'Cash for Clunkers' Depletes Auto Inventories, According to Scotia Economics

- Assemblies to increase into 2010, bolstering economic activity

TORONTO , Sept. 23 /CNW/ - The cyclical recovery in the auto market continues to gain momentum around the world, according to the latest Global Auto Report released today by Scotia Economics.

"Record purchases in emerging markets are leading the way, with sales in China , India and Brazil advancing 55 per cent year-over-year (y/y) in August. However, activity is also strengthening in the mature markets of North America and Western Europe ," said Carlos Gomes , Senior Economist and Auto Industry Specialist, Scotia Economics. "In the United States , the 'cash for clunkers' program pulled many buyers into dealer showrooms in August, lifting passenger vehicle sales above a year earlier for the first time since October 2007 . Even excluding 'cash for clunkers', U.S. sales climbed to a nine-month high of 10.5 million units, up from a cycle low of 9.1 million in February."

In Canada , car & light truck sales remained strong in August, totaling an annualized 1.51 million units. This represents the second consecutive month above 1.50 million units and is the best back-to-back performance since last October.

Record Low Inventories

According to the report, the strong U.S. sales performance in August slashed dealer inventories to record lows, prompting automakers to extend the gearing up of production into 2010. U.S. inventories fell to only 1.41 million vehicles in late August, down sharply from an already low 1.79 million at the end of July and nearly half the 2.76 million units prevailing a year ago.

Automakers began to ramp up production even before the inventory depletion in August, with assemblies across North America climbing to an annualized 9.3 million units in July and August, up from 7.0 million in the first half of 2009.

"This increase is now filtering through the economy, helping overall activity transition from recession to recovery," commented Mr. Gomes . "For example, Statistics Canada recently reported that a surge in vehicle assemblies in July lifted overall Canadian manufacturing shipments to the strongest gain since 1998. In the United States , the Federal Reserve Board indicates that motor vehicle assemblies jumped a hefty 20 per cent in July, and increased an additional 5.5 per cent in August."

Rising Output Into 2010

Vehicle assemblies will continue to rise in coming months, with automakers planning to assemble an annualized 10.3 million units in the fourth quarter. However, these schedules are likely to be increased further, even as sales moderate from the recent 'cash for clunkers' rush. Scotia Economics' estimates suggest that even if fourth-quarter U.S. sales slip back to an annualized 10 million units, current production plans imply year-end 2009 inventories of about 50 days' supply - well below the 67 days' average of the past decade and nearly 10 per cent below the level prevailing at the end of the 2001 recession.

Current production plans will add roughly two percentage points to U.S. overall economic activity in the second half of 2009.

"In Canada , auto assemblies are expected to add at least a percentage point to economic growth in the third and fourth quarter," said Mr. Gomes . "However, output would have to increase at least 20 per cent above current schedules to bring inventories back to 'normal' by the end of 2009."

Low Stocks of Popular Canadian-Made Models

Inventories of Canadian-made models are also very low, especially for popular models such as the Toyota Corolla, Honda Civic and Chevy Camaro. Current plans call for vehicle assemblies in Canada to climb to an annualized 1.7 million units in the final months of 2009, nearly 40 per cent above the 1.2 million average of the first half of 2009. Output in Canada will jump further in early 2010, once Toyota expands production of the Corolla at its facility in Cambridge, Ontario in the wake of the closure of its joint-venture plant in California planned for early next year.

Autos Boost Industrial Activity in Mexico

" Mexico has also started to benefit from rising vehicle production, which represents about 11 per cent of overall industrial activity," concluded Mr. Gomes . "Vehicle output climbed to an annualized 1.8 million units in July, up from only 1.24 million in the first half of 2009, helping to lift industrial activity for the first time in sixteen months. Further gains are expected, with auto assemblies scheduled to climb to an annualized 2.0 million units in the final months of 2009."

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]