SOURCE: Scotiabank

Scotiabank

June 30, 2016 08:30 ET

Global Auto Production Gains Momentum in the Second Half of 2016: Scotiabank

Broad-Based Increase Will Buoy Economic Activity

TORONTO, ON--(Marketwired - June 30, 2016) - Global car sales posted another solid advance last month, climbing 4% y/y and continuing the string of strong gains since last September. Western Europe and China led the way, with both regions posting double-digit advances in May.

While the economic and sales outlook has become more uncertain in the aftermath of the recent U.K. referendum, volumes across Western Europe have advanced a stronger than expected 9% y/y through May -- the largest increase in nearly two decades. The improvement reflects increased replacement demand and a strengthening labour market, which will continue to buoy sales even as activity begins to falter in the U.K.

"Rising sales will lift vehicle production across most of the world in the second half of 2016, providing a welcome boost to industrial activity," said Carlos Gomes, Senior Economist and Auto Industry Specialist at Scotiabank. "This comes at a time when heightened economic and political uncertainty is dampening overall economic growth."

North America will lead the way, with assemblies in the July-September period scheduled to post the largest quarter-to-quarter increase in more than two years. However, assemblies are also moving higher across Asia and Europe, supporting manufacturing activity which has staggered into the summer.

While North American vehicle production and overall industrial activity has been sluggish in recent months, we expect factory floors to become busier during the summer, with a record number of vehicles scheduled to be built during the July-September period. We estimate that the annualized production rate in Canada, the United States and Mexico will climb to 18.9 million units during the summer, up from 17.9 million between January and May.

Rising vehicle production is expected to add half of a percentage point to economic growth in the United States in the third quarter, the largest increase in more than a year. The impact will be even greater in Mexico, with third-quarter assemblies scheduled to jump 5% above a year earlier. The sharp gain reflects the inauguration of a new facility in Nuevo Leon, and the restart of an assembly plant in Tolluca, following several months of retooling.

New orders for vehicles from assembly plants in Germany and Spain recently jumped to the highest level in more than five years. Vehicle production is even outperforming in the U.K., with assemblies jumping 16% y/y in April. Overseas demand for British-made cars is driving the improvement, accounting for roughly 80% of overall production.

Passenger vehicle sales in China have outpaced production gains this year, enabling automakers to reduce inventories to only 1.4 months' at the end of May, down from 1.7 months' a year ago and a peak of nearly 2 months' in early 2015. Sales have also gained momentum in the rest of Asia, with volumes excluding China, advancing in May at the fastest pace since late 2015.

Read the full Scotiabank Global Auto Report online at: http://www.scotiabank.com/ca/en/0,,3112,00.html.

Scotiabank provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

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