Auto sales are slowly increasing but there’s still economic uncertainty on the horizon.

Canadian auto sales are still progressing year-over-year at a relatively even level, as new data from Wards Automotive shows slightly less of a decline in seasonally adjusted sales through the second quarter of 2024 than previously reported. And while June’s sales were negatively affected by the CDK dealer software outage, seasonally adjusted sales increased comparatively in July.

With this improvement in second-quarter sales, our 2024 vehicle sales forecast at Scotiabank of 1.76 million likely faces upside risk, owing purely due to the recent positive revisions. That said, we expect the next couple of quarters to experience low growth, as elevated interest rates and consumer costs continue to weigh on buyer demand.

Easing federal policy rates

The Bank of Canada cut its policy rate in July by 25-basis points to 4.5% and followed that up with another 25-basis point cut in September. As we go to press, further cuts are predicted this year and into the next. We recently saw headline inflation—which includes volatile items of food and energy in the price index—come in at 2.5% year-over-year, which would mark seven consecutive months being in the 1% to 3% target range. Core inflation, which excludes food and energy, has been within that band for six consecutive months.

We have seen some softening in the labour markets, where Canada’s employment levels were flat in June and July. This slowdown in job growth is having a greater impact on youth and temporary residents; but the labour market overall remains a bit more stable for the prime age working groups in Canada. This continues to support consumer spending, even in the face of all these economic headwinds.

Vehicle sales improve but headwinds remain

We saw strong growth in vehicle sales through the second half of 2023 and into the first few months of 2024, as pressures on vehicle supply abated. Vehicle production is nearly back to its pre-pandemic levels, which is helping to build up inventories.

However, while there is still some pent-up demand, the elevated costs of vehicle prices, fuel, insurance, and other cost-of-living expenses including food and shelter, continue to weigh on consumer sentiment regarding new vehicles.

Looking at battery electric vehicles (BEV) on a broad level, the 2024 first-quarter report from Statistics Canada indicates BEV sales and market share have been slowing. BEVs have an average vehicle price tag that’s higher than their internal-combustion counterparts, which affects affordability for consumers.

Tariffs to protect the auto sector

The federal government recently announced plans to impose tariffs on EVs manufactured in China to protect Canada’s automotive sector. Policymakers must weigh the opportunity costs of protecting the domestic automotive sector, while still providing consumers with affordable options to assist with the transition to meeting the 100% zero emission vehicle sales target by 2035.

Overall, we expect the third and fourth quarters of 2024 to come in at similar levels to what we saw in June and July. While uncertainty remains as supply and demand in the automotive sector come back into balance amid still elevated interest rates and changing dynamics, there is still road left in the recovery.