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Economy BoC projects contraction as Canada’s economy feels effects of wildfires

Bank of Canada Governor Stephen Poloz holds a new conference at the National Press Theatre in Ottawa on Wednesday, April 13, 2016.

Sean Kilpatrick/THE CANADIAN PRESS

The Bank of Canada says the Canadian economy is headed for its third quarterly contraction since the start of 2015, knocked off its stride by destructive Alberta wildfires and weak business investment.

The central bank, which held its key interest rate unchanged Wednesday, said growth will rebound in the third quarter as the oil patch gets back to full production and the rebuilding of Fort McMurray begins.

The hit from the fires, which triggered widespread oil sands production cuts and destroyed thousands of buildings in the northern Alberta city, will knock 1.25 percentage points off gross domestic product in the April-to-June period, according to a new estimate by the bank. That is expected to stall the economy, which the bank had previously forecast would grow at an annual rate of 1 per cent in the second quarter.

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It would mark a second bout of contraction in the past year for the economy, which also shrunk in the first and second quarters of last year.

The overarching message from the Bank of Canada is that economy remains weak and still needs record-low interest rates to keep from sliding into reverse.

Many economists don't expect Governor Stephen Poloz to start pushing up the bank's overnight rate for at least another year – keeping it on a divergent track from the U.S. Federal Reserve Board in the short-term.

"There was little in [the statement] to alter our view that it will be some time before we see any movement in the policy interest rate," Toronto-Dominion Bank economist Leslie Preston said in a research note.

Bank of Montreal economist Benjamin Reitzes similarly doesn't expect a rate increase until the second half of next year. "The bar to any rate move from the Bank of Canada remains high," he said.

In its statement, the bank remarked on the economy's bumpy recovery from the collapse in the price of oil that began in 2014.

"The economy's structural adjustment to the oil price shock continues, but is proving to be uneven," the bank said, pointing to "disappointing" business investment.

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The central bank also noted "fragile sentiment" in global financial markets – a worry that Mr. Poloz highlighted in a speech earlier this month.

And the statement raised fresh concerns about household debt owing to "divergences" in regional housing markets. "In this context, household vulnerabilities have moved higher," the bank said in the statement.

The housing market is in retreat in Alberta, but continues to boom in parts of Ontario and British Columbia, where prices and starts continue to soar higher.

"Clearly, the bank is concerned about the debt burden of home buyers," said Sherry Cooper, chief economist at Dominion Lending Centres. "The Bank of Canada has been whistling this tune for years now, but the continued frenzy in the hottest housing markets have further accentuated concern."

The rest of the economy is evolving pretty much in line with the bank's April forecast. The Canadian dollar, now at roughly 76 cents (U.S.), and inflation are both in line with its earlier projections. The price of crude, now just shy of $50 for West Texas intermediate, has recovered some lost ground.

"The global economy is evolving largely as the bank projected in its April monetary policy report," according to the statement.

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And the bank said the risks to its critical inflation projection remain "roughly balanced" – a sign the bank is in no hurry to raise rates.

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By the numbers

1 1/4: Percentage points knocked off real GDP growth in the second quarter owing to Alberta wildfire destruction and associated halt to oil production, according to the bank's preliminary assessment. In April, the bank had forecast 1-per-cent growth in the quarter

0.5%: The bank maintains its target for the overnight rate where it's been since last July

2%: Current inflation rate, which "is roughly in line with the bank's expectations"

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