Fire damage

The huge wildfire that scorched the city of Fort McMurray at the start of the month is still burning, but for the moment it's moving east, away from the city and from the oil sands mines that are Fort McMurray's raison d'etre.  Some of the oil sands facilities that were closed down in response to the fire have re-opened and others will do so soon. The residents of Fort McMurray itself will start returning home on June 1, barring a deterioration in the fire situation.

Today the Bank of Canada took careful notice of the impact of the fire as it issued its latest policy decision -- which was, as generally expected, for no change in its 0.5 percent reference rate.  The Bank estimates that the fire will cut as much as 1.25 percent from Canada's GDP in Q2, probably leading to an overall decline in national output for the quarter.

This is rather more pessimistic than the forecasts from most private sector analysts, which have generally placed the hit to GDP closer to 0.5 percent.  However, the Bank is benefiting from a kind of last-mover advantage.  The shutdown in the oil sands has lasted much longer than seemed likely at the outset, so it stands to reason that the impact will be greater than first thought.  Moreover, after one attempted restart that had to be hastily aborted when the fire changed course, the operators are being cautious. As the operator of the giant Syncrude plant noted, this has been the first shutdown in their facility since it opened in 1978, so they want to be sure they get things right as they ramp back up.

The Bank of Canada correctly noted that GDP will recover in Q3, as the oil sands plants presumably move back to normal operation and the reconstruction efforts in Fort McMurray get under way. This being the case, it is entirely appropriate that the Bank kept rates unchanged today, in the face of a severe but transitory setback caused by the fire.

It is noteworthy that the Canadian dollar, which was on something of a tear from February to April, has not benefited from the recent bounce in global oil prices, which has reflected developments in Nigeria and Venezuela as well as the Alberta fires.  Expectations of a Fed rate hike in June are clearly the major driver of the C$ exchange rate, at least for the time being.  This is welcome news for the Bank, which remains anxious to see an improvement in non-oil exports in order to rebalance the economy away from its previous dependence on the resource sector.  It remains probable that Canadian rates will stay at their current level well into 2017.