Despite the sharp decline that has already occurred in the U.S. automobile and housing markets, the outlook continues to deteriorate, according to the latest Global Auto Report released on Tuesday by Bank of Nova Scotia’s Economics department.

Although the housing market is more volatile, housing and auto markets move in tandem, and are likely to weaken further through early 2009, especially in the U.S.

“U.S. vehicle purchases and housing activity are already at multi-decade lows, but will be undercut further by falling house prices, high energy costs, the worsening credit crunch and declining household wealth,” says Carlos Gomes, a Scotiabank senior economist and auto industry specialist. “Mounting U.S. job losses will lead to a further deceleration in economic activity and a more protracted slowdown into 2009, especially now that real wages are declining for the first time since the economic downturn of the early 1990s.

“We have reduced our U.S. vehicle sales outlook for both this year and 2009, as the freezing up of U.S. financial markets is now affecting the broader economy by restricting the availability of credit,” adds Gomes. “We expect 2008 U.S. passenger vehicle sales to fall to 13.7 million units, the lowest level since 1993, from our previous estimate of 14.1 million. Our 2009 forecast has also been reduced to 13.5 million units, compared with an average of 16.7 million over the past decade.”

The report states that economic conditions have also softened in Canada in recent months, with employment growth moderating to 1.3% year-over-year in August, from 2% in early 2008. Households have become more frugal in this environment, with vehicle sales averaging 1.66 million units over the last three months, down from 1.76 million in the first quarter.

“As a result, we have reduced our 2008 and 2009 sales forecasts. Purchases are now expected to total 1.67 million units this year and 1.59 million in 2009, down from our previous estimates of 1.69 and 1.65 million respectively,” says Gomes.

The report adds that the sharp erosion in U.S. economic conditions will increasingly take a bigger toll on Canadian prospects. Although our household and government balance sheets are not as leveraged as in the U.S., the economic slowdown has spread across the globe and will increasingly weaken activity in Canada.

Conditions are healthiest in Saskatchewan, where record grain and oilseed prices have lifted first-half 2008 farm incomes an additional 24% year-over-year, following a 14% advance in 2007. In contrast, activity is weakest in Ontario’s manufacturing heartland, due to the loss of more than 200,000 jobs since late 2002. However, outside of Ontario, income growth remains strong at 7% year-over-year.

U.S. car and light truck sales slumped 14% below a year earlier in July and August, a further deterioration from the 10% slide reported in the first half of 2008. The annualized sales pace fell to a sixteen-year low of 12.5 million in July. Purchases improved moderately in late August, alongside the introduction to ‘employee discounts for everyone’ by a major automaker. However, anecdotal evidence suggests a further weakening, especially for retail purchases, when September data are released on October 1st.

Passenger vehicle sales have also softened in Canada in recent months, easing to 1.65 million units in August from an average of 1.72 million units during the first half of 2008. The decline was led by a double-digit fall-off for North American automakers, as several companies announced in July that they would shift away from leasing. In contrast, sales of imported brands continue to advance, with several Japanese, European and Korean automakers setting monthly sales records for August. So far this year, imported brands have posted an 11% gain, lifting overall Canadian sales 1.4% to the second-highest level on record.