Canadian Black Book COVID-19 Update – May 11, 2020

May 11 2020
CBB

CBB COVID-19 Update

We begin our latest Canadian auto industry update with some very good news. While there certainly will be many new precautions, restrictions and processes in place to protect everyone in this new normal, for the first time in quite a while, dealers in Ontario and Quebec (outside of metro Montreal) are open for sales. Greater Montreal-area dealers will be able to re-open their sales doors on May 18. Those two provinces represent approximately 65% of new vehicles sales in Canada. In our business, everything stops and starts with auto retailers, and with the sales lights back on, this signals the start of a recovery for our industry.

Canadian Black Book continues to be vigilant, as always, in regard to monitoring wholesale market activity in Canada. There are now consistent positive patterns emerging nationwide. The sale rates at auctions are improving dramatically, since bottoming out over the last several weeks. In the early days of this crisis we were often seeing 10% or less of vehicles in the lanes selling, but this week several auctions were just over 50%. That said, we still believe that buyers and sellers are not on the same page when it comes to pricing; however we do expect there will be more agreement in the market in the coming weeks regarding true prices, in this volatile market.

From a general economic standpoint, there was some unwelcome news last week from Statistics Canada when they released their Labour Force Survey. For April, the unemployment rate rose 5.2 percentage points to 13.0%. This significant climb was after an increase of 2.2 percentage points in March. The April unemployment rate was the second highest level, only to the 13.1% observed in December 1982. It should be noted that the April unemployment rate would be a staggering 17.8%, when adjusted to reflect those who were not counted as unemployed for reasons specific to the COVID-19 economic shutdown.

After the COVID-19 crisis is resolved from a public health standpoint, the lingering effects will be the recession this virus will leave in its wake. With record high unemployment and rock bottom consumer confidence, there will be a pronounced temporary change in behavior for vehicle consumers. Some, but of course not all, will rethink or postpone their vehicle purchases, which will result in the expected decline that analysts, including Canadian Black Book, predict.

April saw a 75% decline in new vehicle sales according to DesRosiers Automotive Consultants. This preceded by a 48% decline in March. If dealers across the country are allowed to operate without more interruptions, albeit with restrictions, we expect that April will be the low water mark in sales and the industry will slowly begin to rebuild itself starting this month.

Our own Canadian Black Book March Used Vehicle Retention Index, which measures the actual retained value performance of 2-6-year-old vehicles across 20 segments, saw its biggest decline ever at 3.3%.  Previously, the largest single month decline was -2.9%, which occurred in Jan 2008. We expect pronounced declines to continue for several months, with a slow recovery in used car values towards the end of 2020.

CBB Retained Value Indes April 2020
CBB's Retained Value Index sees the largest monthly decline since 2008, this past April.

The biggest decliners for April were seen in the Car segments. Compact Cars (-4.8%) led the way down. Following close behind were Sporty Cars (-4.3%), Mid-Size Cars at -2.8% and Full Size Cars (-2.5%).  Even the highly popular Compact Crossover/SUV segments lost -2.3% of value on average. These declines are significant given that the average monthly variation is typically very small, often well below 0.3% for a given segment.

The Canadian dollar has strengthened from a low of $0.69 in late March to $0.72 against the US Dollar as of writing this update. This remains very positive news for used car prices, as there is still a significant profit opportunity for export of used vehicles to the United States market. Last year, there were still almost 300,000 used vehicles shipped from Canada to the U.S. according to DesRosiers Automotive Consultants. This is a critical aspect of the used vehicle ecosystem in Canada. The large number of units being shipped out of the country each year keeps supply down and prices up. Today the question mark for export is when demand will rebound south of the border, as the car business also commences recovery, in that market.

Our Industry Outlook:

For new car sales, Canadian Black Book foresees two possible scenarios for the impact on the wholesale value market and our residual value forecast. Our outlook has remained unchanged over the past several weeks.

A) Most Likely Scenario

-Negative GDP growth for Q1 through Q3 that leads to a very large drop in consumer confidence and a jump in unemployment to double digits, which results in a 25% drop in new sales in 2020 to 1.436 million units

-We project a drop in wholesale prices by 17% of 1-6-year-old vehicles compared to a pre-virus baseline in Q3/Q4 as the economy starts to recover from the effect of COVID-19. This would be a:

-18% drop for SUVs, vans, and light trucks
-15% for cars 

-36 months from now, the effect of the pandemic will be felt, but we project that values will return to close to pre-virus levels, with only a small impact on wholesale values

-Our residual value forecast will drop by 4% to 0% (no negative adjustment) depending on the term of the residual and the vehicle segment

B) Severe Recession Scenario

-Scenario B is created by a prolonged social separation policy due to COVID-19 that stretches into late summer/early fall. This scenario could also be brought on by a prolonged feeling of insecurity by consumers. What follows will be deep recession, which will result in a 40% drop in new sales in 2020 to 1.149 million units

-Under this scenario, we project a drop in wholesale prices of 1-6-year-old vehicles compared to a pre-virus baseline of 25%.  This will be a:

-26% drop for SUVs and light trucks
-22% drop for cars.

-Looking forward in Scenario B, 36 months from now we expect the effect of the pandemic and resulting recession will still be felt. We project a 10% market level decline of wholesale prices compared to pre-virus projections

-Our residual value outlook would then decline between -7% and -2%, depending on the term of the residual and the vehicle segment