A look back at the year that was and a glance ahead to 2018
Welcome to a new year!
First, the bad news: there’s a good chance we’ve started the first year in six that won’t set (yet) another new record for new vehicle sales in Canada.
Though the economy has been on a very hot streak in recent quarters, it’s difficult to predict vehicle sales will continue to outpace growth year after year, particularly given our first two million market in 2017.
If you accept, as most do, that we cannot possibly set a new record every year, then it follows that one year, likely soon, sales will decrease. But whether we’re up a half point or down a point this year versus last, the industry remains in a very strong position heading into a new year.
Potentially bad news out of the way, the rest of the column should help your January blues with some happier content.
Though November and December were ever-so-slightly down in terms of monthly year-over-year sales to close out the year, we did indeed comfortably break the two million threshold last year.
This represents the fifth consecutive year of record new vehicle sales in Canada, with consumers continuing to take advantage of the incredible value proposition in our industry today. Dealer revenues, at close to $120 billion, grew even faster than sales as consumers increasingly opted for trucks and SUVs versus cars, which continue their years-long slide down the sales ladder.
The final quarter of the year saw what can only be described as a jobs boom, with 80,000 positions added to payrolls in November alone. This brought the unemployment rate down to below six per cent for the first time in almost a decade.
Of course, the jobs market is tightly correlated to the vehicle market: if you have a job, usually, you need a car to get to it. If you need a car, you need a job to pay for it. No surprise, then, that record job numbers went hand in hand with record car sales in 2017.
But whether we’re up a half point or down a point this year versus last, the industry remains in a very strong position heading into a new year.
That said, job growth is what’s known as a “lagging indicator.” That would be econ-speak for something that happens after the fact. The 80,000 jobs that were created in November, for example, were mostly a result of what happened to those firms from, say, August to October, and less of what those firms expected to happen in December and beyond.
Of course there are exceptions to this — such as retailers jobbing up ahead of Christmas — but for the most part, strong job creation is a manifestation of what happened in the past as opposed to what is expected in the future.
Low unemployment is also usually associated with higher inflation and interest rates, which could put a damper on a finance-heavy industry like autos. However as yet, long-expected higher inflation does not seem to be on the horizon.
Though job growth has been strong, overall economic growth has been modest (+1.7 per cent in Q3). The Bank of Canada is also cognizant of tighter federal rules around mortgages in its interest rate decisions, and will therefore approach its policy with caution this year absent an unexpected inflation spike.
Monetary policy matters, as does government policy. Though it has not yet moved into the space actively, the federal government is increasingly aware of the trend towards ultra-long amortization in the auto industry.
It is also very concerned about deepening levels of consumer debt. We have seen multiple moves from the federal government on housing finance in the past decade, so they are not shy about regulating. I don’t predict any action on finance regulation this year, but it is always a possibility simmering on the back burner of the industry.
In the end, all the fundamentals that have brought us to two million remain in place this year.
I offer no predictions on where we will land in 2018, but if we dip slightly below two million this year, we will still be in a very healthy place. Regardless of sales numbers, revenues are almost certain to increase again, as consumers opt for larger and pricier vehicles still in 2018. Let the good times roll.
