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Vehicle Production Drives Rebound in Economic Activity

Vehicle Production Drives Rebound in Economic Activity, as North American Output Jumps to Five-Year High: Scotia Economics

Global vehicle sales continue to strengthen, with volumes, excluding China, advancing six per cent above a year earlier - the strongest gain since February 2011, prior to the tsunami in Japan last March, according to a Scotia Economics' Global Auto Report released today. We exclude China from last month's performance, as sales were impacted by an early lunar New Year, and a clearer picture of the health of the auto market in China will only emerge once data are available for the first two months of 2012.

"Purchases in the United States jumped above an annualized 14 million units last month, for the first time since the 'cash-for-clunkers' program in mid-2009," said Carlos Gomes, Senior Economist and Auto Industry Specialist, Scotia Economics. "The rebound was driven by strengthening replacement demand and, contrary to expectations, was accompanied by lower incentives."

"Sales in Canada also started the year on a strong note, with volumes surging 15 per cent above a year earlier," added Mr. Gomes. "We estimate that purchases totaled an annualized 1.70 million units in January - the best performance since May 2008 and up from a full-year total of 1.59 million in 2011."

Canadian business purchases led the way in January, soaring 74 per cent above last year's depressed level. Consumer activity also improved, posting the best January performance since 2008 - prior to the global economic downturn. Western Canada is outperforming, led by a 22 per cent y/y surge in Alberta. Preliminary data for February point to continued solid gains.

Auto Production Buoys Economic Activity
Stronger-than-expected passenger vehicle sales across North America have prompted automakers to schedule a further increase in vehicle assemblies, providing an additional boost to an economy that has been gaining momentum in recent months.

However, production gains are not limited to North America. Rising sales led to double-digit year-over-year increases in vehicle assemblies in India, Germany and the U.K. last month, while activity rebounded sharply in Thailand following last fall's flood. Production is also improving in Japan, with vehicle output in January posting a double-digit year-over-year increase. Output schedules even appear to be stabilizing in Western Europe, following a double-digit slump in late 2011.

In North America, vehicle assemblies are now scheduled to climb above an annualized 15 million units in the opening months of 2012 - the highest level since 2007. Assembly plants in the United States will lead the gain, with production planned to climb 14 per cent above a year earlier. In fact, vehicle output in the United States exceeded an annualized 10 million units in January - the highest level since early 2008, led by a 64 per cent y/y surge in car production.

Japanese manufacturers also assembled a record number of vehicles in North America last month, as they attempt to reestablish optimal inventories and continue to shift production from Japan to North America to reduce the impact of a strong yen on their financial performance. Assemblies of Japanese models in North America will climb further in coming months as additional product is transferred to North America from Japan. We estimate that rising vehicle output will add nearly a percentage point to economic growth across North America in the opening months of 2012, helping sustain the improved economic momentum that has emerged in recent months.

The auto sector will also continue to be a source of strength over the next several years, as foreign automakers continue to expand and build new production facilities in North America. Once the planned expansions by Japanese and European automakers are completed by 2014, we estimate that North American vehicle assembly capacity will climb to 19 million units - roughly in-line with the level prevailing nearly a decade ago when the Detroit Three began to restructure and shutter some of their facilities.

Article by Carlos Gomes, Scotia Economics.