving, but inventory still down 

There have been improvements on the supply side, as North American light vehicle production marked its highest level in the second quarter of 2023 since that same period in 2019. But even with vehicle production back up around pre-pandemic levels, it will take time to build up inventories. Most of the new production is being absorbed as soon as it arrives on dealer lots owing to pent-up demand.

Of course, not everyone is rushing out to buy a new vehicle. According to AutoTrader, the average price for a new vehicle in Canada rose above $66,000 in June 2023. Many customers, in both Canada and the U.S., are looking at vehicle prices and financing costs, and are holding onto their current vehicles for a while longer. Black Book’s used vehicle retention index is below its peak from early 2022 and has remained steady in recent months but is still very elevated compared to pre-pandemic.

The Bank of Canada and the U.S. Federal Reserve are both taking a data-dependent approach at each meeting as to whether they adjust their policy rates in this fine-tuning stage working to bring annual inflation rates back towards their 2% targets. As these policy rates get priced into markets, financing costs are likely to remain elevated in the near term.

EV sales slowing

Momentum in Canadian electric vehicle (EV) sales slowed in the first three months of 2023. EV sales as a share of all vehicle sales in the first quarter of 2023 fell to 8.6%, down from 9.6% in the previous quarter. A decline in battery-electric vehicle sales was partially offset by an increase in plug-in hybrid sales. Rising average vehicle prices could limit which EV models are below Canada’s iZEV Incentive Program price cap, further posing a headwind to meeting Canada’s 100% zero-emission EV sales target by 2035.

While still-recovering inventories, elevated prices, and interest rates pose headwinds to near-term vehicle sales, we expect sales to pick up in 2024 as inventory and rate pressures ease, supported by growing pent-up demand.

 

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