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Calgary flood dampens GDP, muddies economic data

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In economic terms, how much damage does a major flood in one of your country's most important hubs of commerce inflict? Canadians are about to find out.

Beyond the obvious devastation to homes and lives that flooding has wrought in Calgary and in surrounding communities, the effort to quantify what the damage means to Canada's fragile economy – of which Alberta was expected to be a leading growth engine this year – has already begun. The numbers are both illuminating and potentially misleading; one thing that's certain is this flood will make gauging Canada's economic strength a complicated task.

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While the early (and unofficial) estimates of the property damage run as high as $5-billion, trying to interpret what that means for broader economic activity – as measured by gross domestic product (GDP) – is more elusive. Nevertheless, Robert Kavcic, senior economist at BMO Capital Markets, has taken a shot at it. Based on what he admits are preliminary calculations, he believes flood effects could cost the economy $150-million to $300-million in lost activity in June.

That's about 0.1 to 0.2 per cent of the country's monthly GDP – not a massive hit on a national level. But it may be enough to all but wipe out any GDP growth for the month, based on the country's recent growth pace and economists' forecasts.

On a provincial and local level, the impact on GDP will be much more dramatic. A $300-million slowdown in June activity would equate to roughly 1.2 per cent of Alberta's typical monthly GDP; it would slice more than 3 per cent from Calgary's monthly GDP.

Mr. Kavcic is quick to point out that, as other historical natural disasters have demonstrated, these slowdowns are typically followed by dramatic rebounds afterward, as business returns to normal, people make up for lost time and delayed spending, and the rebuilding effort kicks in. The GDP numbers will bounce back.

But the floods will certainly have a significant distorting effect on many key indicators used to measure the health of both Alberta's and Canada's economy. Numbers such as job creation, housing starts, retail sales and wholesale trade are all going to carry asterisks for a while – with flood-induced near-term weakness eventually followed by spikes of recovery, neither of which will give an accurate picture of the underlying economic state.

Mr. Kavcic pointed to the June housing-starts numbers as particularly problematic. The combination of the Alberta floods and the Quebec construction strike could deliver a harsh blow to the level of starts this month; that will make it even more difficult to assess whether May's surprisingly strong starts were an aberration or not. But Mr. Kavcic noted that housing starts were one of the indicators (along with employment) that bounced back quickly after Hurricane Sandy struck the U.S. east coast last fall, suggesting any slump might be a one-month phenomenon.

Regardless, the floods will probably force the Bank of Canada to take a stand-pat approach in its next monetary policy statement, scheduled for mid-July. The June economic indicators available to the central bank during its decision-making process ahead of that announcement – most notably, on employment and housing – will be too flood-soaked to be of any use.

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David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe .

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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