Economic Insight: 2024, Year of “Rebalancing?”

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

Trends point to more stability in auto sales during 2024.

Happy new year, and welcome to 2024. Last year was a period of recovery for Canadian new auto sales, which in recent years had flagged due to headwinds including limited production, shipping delays, and low dealer inventories. Despite these challenges abating, there’s still progress to be made, as 2024 is likely to be a year of “rebalancing.”

Canadian new light vehicle sales reached 1.68 million in 2023 according to Wards Automotive, which is equal to a rise of 10.6% year-over-year. While there was a slowdown in the pace of sales over the summer as Canadians dealt with wildfires, strikes, and rising interest rates, seasonally-adjusted sales increased in all but one month in the second half of 2023. Most of the rebound was attributed to the rise in light trucks, sales of which rose 12.2% y/y to 1.42 million.

Modest rebound for vehicle sales

Meanwhile, the rebound in car sales was much more modest, up 2.3% y/y to 267,000 units, primarily owing to volumes of luxury models increasing to account for one-in-four new car sales. Even with this strong growth in the light truck segment, which is now close to 2019 levels, new auto sales for the year remain more than 10% below pre-pandemic levels, as overall sales in the car segment are nearly half of what they were in 2019.

The speed at which sales by vehicle type rebounded can be partly explained by changes in supply-side factors. North American production of light trucks has recovered to pre-pandemic volumes, whereas production levels of cars have improved, but remain a third below pre-pandemic levels. Given constraints to production, vehicle manufacturers likely prioritized light trucks and higher-margin vehicles that make up the biggest market share. With auto production back near pre-pandemic levels, it will take time for still-recovering inventories to rebuild. Looking to the year ahead, we are expecting further rebalancing in the automotive market, as supply and demand return closer to balance.

Inflation is dropping but remains sticky

Vehicle sales growth in percentage terms is likely to slow down from last year’s pace as the rebalancing continues. Today’s elevated interest rate environment continues to weigh on consumer demand. The Bank of Canada continued to raise its policy rate in 2023, and continues to monitor trends as it works to bring inflation down towards its 2% target. Annual headline inflation has come down from the peak 8.1% in mid-2022 to 3.4% at the end of 2023.

Despite this progress, the pace of inflation returning to target has been sticky in recent months, while the impacts of interest rate hikes continue to work their way through the economy. The Bank of Canada is likely to hold its policy rate unchanged in the near term, with cuts not expected until the middle of this year. Once the Bank of Canada begins to ease its monetary policy stance, this should provide some relief to household finances and stimulate demand, as its policy rate settles at higher than pre-pandemic rates sometime in 2025.


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