Wildfires to weaken Canada’s economic growth in Q2; GDP likely to rebound to 2 pct in 2017

The Canadian economy started this year on a strong note as a sharp increase in residential investment and exports resulted in the economy to grow at an annualized rate of 2.4 percent in the first quarter. However, fleeting momentum during the end of first quarter and recent wildfires in the Alberta region are expected to result in a drop in economic activity in the second quarter of this year.

Last month, production capacity was reduced considerably, which pulled down output for both the month and quarter as a whole. As production resumes in the third quarter, activity is likely to rebound; however it will not be enough to avert a significant downgrade to the 2016 growth forecast to a weak 1.3 percent, said TD Economics in a research report.

However, looking through this, the underlying scenario is of modest growth. The economy continues to be in the middle of a large scale, commodity price precipitated economic rotation, according to TD Economics.

The real GDP growth is likely to rebound to two percent in 2017 as the adjustment shifts towards a more growth-friendly phase next year and as the fiscal stimulus boosts into higher gear, added TD Economics.

However, the economy is expected to operate with additional slack even with this rebound. Also, the Bank of Canada is unlikely to lower rates in the 2016-2017 period, noted TD Economics.