Steering into the skid: auto sector avoids crash

By James Langton | December 7, 2020 | Last updated on December 7, 2020
3 min read
Man refuel his car on gas station

With much of the economic disruption inflicted by the Covid-19 outbreak impacting the services side of the economy, the recovery for durable goods, particularly the all important auto-sector, has surprised economists on the upside, says BMO Capital Markets.

In a new report, BMO said the auto industry has enjoyed a V-shaped recovery from the initial heavy damage inflicted by the pandemic.

While vehicle sales are still seen finishing the year down by 15.5% from last year, that’s much better than the most severe scenarios that economists considered, although still weaker than pre-pandemic forecasts for a 3.7% decline.

“Early in the year, the outlook for the global auto industry looked dire. Dealerships were temporarily shuttered and production was halted as the global pandemic caused the shortest and steepest post-war recession on record. Still, vehicle sales have managed to chart a V-shaped recovery,” it said.

While demand plunged when the pandemic first hit, it quickly rebounded as lockdowns eased, interest rates were slashed and extensive fiscal supports were deployed, BMO noted.

Indeed, the bank said the global financial crisis led to tighter credit standards and weak consumer demand that “kept auto purchases low for years.” However, this time around, “policymakers responded aggressively to normalize both lending rates and household incomes during this year’s downturn.”

As a result, “when dealerships reopened after the initial wave of shutdowns, the average auto consumer was well- positioned to resume spending,” the report said.

BMO expects vehicle sales in Canada for 2021 to come in at just under two million, with U.S. sales reaching 15.6 million, with demand propped up by the extraordinary fiscal and monetary support.

Looking ahead to 2021, BMO said that higher household savings rates and continued curbs on services spending is expected to bolster new vehicle demand too.

Additionally, the biggest potential drag on Canadian sales — high household debt levels — has been pushed to the side by the prospect of rock bottom interest rates for the foreseeable future, BMO said.

“While the momentum built up over the last several months could take a hit amid surging Covid-19 cases in both countries, we see sales accelerating in 2021,” it said.

Alongside new vehicle sales, the auto parts industry held up even better, BMO said.

Despite the sudden shift to remote working, which was expected to hurt demand for parts and services, “that is not how the year played out,” BMO said in the report.

In fact, retail parts sales held up better than vehicle sales, likely boosted by increased vehicle usage for vacations amid limited summer travel alternatives.

“With a potential vaccine on the horizon, there is further upside for vehicle use,” BMO said.

Additionally, the report noted that with each of the “Big Three” automakers planning to invest in their Canadian operations “auto sector employment will grow for the first time in years.”

Moreover, these investments are in segments that are growing, such as trucks and electric vehicles, rather than conventional passenger cars, BMO said.

“That’s a big deal for the broader Canadian economy with auto and parts production representing 9% of manufacturing,” it noted.

“Despite the severe economic repercussions of the pandemic this year, the auto sector has avoided the worst case scenarios and is headed for a brighter 2021, assuming the pandemic is brought under control,” BMO concluded.

James Langton headshot

James Langton

James is a senior reporter for and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.