GLOBAL ECONOMICS GLOBAL AUTO REPORT

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1 Rising Gasoline Prices A Minor Setback For Consumer Spending GLOBAL PURCHASES ACCELERATE IN APRIL Global auto sales gained significant momentum in April. Volume growth accelerated in most regions and sales rose.% y/y, up from a.3% y/y increase during the first quarter. South America led the advance, with sales surging 7% y/y, but Asia and Eastern Europe also reported 11% y/y gains. The latest advance leaves year-to-date global volumes up 3.3% through April, in line with our 01 calendar year forecast. Canada was a notable exception, with purchases edging down year-over-year for the second consecutive month, and falling below an annualized mn units for the first time since December. The fall-off was broadly-based, with volumes declining below a year earlier in most provinces. Manitoba was the exception, with sales rising 19% above a year earlier in April, bolstered by sharp gains in business purchases. Sales moved higher in all other major markets, with US purchases remaining above an annualized 17 mn units in April for the eighth consecutive month, supported by a 9% y/y jump in commercial volumes due to an improving economic outlook and strengthening business confidence. During 017, business purchases edged up only 1.% y/y and rental volumes slumped 1%, the largest fall-off since 009. Auto sales in China, the world s largest vehicle market, revved up to 1.% y/y last month, the largest advance since February 017. The acceleration is being buoyed by strengthening household wealth, near-record consumer confidence and strongerthan-expected industrial activity and house prices. In April, house-price gains broadened out to large cities in China, up from an average of 0 cities during the first quarter. This represents the most broadly-based house price appreciation since last June. Activity also gained momentum across Western Europe last month, with half of the countries reporting double-digit year-over-year sales gains. This represents the best performance of the past year, and confirms that the weakness reported in March was a temporary aberration. Income gains continue to accelerate across Europe, and are now rising at the fastest pace of the past decade. SOLID INCOME GAINS OVERWHELM RISING GASOLINE COSTS CONTACTS Carlos Gomes Scotiabank Economics carlos.gomes@scotiabank.com To Clients, Colleagues and Friends: This will be the last Scotiabank Global Auto Report published under my name, as I will be retiring from Scotiabank on June 1 st. It has been a privilege to cover the auto sector and write the Scotiabank Global Auto Report and its predecessor publication during my tenure at Scotiabank. I trust that you will continue to find the report informative under new authorship. Chart f * Assumes 0% y/y increase in gasoline prices. Sources: Scotiabank Economics, BEA, Statistics Canada. Chart Gasoline Spending as a Share of Household Income % of PDI Canada US Diverging Gasoline Demand forecast* US gasoline prices are approaching USD 3/gallon, a level similar to prices that prevailed in the final months of 007, as the previous global economic expansion was coming to an end. The recent surge in gasoline prices has led some commentators to suggest that auto purchases and overall consumer spending could be dampened in coming months, potentially leading to an economic slowdown. We highlight that rising gasoline prices are likely to have limited impact on consumer spending both in the United States and around the world, as household incomes are accelerating in most regions and balance sheets continue to improve. The latest surge in gasoline prices has led to roughly an 1% y/y jump in prices in the US and in many other countries. We looked at past periods of similar 3 000s of US litres per vehicle US China Sources: Scotiabank Economics, Bloomberg, Wards Automotive Reports. 1

2 increases to gauge the historical impact on auto sales and overall consumer spending. We found that gasoline price increases of at least 0% y/y occurred six times during the past twenty years. During most periods, the impact on consumer spending was limited due to ongoing income gains. Sharp run-ups in gasoline prices only provided a significant drag on household activity during 000 and 00, when households were also facing slowing income growth, which dampened their ability to make discretionary purchases. In contrast, wage and income gains in the United States are currently advancing at the fastest pace in three years, while strengthening global economic growth is lifting incomes and reducing unemployment around the world. Though gasoline prices are rising faster than incomes, the added gasoline costs represent a small share of the overall increase in earnings. For example, a 0% jump in gasoline prices translates to an additional annual spending of USD per US household. This represents only about 9% of the projected increase in US household incomes this year. In contrast, prior to the 001 recession, the added cost of filling up a gas tank absorbed 3% of the increase in household incomes. Furthermore, even with the latest jump in energy costs, spending on gasoline only accounts for % of overall disposable income in the United States, well below the 3% required from 00 through 013, prior to the collapse in global oil prices in mid-01 (chart 1). The impact of rising gasoline prices will be proportionately larger on Canadian households, as prices are higher north of the 9 th parallel and gasoline absorbs a higher share of household income (chart 1). We estimate that on average, the 0% y/y increase in gasoline prices translates into an additional expenditure of CAD 0 per Canadian household this year. This represents roughly 1% of the projected increase in Canadian household incomes, roughly double the burden of US households. However, Canadians typically drive less than Americans. Data from Bloomberg implies that Canadian households consume roughly % less gasoline per year than their American counterparts. VEHICLE-OWNERS DRIVING LESS IN CHINA Households in the rest of the world are less exposed to rising gasoline prices, as vehicle-owners typically drive much less than their North American counterparts, limiting the effect of gasoline prices on household spending. For example, estimates imply that Germans only spend 1% of their annual income on gasoline, only one-third of the share of Canadian households and roughly half that of their American counterparts. The number is similar for Brazilians, and is even lower across Asia. According to data from Bloomberg, the nearly 3 mn barrels of gasoline consumed annually in China is less than one-third of the consumption in the United States, and per-vehicle demand has been steadily declining (chart ). As a result, gasoline absorbs only 0.% of household income in China, significantly less than in most jurisdictions. INTERNATIONAL CAR SALES OUTLOOK (millions of units) f TOTAL SALES North America* Canada United States Mexico Western Europe Germany Eastern Europe Russia Asia China** India South America Brazil *Includes light trucks. **Includes crossover utility vehicles from 00. Sources: Scotiabank Economics, Ward's Automotive Reports, Bloomberg.

3 CANADA/US MOTOR VEHICLE SALES OUTLOOK Average Jan-Mar ** Annual f (thousands of units, annualized) CANADA 1,39 1, 1,99,01,0,000 Cars Domestic Imports Light Trucks ,7 1,397 1,0 1,390 (millions of units, annualized) UNITED STATES Cars Light Trucks NORTH AMERICAN (millions of units, annualized) PRODUCTION* CANADA UNITED STATES MEXICO *Includes light, medium and heavy trucks. **Canadian sales are Scotiabank estimates. Sources:Ward's Automotive Reports, Statistics Canada. VEHICLE SALES OUTLOOK BY PROVINCE* (thousands of units, annual rates) Average Jan-Mar ** Annual f CANADA 1, 1, 1,99,01,03,000 ATLANTIC CENTRAL 93 1,03 1, 1,300 1,337 1, Quebec Ontario WEST Manitoba 9 1 Saskatchewan Alberta British Columbia *Includes cars and light trucks. **Scotiabank estimates. Sources: Statistics Canada, Canadian Vehicle Manufacturers' Association. 900 thousands of units Ontario Quebec VEHICLE SALES BY PROVINCE thousands of units Atlantic Alberta British Columbia thousands of units 0 0 Manitoba 0 30 Saskatchewan Includes cars and trucks (light, medium and heavy). Shaded bars indicate U.S. recession periods. Source: Statistics Canada. 3

4 AUTO MARKET SHARE BY MANUFACTURER CANADA* Jan to Apr Jan to Apr Apr Apr Units % of Total Units % of Total Units % of Total Units % of Total TOTAL Big Three General Motors Ford Chrysler Japanese Honda Toyota Nissan Mazda Mitsubishi Subaru Hyundai Volkswagen Kia BMW Mercedes-Benz Other *Source: Dealer sales from the Global Automakers of Canada. TRUCK MARKET SHARE BY MANUFACTURER CANADA* Jan to Apr Jan to Apr Apr Apr Units % of Total Units % of Total Units % ot Total Units % of Total TOTAL Big Three General Motors Ford Chrysler Other Domestic Japanese Honda Toyota Nissan Mazda Mitsubishi Subaru Hyundai Kia Other Imports LIGHT TRUCKS *Source: Dealer sales from the Global Automakers of Canada.

5 AUTO SALES BY PROVINCE Jan to Mar Jan to Mar Mar Mar CANADA ATLANTIC Newfoundland Nova Scotia New Brunswick Prince Edward Island CENTRAL Quebec Ontario WEST Manitoba Saskatchewan Alberta British Columbia Source: Statistics Canada. TRUCK SALES BY PROVINCE* Jan to Mar Jan to Mar Mar Mar CANADA ATLANTIC Newfoundland Nova Scotia New Brunswick Prince Edward Island CENTRAL Quebec Ontario WEST Manitoba Saskatchewan Alberta British Columbia *Light, medium and heavy trucks. Source: Statistics Canada.

6 CANADIAN MOTOR VEHICLE PRODUCTION Jan to Apr Jan to Apr Apr Apr TOTAL CAR Chrysler GM Honda Toyota TRUCKS* Chrysler Ford GM Honda Toyota Others *Light, medium and heavy trucks. Source: Ward's Automotive Reports. 3. quarterly Canada Motor Vehicle Production 3. 0 Canada World Auto Trade Balances billions of dollars Total Assembled vehicles Total 0 1. Cars Trucks* Parts Millions of units, seasonally adjusted annual rates. *Light, medium and heavy trucks. Source: Ward's Automotive Reports. 01 data are January-March annualized. Source: Statistics Canada.

7 New & Used Car Prices Scotiabank Car Price Indicators Canada Used* year-over-year per cent change 1 New 1 CPI *Scotiabank estimate from Canadian Black Book data. Sources: Canadian Black Book, Statistics Canada. Scotiabank Car Price Indicators Canada thousands of dollars by age of car, seasonally adjusted Year 1 Year Year Scotiabank estimate from Canadian Black Book data. Scotiabank Car Price Indicators United States year-over-year per cent change 1 Used 1 - New CPI Consumer price indices for new and used cars. Shaded areas indicate recession periods. Source: U.S Bureau of Labor Statistics. 7

8 CANADIAN CORPORATE FINANCIAL PERFORMANCE MOTOR VEHICLE DEALERS AND REPAIR SHOPS Net Income Pre-Tax Inventory Interest Debt/ Return on After Tax Profit Turnover Coverage Equity Shareholders ($ mil) Margin (%) Ratio Ratio Ratio Equity (%) Annual Quarterly at annual rates 017Q Q Q Q Q Average (9 17) Low (9 17) Definition of Ratios: Pre-tax Profit Margin: pre-tax income/sales Inventory Turnover Ratio: sales/inventory Source: Statistics Canada. Interest Coverage Ratio: (pre-tax income and interest payments)/(interest payments) Debt/Equity Ratio: (short-term and long-term debt)/total equity Return of Shareholders Equity: after-tax income/total equity number of bankruptcies Retail Auto Dealer Bankruptcies Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. 0 New car dealers only; cumulative total during the year. Source: Office of the Superintendent of Bankruptcy.

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