Economic Insight: Headwinds Continue to Strike

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John Fanjoy serves as an Economic Analyst at Scotiabank. Photo John Fanjoy

Auto sales rose slightly, but momentum slowed during the summer

Continuous shocks along with the Bank of Canada’s further hiking rates into the summer have weighed on economic activity. While Canadian auto sales were up a little over 7% year-to-date through August compared with the same period last year, the momentum of sales overall slowed throughout the summer.

Looking at the three-month moving average, auto sales on a seasonally adjusted annualized rate (SAAR) fell to 1.59 million in August, the first time they have dropped below 1.6 million since the end of 2022. Momentum in household consumption growth, adjusted for inflation, is slowing and with it, so are auto sales. As a result, we have revised our forecast for Canada to 1.64 million light-vehicle sales in 2023, owing to rising prices, elevated financing rates, and weak sentiment—which is based on consumers’ perceptions about whether it is a good time to make a major purchase.

Improvements expected in 2024

That said, we expect headwinds to ease in 2024. The Canadian economy has faced several shocks, including damaging weather and wildfires, along with labour strikes amid contract negotiations. The Bank of Canada must discern which are temporary fluctuations, versus underlying trends, as it works to bring inflation back to 2%. As inflation eases back towards its target, the Bank of Canada is likely to begin cutting its policy rate next year. We are forecasting sales to pick up to 1.72 million in 2024 as headwinds ease and with improving vehicle inventory, underpinned by pent-up demand against an aging vehicle stock and population growth.

Sticky inflation brings the risk of rising rates

Annual inflation remains sticky above target as the monthly pace of inflation runs above target, and as it persists, it adds to the risk that the Bank of Canada will raise interest rates further to bring inflation down. The average Canadian auto loan interest rate has fluctuated between 7.5% to 8% throughout 2023. As the Bank of Canada’s policy rate gets priced through the market, it’s unlikely that financing rates will come down in the near term.

Production is back up to pre-pandemic levels

That said, there are some bright spots. North American light-vehicle production has averaged more than 16 million SAAR since May, back around pre-pandemic levels, which will help build up inventories from their still-low levels. Auto sales in the U.S. have been holding steady on the three-month moving average at 15.5 million SAAR, an improvement from the recent low in mid-2022 when they were 13.0 million SAAR which was mostly due to production and supply constraints. 

Financing rates will likely remain elevated south of the border as the Federal Reserve maintains an elevated policy rate into 2024. We forecast U.S. light vehicle sales at 15.4 million in 2023 and picking up to 16.5 million in 2024.

While headwinds persist, there is pent-up demand in the market as existing buyers seek to replace the aging vehicles they’ve hung onto, and new buyers look forward to purchasing their first ones. The recovery in vehicle sales to pre-pandemic levels will likely take time, meaning that in the near term, we expect market volatility to continue.



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