Fire damage

This morning Statistics Canada issued its first report on the overall state of the economy since the Fort McMurray wildfires. It revealed that GDP fell by 0.6 percent in the month of May, a slightly worse outcome than the consensus of analysts' expectations. This is the worst single monthly performance since the depths of the financial crisis, back in 2009.  After a strong start in January, GDP has fallen in three of the last four months.

Unsurprisingly, the decline was led by the non-conventional oil sector, which is centered on Fort Mac. Output there plunged by 22 percent in the month, a number that surprises only in the sense that some of the more apocalyptic reportage at the time suggested that the entire sector was basically shut down. As with the stories that seemed to imply that the whole city had been burned to the ground, this was evidently an exaggeration.  There was also a decline in manufacturing output, but this too reflected the impact of the fire, as oil refining is classified as a manufacturing activity.  

What next?  June likely saw some recovery in oil sands output, but not to pre-wildfire levels, so it seems certain that even if GDP rebounds somewhat for the month, it will not recoup all of May's losses. As  a result, the quarterly GDP data for Q2 now seem certain to see a decline, which will no doubt see the R-word (for recession) popping up in newspaper headlines again. For Q3 and beyond, barring some further one-off shock, it seems likely that growth will resume its gentle upward trend. The reconstruction effort now underway at Fort Mac will provide a small boost to the overall picture: housing agency CMHC recently described the coming building boom there as unprecedented, but as it's a city of 80,000 in a country with a population of 36 million, the impact should not be overstated.

The really significant takeaway from the May GDP data, and from the economy's sluggish performance since February, is not really about oil per se. Rather, what we are continuing to discover, month after month, is that the Bank of Canada's hopes of seeing a rebalancing of the economy away from resource extraction are looking increasingly forlorn. The manufacturing sector, in particular, is proving itself largely incapable of responding to the supposed advantages created by the lower exchange rate -- no surprise to those of us who think that the decline in the sector is inexorable rather than merely cyclical.

All of this leaves the Bank of Canada stuck on the sidelines, even as evidence grows that its low interest rate policy is producing a housing bubble that is starting to spread beyond just Toronto and Vancouver,  An excitable journalist recently wrote a column about why "low interest rates may last for the rest of your life".  It's certainly starting to feel that way, and that's not a good thing.