IMF ups Canada 2016 growth forecast to 1.75%

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Good news for Loonie bulls: the IMF says Canada is “coping well” to the oil shock and projects the country’s economy is set for a modest recovery this year.

Having cut its growth forecast for Canada for this year to 1.5 per cent just a month ago, the IMF said in its annual review that it now expects the country to grow by 1.75 per cent this year and 2.25 per cent in 2017, reports Anna Nicolaou in New York.

The group said the upgrade is driven in part by the C$60bn in fiscal stimulus that Justin Trudeau’s government unveiled in March, which is expected to boost GDP by 0.5 percentage points in each of the next two years,

However the IMF report comes with a caveat: it does not incorporate damage from the wildfire that has ravaged Alberta in the past week, shutting production plants and forcing evacuation from Fort McMurray, the heart of Canada’s oil sands.

The IMF said that there is “clearly room” for further fiscal stimulus or interest rate cuts if the economy is damaged, although it’s “still a little bit early to have a definitive assessment of the impact of the wildfire”.

About a third of oil production, or nearly 1m barrels per day, has been sidelined in Alberta, with companies including Royal Dutch Shell and Suncor Energy curtailing operations to evacuate workers or offer shelter for fleeing residents.

Private bank economists have slashed forecasts for second quarter growth in light of the forest fires. TD Bank now projects second quarter GDP of between -0.5 per cent and 0 per cent, from its previous forecast of 1.3 per cent. While TD views this as a temporary negative shock, the impact is “still significant enough” to nudge the national unemployment rate up 0.2 per cent.

“There is little in the way of precedent to gauge the total impact” of the fire on the labour market, TD says.

The wildfire comes at a time when Canadian economic data had already shown signs of slowing after a strong first quarter. Jobs, export and growth data reported in the past month have come in weaker than expected. Meanwhile the Canadian dollar has climbed about 8 per cent, to 0.77 versus the US dollar, in the past three months, thanks to more buoyant gains in jobs and GDP.

Canada’s central bank cut its benchmark interest rate twice last year, to 0.5 per cent, after the plunge in the oil price drove down business investment and capital spending and sent unemployment surging in Alberta, sending the oil-sensitive country into a recession.

However TD says that assuming oil production facilities are unharmed by the wildfire, the BoC will see this as a transitory shock and will hold back from another rate cut.

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