As 2023 approaches the midway point, it appears there are as many reasons for optimism about new-vehicle sales as there are for pessimism for what lies ahead.
North American production is ramping up, demand remains high, and vehicles sold at a faster pace in May compared with April, according to J.D. Power Canada. Scotiabank Economics, however, issued a series of warnings in its June 7 Global Auto Report.
“Sticky core inflation, along with still-tight labour markets and activity in the housing market picking up, pose headwinds,” the financial institution said.
The statement came minutes before the Bank of Canada raised the overnight lending rate by 25 basis points to 4.75 per cent, the highest it has been since 2001.
New-vehicle sales were up about 13.5 per cent in May compared with the same month a year ago, according to estimates by DesRosiers Automotive Consultants (DAC). It said automakers sold an estimated 160,000 units, compared with 140,725 in May 2022.
‘RETAIL VELOCITY IS STILL QUITE FAST’
The number of days it took for a vehicle to turn in May stood at 41, slightly less than April’s 43 days.
“While we’ve been slowing down for the past six months, this retail velocity is still quite fast compared to historical norms, pre-COVID, or 60 to 75 days to turn [in 2019],” said Robert Karwel, senior manager of the automotive practice at J.D. Power Canada.
J.D. Power is “cautiously optimistic” about the final seven months of the year, Karwel said. “Indicators are generally pretty good so far, and I think we’ll sell more vehicles this spring and indeed this year in Canada,” he said.
Scotiabank forecasts 1.7 million sales in 2023, unchanged from a month ago. It expects 1.83 million in 2024 “as inflation comes down and rates pressures ease.”
“It all lends credence to the unmet-demand theory,” Karwel said.
Karwel's forecast is slightly lower, however.
"I'm sticking to 1.63 million because we aren’t out of supply disruptions, and the full-size truck market is already cooling," he said. "So better than last year, but not a massive improvement."
Still, retailer performance remains “quite good, with high margins [and] high F&I sales,” he said.
Trade-in values and down payments remain high, offsetting the rising interest rates at banks and the higher rates currently being offered by automakers through their captive lenders, Karwel said.
Demand for brands with a lot of body-on-frame product — typically large pickups and SUVs — is slowing because monthly payments and interest rates are rising, he said.
DEMAND STILL OUTPACING SUPPLY
The average transaction price of a new vehicle stood at $49,000 in April. May numbers aren’t yet available.
“Brands who dominate in small SUVs and cars are turning as fast as ever, and they cannot produce enough vehicles,” Karwel said.
May marked the second month this year in which sales were up over 2021 numbers, which were higher than in 2022 in all but November and December.
DAC said that May is usually the strongest sales month of the year. From 2010 to 2019, May took the crown eight times.
“The last three years have seen very different sales patterns, however, with first the pandemic and then the semiconductor shortage, meaning that the traditional spring selling season failed to materialize,” DAC said in a statement.
May this year was “definitely a positive sign of improved vehicle availability across a broader array of manufacturers,” said Managing Partner Andrew King.
However, the latest May total marks a 21-per-cent decline from 2019, when automakers sold 203,343 new vehicles. That was the last May before COVID-19 arrived and the microchip and inventory shortages began to take hold.
“While May 2023 did offer hope, it should be noted that there is still a long way to go,” DAC said.
Scotiabank Economics said that while auto sales are up 3.7 per cent for the year to date compared with 2022, they are falling behind the pre-pandemic pace and are now down 18.5 per cent year-to-date compared with 2019.
However, increased output is helping.
“The upward trend in North American light-vehicle production is helping alleviate supply-side pressures to auto sales,” the report said.
The seasonally adjusted annual rate of North American light-vehicle production reached 16.2 million vehicles in April, the latest month for which data is available, Scotiabank said. That’s the highest seasonally adjusted number since July 2020, when production picked up after the first wave of pandemic-related lockdowns, the bank said.
“I think we were all just waiting to see how the seasonal spring market in Canada would start to shape up,” said J.D. Power’s Karwel. “Do we have enough incentive spending? Do we have enough retail units? Is demand still unmet and still out there? These are all the questions we were waiting to find answers to with greater clarity heading into the May-June market.”