TRENDS

By Chris Chase

WITH THE TRANSITION FROM WINTER TO SPRING comes some hope for car dealers and consumers: Auto industry analysts predict that supply-chain constraints will ease this year and lead to longer-term stability in the used-vehicle marketplace in Ontario and nationwide.

Predictions are also positive for the economy at large, as the Bank of Canada is confident that inflation will continue to fall and make life more affordable in all sectors of the marketplace.

Canadian used-vehicle wholesale values stable, U.S. wholesale prices on the rise

As of March 2023, the Canadian Black Book (CBB) Used Vehicle Value Retention Index was at 158.0 points. That’s down 0.6 points compared to our last market update and 7.4 points lower than the index’s peak a year earlier, but the index has held steady around the 158.0-point mark since October of last year. According to David Robins, CBB’s Principal Automotive Analyst and Head of Canadian Vehicle Valuations, that points to “overall stability as the economy continues to show strength and the U.S. wholesale market heats up.” have risen about 12 per cent since January 2023 to an average of $16,525.

According to Adesa Analytical Services’ most recent update on March 19, 2023, wholesale used vehicle prices in the U.S.

As of the week of April 24, the Canadian dollar was trading at nearly US$0.74, down about a tenth of a cent compared to our last market trends update. While that exchange rate theoretically remains favourable to U.S. dealers sourcing inventory from Canadian auctions, the downward trend in Canadian wholesale values suggest it’s having a less pronounced effect than it was earlier in the pandemic.

However, there are conflicting opinions on how the Canadian dollar will fare through the rest of 2023: Some economists think it could go as high as $0.77, while others predict a weaker performance that could see it drop below where it is now.

Positive outlook for semiconductor microchip production

According to a KPMG survey of the semiconductor industry, the outlook for 2023 is mostly positive, with semiconductor executives confident the chip shortage will ease by the middle of this year. Meanwhile, about a quarter of those executives “believe there is already an inventory excess and the chip supply shortage is over.”

KPMG says that, for the first time in its research, “the automotive sector is considered the most important revenue growth driver for semiconductor companies.” The growing popularity of electric vehicles (EVs) – driven in part by forthcoming regulations aimed at reducing tailpipe emissions – is behind much of that demand. The KPMG survey also points out that some automakers are “building more direct relationships with chip companies” to help guarantee a more predictable supply of chips and alleviate new-vehicle production shortfalls, and some carmakers are even developing inhouse chip production capabilities.

Inflation is coming down, but some consumer goods prices continue to rise

As of the second half of April, inflation was at 4.3 per cent, down from the 6.3 per cent we reported in our last update. According to Bank of Canada Governor Tiff Macklem, who testified in front of the Senate of Canada’s Banking, Commerce and the Economy Committee in April, the central bank has been working toward moving the rate of inflation back to a target of 2 per cent. But part of the bank’s challenge will come from businesses working to reinforce their supply chains against geopolitical and pandemic-related disruptions.

“That will, inevitably, add cost through that adjustment period. That’s going to be a factor that will make it harder to bring inflation down,” said Macklem. “In our own forecast, we have it coming down quickly to 3 per cent, but getting from 3 per cent to 2 per cent takes some time.”

Macklem went on to say that despite that challenge, those more resilient supply chains will have a direct benefit to the economy in that there will be “fewer supply bottlenecks . . . impacting prices, so there will be less variability of inflation.”

Meanwhile, Statistics Canada data says the price of gasoline, and transportation costs generally, have increased since we compiled our last market update at the beginning of 2023, and the Consumer Price Index, which tracks changes in the cost of living across Canada, has been on the rise through the first three months of 2023 after briefly stabilizing in December 2022.

Supply-chain bottlenecks still to blame for elevated vehicle prices

Canadian Black Book says its average used vehicle listing price fell by $500 to $36,000 in the first part of 2023. That marks a slowdown from late 2022, when the average price dropped $850 between September and January. In fact, Canadian used-vehicle wholesale values had all but stabilized by the end of March, dropping just 0.12 per cent between March 28 and April 11 of 2023. By contrast, wholesale values were decreasing by around 0.4 per cent per week in January and February of this year.

Ongoing supply-chain issues in the new-vehicle marketplace are still to blame for elevated used-vehicle values, and while auto industry experts are hopeful things are moving in the right direction, resolving those problems will take more time.

“Maybe it could take as long as two more years,” Bob Armstrong, former president of the Association of International Automobile Manufacturers, told CBC News in April 2023. “Hopefully, next year it will be where it should be. But it could take longer.” And even if supply chains get back to where they were before March 2020, used-vehicle values may never fall back to where they were before the pandemic.

“Looking at the forecast four or five years from now, it will be coming down every year, but it’s gradual,” David Ross, Senior Automotive Analyst with CBB, told The Globe and Mail. “It’s not likely to get to the levels we had seen before the pandemic.” Ross said that because some automakers are still having trouble ramping up new-vehicle production to pre-pandemic levels, used car dealers can expect shortages of cars and trucks from the 2021, 2022 and 2023 model years.

“We’ve already had two years of really low [production] and that means the used market is going to have a suppressed amount of volume three, four and five years from now.” ■