China domestic market weakness lowers global vehicle forecast

As of this writing, there is an extended ceasefire between Iran, the US and Israel, despite intermittent reports of limited strikes. Our base case remains that these strikes are unlikely to trigger a collapse of the ceasefire, and we expect limited military activity to occur alongside ongoing diplomacy, with all sides still having incentives to avoid a wider escalation.

Our expectation remains that the US will continue with this arrangement, and we project that a phased memorandum of understanding is the most plausible path forward. If negotiated over the coming weeks, this agreement should allow for a gradual restoration of shipping through the Strait of Hormuz and would materially reduce the probability of renewed conflict.

The higher-for-longer price forecast that would follow is based on likely hiccups in the negotiations with periodic military flare-ups and temporary closures and reopenings possible.

We have updated our oil price path. The peak is pushed out a bit further into the summer, with a high of $126/bbl now expected in July. Prices then fall back to around $100 by year-end. We now model that oil prices will stay elevated for longer than the model used in the April forecast. Our latest assumption is for the full-year 2026 oil price average to be at $105/bbl. In 2027, we see the full-year average at $87/bbl. However, we see prices elevated until late 2027.

It will also take time for infrastructure to come fully back online and for shipper confidence to be restored. Many countries will want to rebuild strategic reserves, which keeps demand (and therefore prices) firmer than we previously assumed.

We see combined direct Middle East sales impact and additional affordability issues from the Iran war reducing the June 2026 forecast for 2026 by about 700,000 units (vs. the April 2026 forecast) and about 1.1 million units for 2027. Of that total, the direct impact on the Middle East market is expected to reduce regional sales by about 194,000 units in 2026 and 160,000 units in 2027.

Additional affordability pressures have caused a reduction in the global sales forecast of 511,000 in 2026 and 940,000 units in 2027 compared with our April 2026 forecast.

Under the USMCA, the three countries must decide by July 1, 2026, whether to extend the agreement for another 16 years (with another review opportunity in 2032). Given US efforts to increase tariffs on Canada and Mexico since President Donald Trump took office, it seems highly unlikely the countries will agree to an extension. A renegotiation is presumed instead. We believe the probability of a renegotiated USMCA before the US midterm elections in November 2026 is 50%.

We continue to see potential for several new elements to be added to the USMCA. Among them could be implementation of 10% US tariffs on USMCA-compliant vehicles (the 25% on non-compliant vehicles presumably remains) and an addition of a US Value Add (USVA) for Canada- and Mexico-built vehicles bound for the US as high as 50% of value, though the key will be how this is defined and calculated.

We also see potential for changes to the agreement to include an increase in the labor value content rate to US$20+ with a forward inflation adjustment. The regional value add (RVA) could be increased to 80%–85%. We also see potential for the redefinition and expansion of core parts that comply with the RVA.