Bank says auto industry will cut growth by 1%

TORONTO - Scotia Economics said Friday it expects that lower output from the auto industry will cut more than one percentage point from overall economic growth in Canada in the first part of 2009.

North American vehicle output will plummet by nearly 50 per cent compared with a year earlier in January, and output from the Detroit Three automakers -- GM, Ford and Chrysler -- will plunge by an even sharper 65 per cent, said Carlos Gomes, a senior economist and auto industry specialist with Scotiabank (TSX:BNS).

"We estimate that the cutbacks in vehicle production will reduce U.S. economic activity by roughly two-and-a-half percentage points in the first quarter, an impact similar to what occurred in the final months of 2008," stated Gomes.

"In Canada, we estimate that lower vehicle and parts output will subtract more than one percentage point from economic growth in the opening months of 2009."

Economists have estimated the North American economy will shrink by between one and two per cent this year as the recession deepens, especially in the United States.

Scotia Economics said in its Global Auto Report that lower vehicle production is hurting Canada's auto supply industry, where more than 22,000 jobs have been lost since late 2003.

In addition, Canadian suppliers have lost significant market share in recent years.

"We estimate the value of Canadian-made parts in each North American-built vehicle has dropped to less than $1,700 from more than $2,000 as recently as 2004," said Gomes.

"With the order backlog for Canadian suppliers at its lowest level on record, in the absence of a hefty pick-up in vehicle production, job losses in the parts sector could accelerate."

Scotiabank said it expects Canadian auto sales, which slumped 21 per cent compared to a year earlier in December, to remain "weak" in the first half of 2009. Sales are expected to fall to 1.475 million units in 2009, the lowest annual total since 1998.

Gomes added that auto inventories are expected to come in line with demand by April, meaning production could begin to ramp up again in the second quarter, with production advancing year-over-year by the end of 2009.