2009 Auto Restructuring
Rising Used Car Prices Point to Recovery in the New Auto Market, According to Scotia Economics
TORONTO - Used car prices, a key leading indicator of the health of the overall auto market, are strengthening and point to a continuation in the global auto sales recovery, according to the latest Global Auto Report released by Scotia Economics.
"Historically, cyclical turning points in pre-owned vehicle prices lead directional changes in the new car and light truck market by three to six months, reinforcing our view that the outlook for new vehicle sales has improved significantly and that a sustained cyclical recovery is underway," said Carlos Gomes, Senior Economist and Auto Industry Specialist, Scotiabank. "Interestingly, over the past two years, the cyclical turning points in U.S. used car prices have led not only the new vehicle market, but also the directional changes in the overall economy."
Auto Sector Credit Trends
According to the report, the increased prominence of used vehicle prices as a leading indicator of overall economic activity reflects changes in credit availability. Aside from improved access to credit, a pickup in household confidence was also a key factor stimulating used vehicle demand. Consumer confidence in the United States bottomed at a record low in February (data back to 1970), before bouncing back over the summer.
Reduced Supply Will Support Prices Going Forward
A reduced supply of used vehicles, due to a sharp decline in new fleet purchases, as well as the drop in leasing over the past year, are structural changes that will continue to support used vehicle prices in both the United States and Canada. This suggests that, in both countries, firmer used car prices will be a multi-year phenomenon, not just a short-term cyclical development.
"In Canada, new fleet purchases will likely drop to less than 180,000 units in 2009, 100,000 units fewer than the average of the past decade and less than half the record volumes of the late 1980s," said Mr. Gomes. "In addition, the number of new leased vehicles in Canada will slump below 400,000 units this year, the lowest level since 1995. These sharp reductions will lead to a decline in the number of vehicles supplied to the Canadian used vehicle market by 2011."
Global Auto Recovery Remains Intact
In September global car sales, excluding the United States, posted a double-digit year-over-year increase - the strongest gain since April 2008.
Keeping with the global trend, Canadian new car and light truck sales also remained strong in September. Purchases exceeded an annualized 1.50 million units for the third consecutive month - the best performance since last October, before the late-2008 sharp sales downturn.
"This suggests that Canadian households are becoming more confident as economic conditions stabilize," commented Mr. Gomes. "We estimate that this trend remains intact, with volumes surpassing an annual rate of 1.50 million units in October."
In contrast, new vehicle purchases in the United States fell to an annualized 9.2 million units in September, as demand softened from the 'cash for clunkers'-induced 12.7 million units of the previous two months. However, volumes remained roughly in line with the level prevailing in June, prior to the introduction of the government subsidy. Purchases also remained above the early-2009 cyclical low of 9.0 million units. This suggests that the impact of the 'sales pull ahead' from the government program has largely run its course.
"In fact, Scotia Economics believes that low inventories also had a significant impact on dampening sales in the United States last month," concluded Mr. Gomes. "Preliminary estimates suggest that overall industry volumes are bouncing back, with purchases back above an annualized 10 million units in October."
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