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High debt levels and rising interest rates will dampen Canadian auto sales in the coming years, according to a new report from TD Economics.
Unlike consumers in the United States who have been paring back on their debt levels in the wake of the financial crisis, Canadians have continually taken on greater debt loads—mostly for housing, but to a lesser extent to finance consumption.
The authors project that Canadians will gradually pull back on high debt levels as interest rates rise, and this will have a negative impact on the country’s auto market.
“Any unanticipated spike in interest rates or weakness in job markets has the potential to lead to a significant medium-term correction in Canadian auto sales,” the authors said.
The authors also write that because the financial crisis was less dramatic in Canada, auto sales didn’t pull back as severely as they did in the U.S. This means that the recent surge in auto sales reported in the U.S. won’t be repeated in Canada.
“It shouldn’t be surprising that growth in sales so far during the recovery has been lagging behind that of the United States,” they write. “Year-to-date Canadian sales are up a relatively moderate 1.9%, to 1.33 million units at annual rates.”