Canada Rebound Set to Survive Wildfires That Ruined May GDP

  • Non-conventional oil production plummets a record 22 percent
  • Desjardins Capital sees economy rebounding in third quarter

Canada’s gross domestic product contracted at the fastest pace in more than seven years in May as wildfires curbed Alberta oil production.

The economy shrank 0.6 percent after an April expansion of 0.1 percent, Statistics Canada said Friday in Ottawa. The median forecast in a Bloomberg survey was for a 0.5 percent contraction. The drop was “primarily due” to the record 22 percent plunge in non-conventional oil production, the agency said, which typically refers to the technique used in the oil sands of extracting bitumen by mining it or injecting steam into the ground.

Analysts see the damage from the fires as contained and predict the losses will be more than recovered in the second half.

“We would still not regard this as a bad news story,” said Doug Porter, chief economist at BMO Capital Markets in Toronto. “The oil production losses will be fully reversed over the next few monthly reports, and the rest of the economy is still grinding along at a pace of around 1 percent.”

The wildfires are another chapter in a long-delayed economic recovery following years of weak global demand and a more recent plunge in energy investment. Whether or not oil production and the wider economy bounce back is critical for Bank of Canada Governor Stephen Poloz, who is standing by a prediction for an export recovery in the second half.

Poloz kept his key lending rate at 0.5 percent on July 13, pointing to signs oil production was resuming after fires knocked about 1 million barrels a day offline and forced the evacuation of 80,000 people from Fort McMurray. Poloz also projected the economy would rebound with annualized growth of 3.5 percent in the third quarter after shrinking 1 percent in the second.

Rebound Expected

“I’m pretty sure we are going to see some rebound,” in the third quarter, said Jimmy Jean, a fixed-income strategist at Desjardins Capital Markets in Montreal. “There’s still a case to be made that we’re going to be fine.”

The economy probably shrank at a 1.7 percent annualized pace in the second quarter, while expanding 3.5 percent in the third, he said, adding Friday’s GDP report won’t cause the Bank of Canada to change rhetoric. “They don’t want to signal that they are ready to move because it’s pretty clear they want to wait for fiscal stimulus to work.”

Canada’s dollar strengthened 1 percent to C$1.3027 per U.S. dollar at 11:06 a.m. 

Excluding non-conventional oil, output shrank 0.1 percent in May. Manufacturing fell 2.4 percent, also the fastest since 2009, on disruption to transportation-equipment makers and a 15 percent drop at oil refineries.

Conventional oil production rose 0.6 percent in May, as most refineries for that industry were outside the fire zone, Statistics Canada said.

Friday’s report was marked by other one-off factors. The output of utilities fell 1.8 percent in May after a jump in April when there were colder-than-average temperatures. The public sector expanded by 0.3 percent, led by gains tied to the collection of the 2016 census. Finance and insurance climbed 0.6 percent on increased claims linked to the Alberta fires.

Finally, arts and entertainment rose 4.3 percent, as the sting of Canadian teams failing to make the National Hockey League playoffs was eased by basketball and the return of Toronto Blue Jays baseball.

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