Market Forecast : The Ups & Downs of 2016

Unless Canada’s economic growth falls below the one percent pace set last year, we still expect passenger vehicle sales to be very close to last year’s record number. (Photo: Scotiabank)

Expect a fat year, but at a nice high level.

While we saw some signifcant declines in equity markets during the first few weeks of 2016, the global economy still continues to do reasonably well. Worldwide auto sales gained momentum in the second half of 2015 and we expect to see them increase by about three percent in 2016. If that happens, it will be the seventh consecutive annual record for global vehicle sales. Here at home, we expect to see sales level out and stay fat. Tat’s still good news overall, because we’re coming of a record of 1.9 million units in 2015, an increase of three percent from 2014 that was stronger than we expected. Tat fattening-out has much to do with the ups and downs in various sectors. Vehicle sales are falling in provinces such as Alberta, hit hard by declining oil prices. Tat’s ofset by positive results in manufacturing markets and the provinces that are stronger in non-energy exports, especially Quebec, Ontario, and British Columbia. One side loses and the other side gains. Unless Canada’s economic growth falls below the one percent pace set last year, we still expect passenger vehicle sales to be very close to last year’s record number. It’s oil supply, not oil demand When looking at oil prices, including how they afect the level of our dollar on the world market, it’s important to understand why they fuctuate as they do. Te drop is due to oversupply, not decreased demand, and that can take a while to stabilize. Oil is a long-term industry, starting with exploration activity followed by production a few years aferwards, and our current production is the result of money that was put into projects when times were good. Investment cuts in 2015 and 2016 will limit growth in the sector in a couple of years, but actual oil output is still continuing to increase in Canada. Oil producers are reducing their employment levels, and the unemployment rate in Alberta has Department of Energy suggests that we’re starting to see a levelling-of and stabilization of inventory in the United States, which is a positive step.

Stronger growth means higher sales

The drop in oil prices has afected the global equity markets, of course, as investors fearful of potential bankruptcies in the sector have pulled back signifcantly. However, employment growth in the world’s major developed markets is advancing at the fastest pace since 2007, and that drives global vehicle sales up. Any sales moderation we saw last year was primarily due to sharp declines in Russia and Brazil. We don’t expect these to turn around soon, but we’re cautiously optimistic: Russia’s sales fell by 40 percent last year, but it’s unlikely they will continue to drop so dramatically in 2016. While falling oil prices have a negative efect on world markets, they can be positive at the consumer level. In the United States, vehicle sales are expected to approach 18 million units this year, thanks to a strong labour market, the healthiest household balance sheets in more than a decade, and an aging vehicle feet where 40 percent of what’s on the road is at least 12 years old. Instead of a peak sales year, we anticipate an extended replacement cycle. Leasing played a major role in Canada’s vehicle numbers last year, with a double-digit gain that was largely responsible for our record year. If the lease numbers are excluded, our volumes actually edged downward in 2015. Overall healthy fnancial conditions will also play a role this year, as household financing costs have dropped to record lows with short-term interest rates reduced to counter the impact of lower global oil prices. Some provincial outlooks We expect to see Ontario’s vehicle sales rise to 772,000 units this year, up from 761,000 in 2015, as the province’s export sales gain momentum. In British Columbia, we expect sales to climb from 207,000 last year to 211,000 this year, in a province that has the strongest job market in Canada and will have the largest intra-provincial population infow in decades. Quebec should rise to 450,000 units, up from the 444,000 vehicles sold in the province in 2015, thanks to improving labour market prospects and the largest increase in full-time employment in nearly a decade. We also expect to see small gains in Manitoba, which saw a two percent increase in industry hiring last year, and in Nova Scotia, which should top last year’s record 54,000 vehicles by another 1,000 units. However, the sharp decline in Alberta’s capital expenditures and labour market saw a 12 percent decline to 236,000 vehicles last year, and we expect to see it fall further to 220,000 units for 2016, despite some relief from increased government spending and oil price improvement as the global supply levels out. Overall, while individual results will depend on where you are in the country, we expect the coming year to be fat, but still at a very high level.

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