A temporary setback (probably)

Data released today show that Canada's GDP shrank at a 1.6 percent annualized rate in the second quarter of the year, its worst showing in seven years. Statistics Canada was at pains to point out that the setback was almost entirely due to the impact of the Fort McMurray wildfire back in May.  But for the sharp fall in crude oil output resulting from that catastrophe, GDP would have edged forward at a 0.4 percent annualized rate in the quarter.

Monthly GDP data for June, also released this morning, show that the bounce-back from the impact of the Fort Mac fire began quickly.  Real GDP rose 0.6 percent in the month, the best performance for any month so far in 2016.  Since oil operations in the Fort Mac area only gradually came back online in June -- recall that residents of the city only began to return around the fourth day of the month -- monthly GDP data for July can be reliably expected to show further gains.

Reconstruction work in Fort McMurray itself will accelerate in the coming months; residents of the worst-affected neighbourhoods are only being allowed to return to the city this week.  However,  it is important not to exaggerate the impact on national output data. Fort Mac is a city of about 80,000 people in a country with a population of 36 million and, despite some of the more lurid headlines at the time of the fire, "only" about 10 percent of the city's buildings were destroyed.

In all it seems likely that the fall in quarterly GDP in Q2 will prove a one-off event, and the media have been careful to report it as such, rather than starting to hype up the possibility of a "technical recession".  Still, there are reasons to be concerned about the underlying condition of the economy.  Although the monthly data for June showed a welcome rebound in manufacturing activity, it remains the case that the "rebalancing" of the economy that the decline in the exchange rate was supposed to encourage -- with reduced dependence on resource exports, especially oil, and a greater contribution from manufacturing -- remains difficult to discern.

Record trade deficits during Q2 speak to the failure of non-oil exports to pick up the slack. Some economists are beginning to muse that it may take another bout of exchange rate weakness to get the non-oil economy going again. With the CAD trading almost 30 percent down from its cyclical highs, it's getting very hard to see why this might be expected to work.