May 5, 2016 / 10:17 PM / in 4 years

Alberta wildfire may stall Canada's second-quarter growth

TORONTO (Reuters) - Production cuts in Alberta’s oil sands forced by a raging wildfire may cause Canadian growth to stall in the second quarter, economists warned, predicting this would help keep the central bank on hold and weigh on the Canadian dollar.

An aerial view from the helicopter of Alberta Premier Rachel Notley shows smoke rising from raging wildfires which caused the mandatory evacuation of Fort McMurray, Alberta, May 4, 2016. Cheryl Oates/Government of Alberta/Handout via REUTERS

The wildfire near the oil sands hub of Fort McMurray has forced the evacuation of 88,000 residents, destroyed 1,600 structures and disrupted energy production.

At BMO Capital Markets, senior economist Robert Kavcic now expects no growth in the second quarter, having previously projected a 1.3 percent annualized gain, with most of the reduction due to the wildfire.

“It’s typical of the disruptions you see when something like this happens ... just quite a bit bigger than some of the past experiences,” he said.

Toronto-Dominion Bank is still finalizing projections, but expects the fires could shave as much as 0.3 percent off May growth, according to senior economist Michael Dolega.

Weaker-than-expected trade data this week had already fed expectations for a sharp slowdown after a strong start to the year.

As of Thursday, the wildfire had led to nearly one-third of Canada’s oil sands production being shuttered and key pipelines being closed, with no certainty about when they would reopen.

“This will significantly suspend the oil production in May and June at a minimum ... so you can’t rule out the risk of an outright dip in the economy in the second quarter,” said Derek Holt, head of capital markets economics at Scotiabank.

“The question is does the Bank of Canada look through that? I don’t think the market will, which is why we expect the currency to continue to weaken,” he said.

The Canadian dollar has plunged more than three percent from a 10-month high on Tuesday, driven by growth worries. [CAD/]

Last month the Bank of Canada held rates steady even as it warned of downside risks to the economy.

Overnight index swaps now imply a greater than 20 percent chance of a rate cut this year, a swing from a 20 percent chance of a hike seen at the beginning of the week.

BMO has added one percent to its third-quarter growth forecast, noting that Alberta rebuilding efforts would likely add to growth later this year and in 2017.

However, the incentive to rebuild may be reduced by depressed oil prices that already weigh on capital spending.

“You almost have an excuse not to rebuild back to the prior peak,” said Holt.

Reporting by Fergal Smith; Editing by Toni Reinhold

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