TORONTO, July 30 /CNW/ - It is widely recognized that emerging markets,
especially China, hold the key to the auto industry's continued growth.
However, sales gains in both South America and Eastern Europe are outpacing
the increase in China this year. Purchases in both regions jumped in excess of
24 per cent year-over-year in the first half of 2008, compared with a
17 per cent advance in China, according to the latest Global Auto Report
released today by Scotia Economics.
    "Sales gains in China have moderated in 2008 from an average annual
increase of 30 per cent this decade, as high fuel prices have dampened buyers'
enthusiasm," said Carlos Gomes, Scotiabank Senior Economist and Auto Industry
Specialist. "China and other emerging market governments subsidize fuel costs
to insulate domestic consumers from the effects of high oil prices. However,
the Chinese government lifted fuel prices by nearly 10 per cent last November
and raised prices an additional 18 per cent this June, leading to a moderation
in sales gains."
    Despite a three per cent decline in car sales in the mature markets of
Western Europe, due to slowing economic growth, double-digit gains in Eastern
Europe have lifted total European sales four per cent during the first half of
2008.
    The report states that Russia is the largest market in Eastern Europe and
is rapidly becoming one of the auto industry's most important growth markets.
Car sales in Russia rose by 34 per cent last year to 2.3 million units, and
have surged an additional 40 per cent in the first half of 2008. Purchases
totaled 1.45 million units in the first half, becoming the second largest
market in Europe, behind Germany's 1.63 million units. In fact, Russia is set
to become Europe's largest car market and the world's fourth biggest in 2009,
with annual volumes of 3.7 million units.
    "Russia is the world's largest energy exporter and soaring oil and gas
export revenues are buoying activity. Economic growth jumped to 8.5 per cent
in the first quarter and real wages have been increasing at a double-digit
pace since mid-2005, boosting domestic demand," added Mr. Gomes.
    The report also states that surging oil prices are having little impact
on Brazil's auto market, the largest in South America accounting for
60 per cent of the region's volumes. Eighty-eight per cent of new vehicles
sold in Brazil are flex-fuel models that can run on less expensive ethanol,
manufactured domestically from sugar cane. As a result, purchases continue to
be buoyed by strong economic growth, which advanced by 5.8 per cent in the
first quarter. Volumes are also being supported by employment growth of more
than six per cent year-over-year, the lowest unemployment in six years, and
credit growth in excess of 25 per cent year-over-year.
    "Given robust sales gains in Brazil and throughout South America, vehicle
production in Brazil has expanded by 23 per cent so far this year and will
continue to advance as automakers invest US$5 billion in 2008 and up to
US$20 billion through 2010," said Mr. Gomes. "Even prior to these investments,
Brazil was already the seventh-largest vehicle manufacturer in 2007,surpassing
both Canada and Spain, and is on target to overtake France, and possibly
South Korea in 2008."

    Global Auto Sales

    Global car sales advanced by 1.5 per cent in the first half of 2008, but
the momentum has clearly slowed. Volumes fell in both May and June, undercut
by record oil prices averaging US$130 per barrel. The mature markets of the
United States, Western Europe and Japan account for the weakness, as purchases
in emerging markets continue to post double-digit gains. However, some
moderation is expected in these nations in the second half of 2008, as several
central banks have started to raise interest rates to curb inflation, at a
time when global growth has dropped out of overdrive.
    "Despite the year-over-year sales decline in recent months, we expect
full-year 2008 volumes to climb to a seventh consecutive annual record, buoyed
by ongoing strength in Brazil, Russia, China and India," said Mr. Gomes. "In
fact, car sales in these nations are expected to surpass U.S. passenger
vehicle purchases in 2009. As recently as 2005, the United States outsold the
BRIC nations by more than 10 million units."
    The sales outlook is bleakest in the United States, where record oil
prices and falling house prices have led to nearly a 30 per cent
year-over-year plunge in sales of SUVs and pickup trucks and a double-digit
slump in overall light truck sales in the first half of 2008.
    "With rising incentives losing their effectiveness in holding up sales
and several automakers getting out of leasing, we expect weakening
fundamentals to slash full-year 2008 passenger vehicle sales to 14.1 million
units," said Mr. Gomes. "Prospects are also subdued for 2009, with purchases
likely to remain soft around 14.3 million units, compared with an average of
16.7 million over the past decade. This would represent the worst back-to-back
performance since 1993."
    The report adds that, purchases are holding up better in Canada, with
first-half volumes advancing 2.5 per cent despite some softening in recent
months in response to record gasoline prices approaching $1.40 per litre.
Vehicle sales in Canada are expected to average 1.67 million units through
2009, up from roughly 1.60 million per annum over the past five years. The
increase reflects improved affordability, as automakers have lowered new
vehicle prices to bring them more in line with prices in the United States.
Sales gains are strongest in Saskatchewan, where record grain prices have
lifted farm income by 66 per cent over the past year, one of the largest
surges on record.

    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.