Faced with weaker-than-expected sales, automakers continue to aggressively cut production, according to report released Thursday by Scotia Economics.

The drop in demand totals nearly six million units of unused capacity across North America this year, one-third of all vehicle assembly capability, the report says.

“Our estimates are based on a full-year 2009 U.S. sales forecast of 11.5 million units, and vehicle production across North America of just under 11 million units, down sharply from an average of 16.1 million over the past decade,” says Carlos Gomes, Bank of Nova Scotia senior economist and auto industry specialist.

“We continue to believe that a moderate sales improvement will emerge later this year, as the U.S. and global economies begin to respond to the unprecedented amount of monetary and fiscal stimulus put in place since last September. These measures should begin to resuscitate economic activity during the strongest months for vehicle sales”, adds Gomes.

Operating rates could be even lower, as the highly volatile and uncertain economic and financial environment has prompted automakers to downgrade their 2009 U.S. sales forecast to a conservative 10.1-10.5 million units.

“The sharp appreciation of the Japanese yen in recent months has eroded the profitability of vehicles exported from Japan, and may benefit North American facilities if production of some vehicles shifts to North America,” says Gomes. “One automaker has indicated that it will move assemblies of some small cars from Japan to Mexico, because of the surging yen.”

Any shift in production to North America would help Canadian, U.S. and Mexican plants and suppliers. However, Scotia Economics says Mexico seems better positioned to benefit more from this shift than its NAFTA partners. European and Asian manufacturers account for 45% of Mexico’s overall assembly capacity, compared with 42% in the United States and 38% in Canada.

Meanwhile, the downturn in global car sales continues to intensify. Purchases slumped nearly 30% year-over-year in January alongside a further deterioration in sales in the United States, Western Europe and Japan.

U.S. purchases plunged 40% year-over-year last month, falling to an annualized 9.5 million units, the lowest level since mid-1982, and down from a 10.3 million unit average in the final months of 2008.

Auto sales in Canada also began 2009 on a weak note. Purchases remained around an annualized 1.30 million units for the second consecutive month, down from a full-year 2008 total of 1.64 million units. Scotia Econmics says volumes are being undermined by a deteriorating labour market, which has shed more than 200,000 jobs over the past three months.

IE