Canadian Auto Market Moves Upscale, According to Scotia Economics

Enhanced incentives prompt shift to larger, more expensive models

TORONTO, Aug. 30 /CNW/ - Global car sales fell below a year earlier in July, a significant slowdown from a 16 per cent surge in the first half of 2010, according to the latest Global Auto Report released today by Scotia Economics.

"A double-digit slump in Western Europe, due to the expiry of scrappage incentives, accounted for the fall-off," said Carlos Gomes, Senior Economist, Scotia Economics. "However, outside of Europe, purchases have also started to moderate, with volumes advancing year-over-year by only nine per cent last month - the smallest gain since last summer.

"While global car sales softened over the summer, purchases in Canada have rebounded alongside strong employment growth, as well as enhanced incentives, such as 'employee pricing for everyone', helping to lift new vehicle sales to the highest level in nearly three years," continued Mr. Gomes.

Canadian vehicle sales advanced to an annualized 1.65 million units last month, lifting volumes at several automakers to the highest level on record for the month of July. This represents the second consecutive monthly rebound from a weak performance in May and indicates that Canadians are once again in a vehicle-buying mood. In fact, the recent improvement in vehicle purchases has led us to raise our full-year 2010 Canadian sales forecast to 1.565 million units from 1.525 million.

Job creation - the key driver of vehicle demand - has strengthened in Canada to an average of 43,000 per month, roughly triple the pace of employment growth in early 2010, while higher incentives by most automakers have reduced new vehicle prices by more than five per cent since February.

"Contrary to expectations, enhanced incentives have led to higher, not lower, average vehicle transactions prices, as Canadians take advantage of enhanced incentives to buy larger and more expensive models," added Mr. Gomes. "In fact, new vehicle transaction prices have jumped by five per cent so far this year - the largest increase since 1996, following the weak auto market of the first half of the 1990s."

Canadians are shifting away from small cars, with segment volumes declining two per cent year-over-year through July. Small cars traditionally dominate the Canadian market, accounting for one-third of overall car and light truck sales. However, their share has slumped to less than 29 per cent so far this year - the lowest level in more than a decade - and down from a peak of 35 per cent in 2008, when gasoline prices across Canada averaged $1.20 per litre.

"We expect this summer's escalation in incentives to moderate in coming months, as it represents a significant divergence from developments in the United States, where automakers - especially those based in Detroit - have scaled back incentives," concluded Mr. Gomes.

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

For further information: Carlos Gomes, Scotia Economics, [phone], [email protected]; Robyn Harper, Scotiabank Public Affairs, [phone], [email protected].