Bank of Canada says Alberta wildfires helped put economy in reverse

OTTAWA — The Bank of Canada is cutting its outlook for the year, saying the extensive damage from the Alberta wildfires helped fuel an economic contraction in the second quarter.

The effects of the disaster, which temporarily shuttered key oilsands facilities, took hold as the national economy struggled with disappointing exports numbers, feeble business investment and uncertainty around the United Kingdom's vote to leave the European Union.

The central bank's forecast was released Wednesday along with its scheduled announcement on its benchmark interest rate, which it left at the rock-bottom level of 0.5 per cent, as expected.

"Essentially, the underlying forces that support a strengthening of growth in Canada remain the same, and the adjustment process of the economy to the lower oil prices is well underway," Carolyn Wilkins, Bank of Canada senior deputy governor, said in French after the announcement.

"That said, international and national factors have led us to lower our projections for growth in the (gross domestic product)."

Among its predictions, the bank for the first time released numbers on the potential impact of the U.K.'s referendum last month to exit the EU, also known as Brexit.

It said the fallout from the vote will reduce the level of global GDP by 0.2 per cent by the end of 2018 — and fall by 0.1 per cent in Canada over the same period.

According to the bank, the "modest" effect on Canada was largely due to the country's small direct trade exposure to the U.K. It stressed that the scope of Brexit's impact remained uncertain and will only be understood as the process unfolds.

The report also provided a more-detailed assessment of the effects of the huge Alberta wildfires that erupted in May. The fires cut oil production, led to Fort McMurray's evacuation and destroyed more than 2,000 structures.

The central bank estimated the fires shaved 1.1 percentage points from second-quarter growth — as measured by real GDP — and forced the economy to contract in that period by one per cent. In April, before the wildfires, the bank had forecast the economy would grow in the second quarter by one per cent.

But looking forward, the bank predicted a "marked rebound" in the third quarter with the resumption of oil production and rebuilding efforts in the region. It projected third-quarter growth to rise by 1.3 percentage points, helping the economy expand in that quarter by 3.5 per cent.

That bounce back is also expected to be fuelled by boosts from the federal government's measures to enhance child benefits — which will support household consumption — and its commitment to increase infrastructure spending, the bank said.

The central bank also lowered its 2016 growth projection to 1.3 per cent from its April estimate of 1.7 per cent. In doing so, it pointed to weaker outlooks for investment and exports that have more than offset the positive effects of the recent rise in oil prices.

It now expects the economy to grow by 2.2 per cent next year and 2.1 per cent in 2018. In April, the bank had predicted growth of 2.3 per cent in 2017 and two per cent in 2018.

Still, the bank stated in its monetary policy report that it's also anticipating the country's non-resource sector to "assert itself as the dominant trend in the second half of 2016."

It expects increased foreign demand and fiscal spending, along with the past depreciation of the Canadian dollar, to lift growth.

Bank of Canada governor Stephen Poloz said despite the underperformance in non-resource exports over the last few months, he still fully expects them to continue their steady climb over the longer term — as they have been doing for the last few years.

"That keeps our faith in the core narrative — now, around that narrative you go through periods of angst," Poloz told reporters Wednesday.

"We resist the idea of turning 180 degrees on our forecast because of the last few data points."

In explaining its decision to stand pat on the trendsetting rate, the bank said inflation had remained within the ideal target range even though it had recently been a little higher than expected.

The bank did, however, warn that financial vulnerabilities are "elevated and rising," particularly in the Vancouver and Toronto areas.

The report reiterated Poloz's past warning that soaring house prices in the hot markets of Vancouver and Toronto have been climbing at an unsustainable clip. He has said the prices have outpaced local economic fundamentals such as job creation, immigration and income growth.

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Andy Blatchford, The Canadian Press