Pressure on U.S. used car prices likely to subside later this year: Scotiabank

Scotiabank (CNW Group/Scotiabank)

TORONTO, May 25, 2017 /CNW/ - Global new car sales moderated to 3.4% y/y in March, down from a 7% jump in February and an average gain of 5% during the previous two months.  Automotive purchases across North America, which account for nearly 30% of the global total, fell below a year earlier in April in all three countries for the first time since late 2009. However, total U.S. vehicle demand continues to move higher and strengthening economic fundamentals combined with slower growth in used vehicle supplies will reduce downside pricing pressures.

Concern over declining U.S. used car prices has climbed back into the headlines due to recent news that the largest auto rental car company reported a much sharper-than-expected loss in the latest quarter due to slumping residual values. This development combined with a rising number of vehicles coming off-lease has many worried that pricing pressure will continue to intensify, potentially leading to a cyclical downturn in the U.S. auto industry. 

"We believe that the industry is currently in the 'eye of a used car price storm', and that pricing will stabilize later this year once the growth in off-lease vehicles moderates," said Carlos Gomes, Senior Economist and Auto Industry Specialist, Scotiabank. "Our expectation is that weakness in retail activity will prove to be temporary, as it likely reflects a shift among many consumers into used vehicles, due to improving affordability."

Several months of lower-than-expected new vehicle sales combined with largest fall-off in used car prices since the global economic downturn have led to fear that the U.S. auto sales may have peaked. However, used car prices have weakened temporarily in past cycles with only a limited impact on the overall U.S. auto market. It is also important to highlight that past automotive cycles only ended when demand was undermined by weakening economic fundamentals, and none of those pre-conditions are currently in place. Stronger economic growth and an ageing fleet suggest that significant vehicle replacement still lies ahead and that a near-term auto cycle peak is unlikely.

Other highlights:

• New vehicle sales in Canada fell 2% below a year earlier last month for the first time since late 2016, likely as a result of two fewer days to buy vehicles in April.
• Slower sales in China dampened activity across Asia.
• Sales growth continues to accelerate in Western Europe, buoyed by strengthening economic conditions.
• Purchases picked up in Eastern Europe, with sales in Russia climbing above a year earlier for the first time in four years.
• Volumes advanced in South America at the fastest pace since mid-2013, as purchases in Brazil posted a double-digit year-over-year gain for the first time in more than three years. 

Scotiabank 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.

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SOURCE Scotiabank

Carlos Gomes, Scotiabank Economics, [phone], [email protected]; For media enquiries only: Debra Chan, Public, Corporate and Government Affairs, Scotiabank, [phone], [email protected]

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