By: Brian Murphy, VP Research & Analytics, Canadian Black Book
At the mid-point of this year that is 2020, it seems a logical time to take stock of the status of the automobile market in Canada so far. Given all that is going on globally, with respect to the COVID-19 pandemic, it’s difficult to determine where to begin. I’ve been providing analysis about the crisis and what it means to the auto market since it began, and am now running out of adjectives to describe it all. Yes, it really is that bad. I am sorry to say. How else could one describe a crisis that has cost over 8,700 Canadians their lives and over a half a million souls globally? I keep recalling the famous quote from Winston Churchill, “If you are going through hell, keep going.” These seem appropriate words for all of us at this time.
Before 2020 began it was our outlook at Canadian Black Book (CBB) that there was a greater probability of recession looming. We had spoke about that potential at our annual TalkAuto conference in November. In the summer of 2019, the bond yield curves had become inverted in the U.S. bond market. This is a fancy way of saying that short term bonds were paying a higher rate than long term bonds, which in the past has been a predictor of a U.S. recession 100% of the time. Historically this, of course, spills over to the Canadian economy. What was not expected was the shockwave caused by a virus humans had not seen before, but we would all feel the impact of it.
Initially industry media reports trickled in regarding a virus in China that was going to affect manufacturing of cars and parts. At the time this was expected to cause some regionalized issues with supply. Ford and GM then blocked their employees from travelling to China for the sake of safety. Then only a month later the world realized it was not an isolated problem, but a global one.
New Car Sales
The year started well enough with new car sales up by 1.4% in January and February. At the time sales appeared better than expectations, except for the in B.C., which was down by 7.5%. Since then new car sales results have been like that report card you dread your parents seeing. March was down by 48%, followed by a 75% dip in April and 44% in May. On July 5th sales for June were reported by DesRosiers Automotive Consultants who shared that the industry is now down by 34.3% for the year, and 16.2% for June. So far this year the industry has sold 336,114 fewer cars than the same time last year.
There are many reasons for the decline, some obvious and some are a bit more below the surface. With so many vehicle retailers closed, for a time, vehicles could not be sold and delivered. Lease returns stopped, so did new leases to replace them. Even more critical, to both new and used car sales, was that consumer confidence sunk at record rates. According to the Conference Board of Canada, 57.5% of Canadians feel this is still a bad time to make a big purchase, and cars are a big purchase.
In the background, corporate rental fleet sales are seeing what is most likely going to be the worst year ever. Fleets account for a about 15% of sales per year and rental cars account for a substantial 10%. Given the environment many businesses are looking to preserve cash flow and not invest in new vehicles. As far as rental cars are concerned, the global travel business has been devastated and demand for rental cars is on pause until 2023 according to the International Air Transport Association.
Used Car Sales and Wholesale Values
According to Statistics Canada, used car sales in Canada (reported in dollars) as of April 2020 have fallen by 66% since April 2019 and by 67% since February. With many auto retailers closed on a compulsory or optional basis, and auction activities shut down, there were no customers at that time and therefore very little movement of product.
At Canadian Black Book we have witnessed used car wholesale values fall in a way that we thought was bordering on the impossible. Our retained value index, which tracks 2-6 year old vehicles has fallen by 7.2% since January. For reference, this same index has seen strong growth since June of 2010. Typically changes month over month are small. The bubble has burst. However, in the last few weeks we have seen values begin to strengthen. The last week of June saw values begin to reverse their downward spiral with Car segments increasing by 0.02% and Trucks by 0.18%.
It is our outlook that values will continue to fall. Today we are at a decline of -7.2 percent, and we expect a further 10% drop before values stabilize and start to climb back up in a more permanent way. At the moment there is a pause in the downturn in values, but with weak consumer confidence, although improving, and the economy in recession, we expect car buying will be put on pause for many Canadians.
As a result, we lowered our residual value forecast back in May around 4%, for 12 month residuals out to no adjustment at 60 months, where we predict COVID-19’s impact would no longer be felt.
The Economic Outlook
At the end of June the Conference Board of Canada Released their summer report (Canadian Outlook Summary, Summer 2020) which provided their view on Canada’s current economic state and the future outlook. The Board expects that the final result will be an 8.2% contraction for the Canadian economy in 2020. That would make it the worst annual contraction on record. At the lowest point, nearly 3 million Canadians had lost their jobs. On a positive note, The Conference Board does feel that the worst of the recession is now behind us. The economy is forecast to strengthen by 6.7 per cent in 2021 and then by 4.8 per cent in 2022.
Some more good news this past week came in the form of strengthening consumer confidence, which is critical to the auto sector. The Conference Board of Canada’s Index of Consumer Confidence increased this month to 79.7 which is approximately two-thirds of its pre-COVID-19 mark. It is important to note, that Canadians are still cautious about making major purchases. As of this most recently consumer confidence study, be aware that more Canadians feel pessimistic about making a major purchase today at 57.5% than during the peak of the 2008 financial crisis when it was 54.3%. Consumer confidence will be a critical indicator over the coming months and seeing some improvement is welcome news.
Our team at Canadian Black Book expects that sales for the year will post an overall decline of 25%. For this to happen, sales for the remaining months of the year will need to strengthen greatly compared to the results for first and second quarters. We still expect car sales to be around 1.436 million cars, a shocking half million units fewer than last year.
For used car sales, we expect a downturn in sales, however not to the same extent as new car sales. Used car sales have the advantage of inherent affordability and not being impacted by fleet and rental car purchases. As many household struggle, we expect that a used car will make a smart substitute for many. Furthermore, the low Canadian dollar makes for an ideal environment for exporting vehicles to the U.S. market where prices remain much higher than here in Canada.
We expect the recovery to commence at the end of this year, and know it will take a while. The path to longer term economic stability includes the continued support of the various levels of government and the availability of a viable vaccine for COVID-19. Yes, we are going though a collective type of hell. However, we should keep going, stay healthy and look forward to a much more friendly 2021. Please wear a mask, keep your distance, and wash those hands. It is good for your health and good for business.