TORONTO, Oct. 4 /CNW/ - Vehicle sales remained weak in the United States
and Mexico during the summer, but volumes strengthened in Canada, buoyed by
robust gains in Western Canada, according to the latest Global Auto Report
released today by Scotia Economics. U.S. vehicle sales have consistently
weakened in 2007, falling to an average of 16.1 million units through
September, down from 16.5 million in all of 2006 and a peak of 16.9 million in
2004 and 2005.
    "We expect purchases to continue to weaken, falling to a decade low of
15.3 million units in 2008, despite the larger-than-expected 50 basis point
cut in short-term interest rates by the U.S. Federal Reserve on September 18,"
said Carlos Gomes, Scotiabank's auto industry specialist. "The continued
decline in U.S. vehicle sales reflects the impact of slumping house prices,
rising mortgage resets and slowing employment growth, which fell in August for
the first time in four years. High energy costs and tighter lending standards
are also squeezing U.S. households, especially those with incomes below
US$75,000."
    Estimates suggest that energy and interest costs now absorb a record
26 per cent of U.S. household disposable income, up from an average 22 per
cent during the previous decade, leaving little room for discretionary
purchases.
    In contrast, Canadian passenger vehicle sales climbed to record highs in
August, before edging down in September. Purchases have averaged an annualized
1.67 million units through September, up from a full-year 2006 total of
1.61 million.
    Western Canada accounts for much of the strength, with sales west of the
Ontario-Manitoba border approaching an annualized 600,000 units in August, up
from a total of 507,000 for all of 2006. Saskatchewan is leading the way, with
purchases surging 16 per cent so far this year, as soaring prices for wheat,
barley and canola have lifted Canadian crop receipts to record highs. Vehicle
purchases in the province are expected to total 43,000 units in 2007, the
highest level in more than twenty years.
    "Outside of Western Canada, volumes are weakest in Ontario, undercut by
the manufacturing slowdown. We expect vehicle sales in Ontario to fall below
an annualized 600,000 units through 2008, down from an average of 620,000
units during the past five years," said Mr. Gomes.
    North American vehicle production strengthened during the summer,
climbing by 16 per cent year-over-year in July to an annualized 17.5 million,
the highest level since early 2006, as automakers ramped up production ahead
of the expiry of the United Auto Workers (UAW) contracts in mid-September.
However, output began to be pared back in August, and in the final months of
2007 will slump to the lowest level since the economic downturn of the early
1990s. Further cuts are in store for 2008, with full-year North American
output expected to drop to only 15 million units next year, down from an
average of 16.4 million over the past decade.
    "The upcoming cutbacks reflect increased concern about the U.S. sales
outlook, especially after the latest U.S. employment report indicated U.S.
payrolls fell in August for the first time in four years," said Mr. Gomes.
"Given increased caution by automakers and rising inventories, vehicle
production across North American is scheduled to slump below an annualized 14
million units in the final month of 2007, the lowest level since July 1998."
    Vehicle output will also move lower in Canada in coming months. However,
the fall-off will be cushioned through late 2007 by rising production of
Ford's new CUVs in Oakville, Ontario. Full-year output of the Ford Edge and
Mercury MKX in Oakville will total nearly 230,000 units in 2007, more than
triple the previous year's production and the highest annual total since 2003.
However, Canadian assemblies will drop sharply in early 2008 with the
elimination of one shift at GM's truck plant in Oshawa. This will reduce the
plant's capacity to 200,000 units from the current 300,000. The start-up of a
new Toyota assembly facility in Woodstock will provide some offset, but
production will only begin later in the year and it will take some time for
output to be ramped up. "Slowing U.S. economic growth and weakening consumer
confidence are prompting U.S. households to delay big-ticket purchases as
household wealth is undercut by declining house prices and soaring
foreclosures, currently at a record high," said Mr. Gomes. "Up until recently,
rising household wealth and soaring home equity credit were key factors
bolstering auto sales. However, with U.S. house prices now falling at the
fastest pace since the economic downturn of the early 1990s, we expect retail
motor vehicle purchases will continue to deteriorate."
    Much of the pressure on the housing market is coming from the reset of
adjustable rate mortgages that were taken out between 2004 and early 2006.
Many mortgages have already begun to reset, however, estimates suggest that
nearly four million mortgages still have to reset through the end of 2008,
with most occurring by mid-year. This suggests that the downturn occurring in
the U.S. housing market will continue through, at least, the first half of
2008, pointing to further deterioration in vehicle sales and overall consumer
spending.

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