OTTAWA, Ontario — The Canadian new-vehicle marketplace has started off 2010 on the right foot and will likely see a full-year lift in sales somewhere between 5 percent and 6 percent compared to a weak 2009, according to Michael Hatch, chief economist for the Canadian Automobile Dealers Association.

During a conference call earlier this week, Hatch said the country's new-vehicle sales for the first quarter were up 15 percent from the same period of 2009 and that "so far this year, things are clearly moving in the right direction."

He attributed the first-quarter upswing largely to stronger consumer confidence, affordable pricing and the fact that consumers are still driving as much as they did in recent years, thus the need to replace vehicles is still there.

Hatch later reiterated to Auto Remarketing Canada that "2009 was a year with a relatively low scrappage rate: Only about 5 percent of the cars on the road were retired last year.

"The rate can get as high as 7 percent in a given year," he explained. "Also, unemployment has declined from its 2009 peak which has helped quite a bit. You don't buy a car if you don't have a job."

While every province saw an increase in sales from a year ago, the amount of improvement in first-quarter sales certainly varied.  

For instance, sales in Manitoba increased more than 8 percent, but in Newfoundland, they were up 34.5 percent.

However, despite the widespread improvements — which are against weak 2009 numbers — Hatch emphasized that the "recovery we're experiencing is fragile," and could be impacted by tides in the economy.

"We have a very solid base from which to grow out of the recession in this country, but we're not immune to some of the factors currently threatening Europe," he explained.

"Governments will soon have to start focusing on paying down the debts they incurred in the past two years to avoid debt levels that could grow to dangerous levels down the road," Hatch continued. "If things go very poorly in Europe with their current sovereign debt problems, confidence could be affected here as well."

When asked during the call whether he felt the lift in first-quarter sales was simply a "push forward" effect that could lead to a slowdown in the second half of the year, Hatch acknowledged the potential for such a scenario, but deemed it unlikely.

"That's certainly possible, but I don't see any specific reasons that's the case," he noted. "I see relatively strong results for the rest of the year."

Continuing on, Hatch said the "vast majority" of dealers in Canada still enjoy profits, and the ones that weren't profitable in 2009 should return to profitability in the coming years.

"Dealers are very good business people, and the vast majority remains profitable," he noted.

Back to Peak Level?

During the call, Hatch pointed out that the new-vehicle sales in the U.S. market contracted about 40 percent over a three-year period from its peak back in 2005 or 2006.

Canada — whose auto market is somewhat of a "microcosm" to the southern neighbor — has seen contraction on a much smaller scale over shorter time frame, Hatch noted. Its market peaked in 2008 with sales of 1.65 million, and saw a sales decrease of 11 percent the following year.

Question is, will the Canadian market ever get back to its peak level that it saw in two years ago?

It's not out of the realm of possibility, Hatch suggested, but that kind of recovery hinges on a number of important factors.

"Primarily, unemployment will have to come down. It is currently at 8.2 percent, which is lower than its recent peak but still too high to think about vehicle sales approaching 2008 levels," Hatch noted.

"Normally unemployment is slow to come down after a recession, as firms learn to get by on fewer employees and productivity improves," he continued.

"My estimate is that unemployment would have to come down close to 2 percentage points from its current level for sales to approach what we saw two years ago in Canada," Hatch added. "It will take time, but it's not inconceivable."