The COVID-19 impact on the auto sector has been significant, but there is light ahead and certain government measures, if continued or implemented, would help dealerships during the crisis and recovery while boosting consumer interest.
Let’s start with the bad news: the COVID-19 global pandemic has cratered the economy as governments imposed strict containment measures in an effort to limit the spread of the virus.
GDP is estimated to have dropped to unprecedented levels in the first quarter and likely in the second. Canada and the U.S. saw their worst job losses on record. The unemployment rate spiked to 13 per cent in April, which is effectively the highest level of joblessness in the country since 1982.
Over 7 million Canadians have claimed the Canada Emergency Benefit (CERB) since it was introduced in mid-March. To top it all off, oil prices declined to historic lows and even temporarily below zero as demand crumbled — a double whammy for the Canadian economy.
In the automotive sector, April was the month of extremes. Vehicle sales ground to a halt as a result of the lockdowns and the mandatory shutdown orders across the country. Sales fell steeply by almost three quarters in April and close to 90 per cent of dealerships have reported a drop in revenue of at least 30 per cent.
The good news is the infection rate is stabilizing and, in many instances, declining across the country. Provincial governments are starting to gradually ease restrictions and re-open their economies.
A number of provinces have allowed in-dealership sales to resume immediately, providing an indication that auto sales may have bottomed out in April and will start showing signs of recovery in May and the subsequent summer months.
As Canadians gradually get back to work and economic activity reboots, vehicle sales are projected to recover slowly.
Overall, government support has helped bridge the gap and grease the wheels throughout the crisis. Federal support such as the wage subsidy program, interest-free loans and guarantees, tax deferrals and the emergency benefit provided businesses and workers with the much-needed relief to cope with the economic impact of the pandemic.
On the other hand, the Bank of Canada interest rate cuts and quantitative easing activities have stabilized the financial system, while injecting an enormous amount of liquidity into the economy. As attention shifts towards recovery, monetary policy and low-interest rates will be key to economic revival.
That said, we are not over the hump yet. While the government’s financial support in response to COVID-19 has averted total economic collapse, more is to be done to ensure a rapid recovery as the path back to normalcy will be slow and uneven across Canada.
It will take some time before economic activity ramps back up to pre-COVID-19 levels. The government must introduce a robust post-crisis stimulus plan to revive the Canadian economy.
For the automotive sector, the recovery plan needs to focus on boosting vehicle demand to jumpstart the industry and protect jobs.
It could include a national scrappage program or a GST/HST holiday aimed at encouraging vehicle purchases across the country.
It should also include a secured credit facility to increase lending capacity for vehicle and equipment purchases, which, as we all recall, significantly contributed to the recovery of the auto industry post-financial crisis in 2008.
A national scrappage program will provide a financial incentive to consumers to scrap their older vehicles for newer and greener vehicles. The program would have significant economic benefits, increase consumer safety, as well as help reduce greenhouse gas emissions by replacing older polluting and less safe vehicles with newer vehicles.
Data show that a $1,500 to $3,000 national scrappage program can deliver greater GHG reduction. Over 35 per cent of the vehicles on the road in Canada are 12 years and older and replacing them with newer vehicles will provide the most environmental and safety benefits.
As an example, Germany has implemented a similar program after the 2008 recession, which has not only helped the German auto sector recover but has also provided considerable environmental benefits. Germany is also currently considering reintroducing a scrappage program as a measure to jumpstart their economy post-COVID-19.
As a result of COVID-19, many consumers have sat on the sideline uncertain about the future. But recovery policies aimed at incentivizing demand would bring them back to the market, increase consumption, and trickle down to many other sectors of the economy.
A targeted stimulus package for the automotive sector will protect hundreds of thousands of jobs in the industry, and will be vital to Canada’s emergence from the crisis.
