Auto Market Update: The Pandemic in the Rear View
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One thing is clear: the auto dealer industry is a resilient one. Amid the rollercoaster ride of the last 16 months, dealers have learned a lot about their ability to adapt much faster than they ever would have under normal circumstances.
BMO’s latest semiannual review of the North American auto industry
provides our projections for light vehicle sales in Canada and the U.S., as well as the market and economic factors behind those expectations. Erik Johnson, economist at BMO Capital Markets, recently provided more context and insight into the report, including how factors such as the labour market, continuing supply issues and the delta variant of coronavirus could impact the industry.
Macroeconomic Factors
Johnson attributes BMO’s historically high GDP growth projections in both countries to robust consumer demand. In Canada, Johnson noted that more provinces have shifted into reopening mode, which is helping boost BMO’s 2021 GDP growth outlook for Canada to 6%. “Historically, that's certainly quite high,” Johnson said. “You have to go back to the early 1980s to see a number that high.”
Johnson also noted that GDP growth should continue to be elevated in 2022, largely due to industry sectors that are still in recovery mode, such as travel and tourism, and arts and entertainment.
BMO recently trimmed its GDP outlook for the U.S., mainly due to elevated inflation risks and the potential effects of the delta variant. Nonetheless, the call is for a robust 6.5% growth in 2021 and 4.3% in 2022.
The labour market has been a point of concern. Even here, though, the longer-term prospects appear to be positive. Johnson said a lot of the slack that currently exists in the labour market will likely be absorbed by the second half of 2022, which should help broaden the pool of new vehicle buyers. Auto demand shifted to higher income households during the pandemic, but an improving employment picture would help demand trickle down to lower income households as well.
A recovery in labour also lines up with the timetable for both countries’ central banks to hike interest rates. The Bank of Canada has penciled in a rate increase for the end of 2022, with the Federal Reserve following suit in early 2023. "What that suggests is we're going to have low interest rates over the near term, [and] that's going to be supportive of things like auto lending and demand,” Johnson said.
Demand Remains Strong
After the turmoil of the past year and a half, Johnson pointed out that the North American auto sector is benefiting from “extremely healthy demand” and, just as crucial, “recuperating supply.” BMO’s projection for U.S. new vehicle sales of 17 million units is on par with 2019 levels. The picture’s a bit different in Canada, where sales in the first half of 2021 were down nearly 4% compared to the same period in 2019. Johnson attributed that to more muted public health restrictions in the U.S., which helped make in-person purchases easier.
The additional fiscal stimulus money the U.S. issued to households earlier this year also helped accelerate auto sales, as did consumers’ ability to adjust their spending patterns.
“Because we saw this dramatic and unusual pattern of consumer spending where we haven't been able to go to concerts or buy a ticket to travel to Europe, consumers have had to channel some of that foreground spending into other parts of the economy,” Johnson said. “One of those that sectors that has certainly benefited a lot has been durable goods and the auto sector in particular. Among the surprises of the past year is that the ability of both households and dealers to adapt during the pandemic has been truly impressive. I think that is part of the reason why this story has been largely positive over the last six months to eight months.”
While demand factors remain strong, Johnson said the delta variant represents the biggest risk factor. “We would be most concerned if the delta variant led to further restrictions on activities, which would certainly slow the recovery,” Johnson said. “The good news for Canada is the high rates of vaccination. We don't see the idea of reimposing significant public health measures to contain future waves of COVID in Canada being a big concern.
“In the U.S., there's a lot more geographic variance in vaccination rates, so there could be a little bit more of a fallout from the delta variant,” Johnson added. “That's much more focused in the South than other parts of the U.S., where there are higher vaccination rates.”
But Johnson noted that the states with higher vaccination rates, such as New York and California, are the ones that represent a larger share of economic activity, and that could dampen any calls for another round of restrictions.
Supply Remains Slippery
While demand drivers remain strong, the biggest drag on the auto sector has been supply. There’s been significant volatility in auto production over the past 16 months, including business shutdowns in the early stages of the pandemic and the global microchip shortage that began last year. Production in Canada for the first half of the year was down 40% compared to 2019. The situation in the U.S. was better, but still off 16% from the first half of 2019.
“The result has been that supply hasn't been anywhere close to being able to keep up with strong consumer demand we've seen for new vehicles, and that's having significant input implications in the sector so far,” Johnson said.
It's also driving prices higher, particularly for used vehicles. While a lot of the market has pivoted to used vehicles, the shifting dynamics of fleet participation is also a key factor.
“Generally, fleets are a net supplier of used vehicles rather than a net purchaser,” Johnson said. "In the U.S. in particular, with fleets not being able to access the new vehicles they normally would buy, they started buying a lot at used vehicle auctions. And because some of them sold some of their fleets at the start of the pandemic for cash flow reasons, you don't have the same kind of inflows into supply.”
The delta variant could have implications on the supply side as well. Right now, it appears as if it’s hitting regions like Southeast Asia harder, which Johnson said could lead to more supply chain disruptions than previously anticipated.
A Positive Outlook
Consumer activity remains healthy, and all indications are that it will remain so (even as some of the pent-up demand begins to fade). Public transit usage, for example, hasn’t rebounded to pre-pandemic levels, which means more households are using automobiles for travel and commuting.
While there’s still uncertainty around how pervasive remote work will be going forward, some of the most recent evidence from the U.S. suggests employees are interested in a hybrid work model going forward. That could drive populations away from central business districts to more outlying areas, where demand for cars would be higher.
“I think we're feeling a lot better about where the world is today,” Johnson said. “What we're seeing in Canada and the U.S. is quite a strong recovery and robust year from a growth perspective.”
For complete statistics on vehicle sales and inventories, as well as insights on the outlook for zero-emissions vehicles, read the full report .
Jamie Gordon, Director of Strategic Initiatives, BMO Automotive Finance, and Paul Hunsley, Head of BMO’s Retail Automotive Finance team, contributed to this article.
Read more
Robert Sadokierski
Former Senior Vice President & Head, Automotive Finance, BMO
One thing is clear: the auto dealer industry is a resilient one. Amid the rollercoaster ride of the last 16 months, dealers have learned a lot about their ability to adapt much faster than they ever would have under normal circumstances.
BMO’s latest semiannual review of the North American auto industry provides our projections for light vehicle sales in Canada and the U.S., as well as the market and economic factors behind those expectations. Erik Johnson, economist at BMO Capital Markets, recently provided more context and insight into the report, including how factors such as the labour market, continuing supply issues and the delta variant of coronavirus could impact the industry.
Macroeconomic Factors
Johnson attributes BMO’s historically high GDP growth projections in both countries to robust consumer demand. In Canada, Johnson noted that more provinces have shifted into reopening mode, which is helping boost BMO’s 2021 GDP growth outlook for Canada to 6%. “Historically, that's certainly quite high,” Johnson said. “You have to go back to the early 1980s to see a number that high.”
Johnson also noted that GDP growth should continue to be elevated in 2022, largely due to industry sectors that are still in recovery mode, such as travel and tourism, and arts and entertainment.
BMO recently trimmed its GDP outlook for the U.S., mainly due to elevated inflation risks and the potential effects of the delta variant. Nonetheless, the call is for a robust 6.5% growth in 2021 and 4.3% in 2022.
The labour market has been a point of concern. Even here, though, the longer-term prospects appear to be positive. Johnson said a lot of the slack that currently exists in the labour market will likely be absorbed by the second half of 2022, which should help broaden the pool of new vehicle buyers. Auto demand shifted to higher income households during the pandemic, but an improving employment picture would help demand trickle down to lower income households as well.
A recovery in labour also lines up with the timetable for both countries’ central banks to hike interest rates. The Bank of Canada has penciled in a rate increase for the end of 2022, with the Federal Reserve following suit in early 2023. "What that suggests is we're going to have low interest rates over the near term, [and] that's going to be supportive of things like auto lending and demand,” Johnson said.
Demand Remains Strong
After the turmoil of the past year and a half, Johnson pointed out that the North American auto sector is benefiting from “extremely healthy demand” and, just as crucial, “recuperating supply.” BMO’s projection for U.S. new vehicle sales of 17 million units is on par with 2019 levels. The picture’s a bit different in Canada, where sales in the first half of 2021 were down nearly 4% compared to the same period in 2019. Johnson attributed that to more muted public health restrictions in the U.S., which helped make in-person purchases easier.
The additional fiscal stimulus money the U.S. issued to households earlier this year also helped accelerate auto sales, as did consumers’ ability to adjust their spending patterns.
“Because we saw this dramatic and unusual pattern of consumer spending where we haven't been able to go to concerts or buy a ticket to travel to Europe, consumers have had to channel some of that foreground spending into other parts of the economy,” Johnson said. “One of those that sectors that has certainly benefited a lot has been durable goods and the auto sector in particular. Among the surprises of the past year is that the ability of both households and dealers to adapt during the pandemic has been truly impressive. I think that is part of the reason why this story has been largely positive over the last six months to eight months.”
While demand factors remain strong, Johnson said the delta variant represents the biggest risk factor. “We would be most concerned if the delta variant led to further restrictions on activities, which would certainly slow the recovery,” Johnson said. “The good news for Canada is the high rates of vaccination. We don't see the idea of reimposing significant public health measures to contain future waves of COVID in Canada being a big concern.
“In the U.S., there's a lot more geographic variance in vaccination rates, so there could be a little bit more of a fallout from the delta variant,” Johnson added. “That's much more focused in the South than other parts of the U.S., where there are higher vaccination rates.”
But Johnson noted that the states with higher vaccination rates, such as New York and California, are the ones that represent a larger share of economic activity, and that could dampen any calls for another round of restrictions.
Supply Remains Slippery
While demand drivers remain strong, the biggest drag on the auto sector has been supply. There’s been significant volatility in auto production over the past 16 months, including business shutdowns in the early stages of the pandemic and the global microchip shortage that began last year. Production in Canada for the first half of the year was down 40% compared to 2019. The situation in the U.S. was better, but still off 16% from the first half of 2019.
“The result has been that supply hasn't been anywhere close to being able to keep up with strong consumer demand we've seen for new vehicles, and that's having significant input implications in the sector so far,” Johnson said.
It's also driving prices higher, particularly for used vehicles. While a lot of the market has pivoted to used vehicles, the shifting dynamics of fleet participation is also a key factor.
“Generally, fleets are a net supplier of used vehicles rather than a net purchaser,” Johnson said. "In the U.S. in particular, with fleets not being able to access the new vehicles they normally would buy, they started buying a lot at used vehicle auctions. And because some of them sold some of their fleets at the start of the pandemic for cash flow reasons, you don't have the same kind of inflows into supply.”
The delta variant could have implications on the supply side as well. Right now, it appears as if it’s hitting regions like Southeast Asia harder, which Johnson said could lead to more supply chain disruptions than previously anticipated.
A Positive Outlook
Consumer activity remains healthy, and all indications are that it will remain so (even as some of the pent-up demand begins to fade). Public transit usage, for example, hasn’t rebounded to pre-pandemic levels, which means more households are using automobiles for travel and commuting.
While there’s still uncertainty around how pervasive remote work will be going forward, some of the most recent evidence from the U.S. suggests employees are interested in a hybrid work model going forward. That could drive populations away from central business districts to more outlying areas, where demand for cars would be higher.
“I think we're feeling a lot better about where the world is today,” Johnson said. “What we're seeing in Canada and the U.S. is quite a strong recovery and robust year from a growth perspective.”
For complete statistics on vehicle sales and inventories, as well as insights on the outlook for zero-emissions vehicles, read the full report .
Jamie Gordon, Director of Strategic Initiatives, BMO Automotive Finance, and Paul Hunsley, Head of BMO’s Retail Automotive Finance team, contributed to this article.
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