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Canada rebound set to survive wildfires that ruined May GDP

[OTTAWA] Canada's gross domestic product contracted at the fastest pace in more than seven years in May as wildfires curbed Alberta oil production.

The economy shrank 0.6 per cent after an April expansion of 0.1 per cent, Statistics Canada said on Friday in Ottawa. The median forecast in a Bloomberg survey was for a 0.5 per cent contraction. The drop was "primarily due" to the record 22 per cent plunge in non-conventional oil production, the agency said, which typically refers to the technique used in the oil sands of extracting bitumen by mining it or injecting steam into the ground.

Analysts see the damage from the fires as contained and predict the losses will be more than recovered in the second half.

"We would still not regard this as a bad news story," said Doug Porter, chief economist at BMO Capital Markets in Toronto. "The oil production losses will be fully reversed over the next few monthly reports, and the rest of the economy is still grinding along at a pace of around 1 per cent." The wildfires are another chapter in a long-delayed economic recovery following years of weak global demand and a more recent plunge in energy investment. Whether or not oil production and the wider economy bounce back is critical for Bank of Canada Governor Stephen Poloz, who is standing by a prediction for an export recovery in the second half.

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Poloz kept his key lending rate at 0.5 per cent on July 13, pointing to signs oil production was resuming after fires knocked about 1 million barrels a day offline and forced the evacuation of 80,000 people from Fort McMurray. Poloz also projected the economy would rebound with annualized growth of 3.5 per cent in the third quarter after shrinking 1 per cent in the second.

"I'm pretty sure we are going to see some rebound," in the third quarter, said Jimmy Jean, a fixed-income strategist at Desjardins Capital Markets in Montreal. "There's still a case to be made that we're going to be fine." The economy probably shrank at a 1.7 per cent annualized pace in the second quarter, while expanding 3.5 per cent in the third, he said, adding Friday's GDP report won't cause the Bank of Canada to change rhetoric. "They don't want to signal that they are ready to move because it's pretty clear they want to wait for fiscal stimulus to work."