Revival in global car sales continued in October

The revival in global car sales continued in October, with purchases jumping 6% above a year ago - the largest gain since December. The advance was led by ongoing double-digit year-over-year increases in North America and a quickening in the sales pace across Asia. Purchases also continued to move ahead in Western Europe, though the advance moderated to only 2.5% y/y from a 9% increase through September. In contrast, volumes weakened further in both Russia and Brazil. During October, purchases in these two large economies plunged 37% below a year earlier - the largest slump since the Asian financial crisis of the late nineties.

In fact, the latest tumble in these two markets is nearly double the fall-off at the height of the global economic downturn of 2008/09. While the economic downturn in Brazil is impacting the rest of South America, the sales slowdown in neighbouring countries has been limited to a mid-single digit slide in recent months.

More recent data for North America point to additional solid gains, with volumes in both Canada and the United States climbing to record highs for the month of November. In Canada, car and light truck sales jumped 5% above a year earlier to an annualized 1.96 million units. Light trucks led the way, surging 12% year-over-year and lifting overall purchases to an annualized 1.90 million units so far this year. In the United States, sales remained above an annualized 18 million units for a record-setting third consecutive month. This leaves the industry on target to surpass the previous annual peak of 17.35 million set in 2000. 

While growth in car sales and economic activity has moderated across Asia this year, purchases have started to bounce back and will be buoyed in coming months by improving credit conditions, recent reductions in sales taxes in two large markets and some strengthening in the pace of economic growth. In addition, new orders from the global high-tech sector appear to be in the early stages of a renewed upswing, following an inventory correction in recent months.

Asia has become a key driver of global vehicle sales, with volumes surging at a double-digit pace since the new millennium, largely due to gains in excess of 20% per annum in China. The region now accounts for 40% of global motor vehicle purchases, and the recent sales acceleration is very positive for the 2016 global outlook. The improvement coincides with an upturn in several key leading indicators and suggests that car sales are likely to gain momentum over the coming year. During 2015, purchases in Asia advanced at the slowest pace in nearly a decade.

A double-digit gain in car sales in China was a key driver of the improvement in Asia, and follows a 50% reduction in the sales tax applied on purchases of new vehicles with engine capacity of less than 1.6 litres to 5% from 10%. The tax cut will remain in place through December 2016 and will underpin higher volumes over the coming year.

"We expect the tax cut will help support the purchase of at least an additional one million vehicles in China, helping to lift sales in China by 7% in 2016, a significant improvement from declining year-over-year volumes between June and August", says Scotiabank.

However, the sales gain across Asia was much broader than just the improvement in China. Purchases in both India and Korea jumped 20% above a year earlier and many other countries reported moderately higher volumes. South Korea also cut taxes on new vehicles and large appliances, such as TVs, refrigerators and air conditioners. However, the reduction in South Korea's excise tax was smaller - a 30% drop to 3.5% from 5% - and will only last through the end of the year. The tax cut has already given a lift to economic activity.

The South Korean economy expanded by 1.2% quarter-to-quarter in the July-September period, up from only a 0.3% advance between April and June. The improvement was driven by the fastest pace of industrial production in two years, and a further quickening is expected in 2016.

Importantly, the latest improvement in car sales also coincides with an acceleration of the pace of loan growth across Asia in response to stimulative measures introduced by monetary authorities. For example, central bank rates across Asia have declined by an average of 50 basis points over the past year, led by reductions of 125 basis points in both China and India. These measures have helped boost household loan growth across the region to nearly 14% y/y, from a low of 13% in May.

In fact, household loan growth across Asia is now advancing at the fastest pace since mid-2014 and will support stronger global economic activity over the coming year, especially since it coincides with strengthening loan demand across the euro zone, in the United States and the United Kingdom.

In addition, new export orders for companies in Taiwan are also on the upswing, pointing to a possible rebound in the global high-tech industry, which sources many of its products in Asia. A revival in export orders for communication equipment is leading the way. However, the gain in order volumes is broad based, with semiconductors and electronic equipment bookings also on the rise and helping to reverse the slide in export orders in recent months.

In India, the accommodative stance of the central bank which includes a 50 basis point reduction in interest rates in late September, as well as elevated consumer sentiment helped lift car sales in October at the quickest pace in three years.

"We expect India to take over from China as the fastest-growing auto market in Asia. Economic growth in India is expected to continue to exceed 7% per annum for the foreseeable future, with activity supported by solid domestic demand which accounts for more than 70% of overall economy", projects Scotiabank.

Income growth in India continues to advance at a solid pace, while vehicle penetration remains extremely low. India is home to 17% of the global population, but only 3% of the vehicles on the road. There are only 30 vehicles per every 1,000 people in India - 70% fewer than in China and 96% below the G7 average of 0.69 vehicles per capita.