- Reduced Leverage Will Limit the Downturn in Canada

    TORONTO, Sept. 30 /CNW/ - Despite the sharp decline that has already
occurred in the U.S. auto and housing markets, the outlook continues to
deteriorate, according to the latest Global Auto Report released today by
Scotia Economics. While the housing market is more volatile, housing and auto
markets move in tandem, and are likely to weaken further through early 2009,
especially in the United States.
    "U.S. vehicle purchases and housing activity are already at multi-decade
lows, but will be undercut further by falling house prices, high energy costs,
the worsening credit crunch and declining household wealth," said Carlos
Gomes, Scotiabank Senior Economist and Auto Industry Specialist. "Mounting
U.S. job losses will lead to a further deceleration in economic activity and a
more protracted slowdown into 2009, especially now that real wages are
declining for the first time since the economic downturn of the early 1990s.
    "We have reduced our U.S. vehicle sales outlook for both this year and
2009, as the freezing up of U.S. financial markets is now affecting the
broader economy by restricting the availability of credit," added Mr. Gomes.
"We expect 2008 U.S. passenger vehicle sales to fall to 13.7 million units,
the lowest level since 1993, from our previous estimate of 14.1 million. Our
2009 forecast has also been reduced to 13.5 million units, compared with an
average of 16.7 million over the past decade."
    The report states that economic conditions have also softened in Canada
in recent months, with employment growth moderating to 1.3 per cent
year-over-year in August, from 2 per cent in early 2008. Households have
become more frugal in this environment, with vehicle sales averaging 1.66
million units over the last three months, down from 1.76 million in the first
quarter.
    "As a result, we have reduced our 2008 and 2009 sales forecasts.
Purchases are now expected to total 1.67 million units this year and
1.59 million in 2009, down from our previous estimates of 1.69 and
1.65 million respectively," added Mr. Gomes.
    The report adds that the sharp erosion in U.S. economic conditions will
increasingly take a bigger toll on Canadian prospects. Although our household
and government balance sheets are not as leveraged as in the United States,
the economic slowdown has spread across the globe, and will increasingly
weaken activity in Canada.
    Conditions are healthiest in Saskatchewan, where record grain and oilseed
prices have lifted first-half 2008 farm incomes an additional 24 per cent
year-over-year, following a 14 per cent advance in 2007. In contrast, activity
is weakest in Ontario's manufacturing heartland, due to the loss of more than
200,000 jobs since late 2002. However, outside of Ontario, income growth
remains strong at 7 per cent year-over-year.

    Vehicle sales weakened through the summer across North America

    U.S. car and light truck sales slumped 14 per cent below a year earlier
in July and August, a further deterioration from the 10 per cent slide
reported in the first half of 2008. The annualized sales pace fell to a
sixteen-year low of 12.5 million in July. Purchases improved moderately in
late August, alongside the introduction to 'employee discounts for everyone'
by a major automaker. However, anecdotal evidence suggests a further
weakening, especially for retail purchases, when September data are released
on October 1st.
    Passenger vehicle sales have also softened in Canada in recent months,
easing to 1.65 million units in August from an average of 1.72 million units
during the first half of 2008. The decline was led by a double-digit fall-off
for North American automakers, as several companies announced in July that
they would shift away from leasing. In contrast, sales of imported brands
continue to advance, with several Japanese, European and Korean automakers
setting monthly sales records for August. So far this year, imported brands
have posted an 11 per cent gain, lifting overall Canadian sales 1.4 per cent
to the second-highest level 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.