China and South America led the surge in car sales last year and will continue the trend into 2008, according to the latest Global Auto Report released today by Scotia Economics.

According to the report, global auto sales advanced a stronger-than-expected 4% in 2007.

“Emerging markets will remain in the forefront in 2008, more than offsetting lower volumes in mature markets and lifting global volumes to a fifth consecutive record,” said Carlos Gomes, Scotiabank’s auto industry specialist. “However, gains will moderate to 1%, as purchases in the United States slump to the lowest level since the mid-1990s, undercut by the housing-led slowdown and credit crunch.”

South America became the fastest-growing regional auto market in 2007, overtaking the rapid growth of the world’s two most populous markets, China and India.

“This acceleration reflects continued strong economic growth in the region, as well as ongoing strength in agricultural and industrial commodity prices, which loom large in the region’s exports,” said Gomes. “Despite some slowing in global economic activity over the coming year, led by the United States, South America will be the only region to post a double-digit gain in car sales.”

Economic growth in South America will remain close to 5% in 2008, the fifth consecutive year of expansion. The continent has been largely unaffected by the housing and financial sector disruptions which affected many of the developed nations.

While a deeper economic downturn in the U.S. economy remains a risk, South America relies on the United States for less than 20% of its exports. In contrast, a U.S. slowdown will have a much greater impact on economic activity in Mexico, as more than 80% of Mexico’s exports are destined for the United States.

However, even in Mexico, strengthening domestic demand is more than compensating for the weakness in the U.S.-focused export-oriented manufacturing industries. For example, the government’s five-year infrastructure plan has quickened the pace of public sector projects, providing support for overall economic growth and helping to keep new vehicle purchases at 1.1 million units – in line with the average of the past five
years.

China has been the fastest-growing auto market over the past decade, with sales surging ten-fold to more than five million units in 2007.

“Despite this rapid growth, vehicle penetration remains very low at only 27 vehicles per thousand people, compared with a G7 average of 610. With a population of 1.3 billion people and a vehicle fleet of only 35 million, China will continue to experience rapid growth,” added Gomes. “China is on target to overtake the United States and become the largest automotive market by roughly 2020.”

India is also expected to continue to post double-digit sales gains. Vehicle purchases are expected to reach 3.0 million by 2015, up from 1.1 million last year, as the size of the middle class jumps from the current 350 million people.

The new low-cost US$2,500 car recently unveiled by Tata Motors its will go on sale in October 2008. Tata is targeting India’s 45 million motorcycle owners and plans to eventually export the vehicle to other emerging nations. Global automakers have announced investments of more than US$6 billion in India to meet rising demand.

Weak first-half vehicle sales will pull full-year 2008 U.S. volumes down to 15 million units, the lowest level since 1995, from an average of 16.6 million over the past five years. The fall-off reflects the fact that purchasing power and confidence have been undercut by the housing-led slowdown, declining home prices and equity values, as well as moderating job and income gains. High gasoline and interest costs are also cutting into disposable income and discretionary purchases.

“Canadian vehicle sales are expected to soften to 1.61 million units in 2008 from 1.65 million last year, with the slowdown concentrated in Canada’s manufacturing heartland, Ontario and Quebec,” said Gomes. “Weaker U.S. growth, a strong Canadian dollar and slowing exports will undercut employment growth in Central Canada, dampening vehicle demand.”