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Pressure on U.S. used car prices likely to subside later this year

Staff Writer |
Global new car sales moderated to 3.4% y/y in March, down from a 7% jump in February and an average gain of 5% during the previous two months.

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Automotive purchases across North America, which account for nearly 30% of the global total, fell below a year earlier in April in all three countries for the first time since late 2009.

However, total U.S. vehicle demand continues to move higher and strengthening economic fundamentals combined with slower growth in used vehicle supplies will reduce downside pricing pressures.

Concern over declining U.S. used car prices has climbed back into the headlines due to recent news that the largest auto rental car company reported a much sharper-than-expected loss in the latest quarter due to slumping residual values.

This development combined with a rising number of vehicles coming off-lease has many worried that pricing pressure will continue to intensify, potentially leading to a cyclical downturn in the U.S. auto industry.

Several months of lower-than-expected new vehicle sales combined with largest fall-off in used car prices since the global economic downturn have led to fear that the U.S. auto sales may have peaked.

However, used car prices have weakened temporarily in past cycles with only a limited impact on the overall U.S. auto market.

It is also important to highlight that past automotive cycles only ended when demand was undermined by weakening economic fundamentals, and none of those pre-conditions are currently in place.

Stronger economic growth and an ageing fleet suggest that significant vehicle replacement still lies ahead and that a near-term auto cycle peak is unlikely.

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