A look back at the year that was, and a look ahead at what dealers can expect in 2024 for vehicle sales.
As we rapidly approach the end of 2023 and the start of a brand-new year, I thought the moment was right, once again, to go over the major economic trends surrounding our industry. Many of you are looking ahead at 2024 with a lot of optimism, hoping to build on the business momentum observed over the last few months.
Indeed, the last year has been extremely productive for automobile dealers across the country. The increase in sales was not only significant, but it was sustained! In fact, the auto retail industry managed to string together 12 straight months of positive sales compared to the year before.
This was possible because a lot of things have occurred at the same time that are, generally speaking, good for automobile dealers: demand remained relatively strong, manufacturers were able to provide dealers with the most sought-after models and buyers weren’t being entirely deterred by the current environment where high interest rates are the norm.
DesRosiers Automotive Consultants have also recently presented an extremely interesting nugget of information: the year 2015 is the last time where we saw something similar in terms of sustained year-to-year growth in automotive sales. At that time, the month of November saw the end of a 32 month growth streak.
This positive development also isn’t tied to one or two major economic regions, sales growth has been shared across provinces over the last 12 months. More often than not, sales increases observed in Ontario or Quebec do not necessarily translate to the smaller markets like the ones in Atlantic Canada. Usually, lack of supply dictates the dealership’s ability to meet demand which results in fewer sales than other bigger provinces.
Well, if we take September for example, that narrative has been flipped entirely with PEI showing an increase of 39 per cent year-to-date in new light vehicle sales. Nova Scotia recorded a 28.6 per cent increase and Newfoundland, while having the smallest sales increase of all Canadian provinces, still saw a 10.3 per cent increase for the year.
There are multiple variables that could explain this, but it is obvious that manufacturers have been progressively catching up in terms of overall production. There are even specific brands production targets that overshot the current market demand, resulting in more inventory being spread out across smaller markets.
Now, the real question is if we can expect this momentum to be sustained over the first half of the upcoming year? Well, underlying indicators seem to point to the fact that our economy is in a tip of the iceberg scenario and that a severe downturn is still very much in play.
The National Bank of Canada produced a report where it was determined that 43 per cent of the interest rates hikes still haven’t been felt on current consumption. As the effects of interest rate hikes keep being more apparent on consumer paychecks, important budgeting decisions will have to happen and this could very well reduce consumers’ interest in purchasing a new vehicle.
Many economists have been predicting such a scenario for months now, but we now have quantitative and Canada-centric data on the delayed effects of interest rate increases. When sales numbers are as positive as they have been recently, there is a risk for a disconnect to happen between economic forecasts and what is being observed on the ground. Automobile dealers have to be wary of that and plan ahead with a proper understanding of how — and when — interest rates can affect consumption.
Data also shows that Canadian retail sales in real terms have generally been going down since the start of 2023 with the sharpest sales drops occurring over the last five weeks.
While the auto retail industry has benefited from pent-up demand accumulated over the period where inventories were practically non-existent, it is fair to assume the auto market could quickly readjust towards a more balanced state where supply levels keep increasing and consumer demand stalls.
Finally, the Canadian economy has recorded a quick increase in unemployment rate of almost one per cent since Q2 of 2023 — which also should be seen as another factor driving demand and retail sales down.
This past year was a much needed one as there was shared impatience between auto dealers and consumers regarding the lack of inventories. The increased vehicle production allowed automobile retailers to catch-up and meet this pent-up demand. This positive sequence of events, however, has generated a short-term sales bubble for our industry that could start its deflation as early as Q1 or Q2 of 2023.
Being informed on the evolution of the market through quantitative economic forecasts will be crucial for automobile dealers that want to make decisions and plans ahead of this downturn instead of being caught in a tough situation after months of positive sales results.
1 DesRosiers Automotive Consultants, Provincial Sales September 2023
2 National Bank of Canada, Canada :
Signs of weakening labour market continued in October, 2023