TORONTO (AP) — Canada's central bank said Wednesday the Canadian economy will shrink in the second quarter because of Alberta's devastating wildfires, which shut down its oil sands production.
The Bank of Canada, which kept its key interest rate on hold, said its preliminary assessment is that the destruction and halt to oil production will knock about 1 1/4 percentage points off real GDP growth in the second quarter. In April, the bank had forecast 1 percent growth in the quarter.
The bank expects the economy to rebound in the third quarter as oil production resumes and the rebuilding starts.
Officials hope to start a phased in return of more than 80,000 evacuees to the main oil sands city of Fort McMurray starting June 1. The fire and mass evacuation has forced a quarter or more of Canada's oil output offline. The Alberta oil sands have the third-largest reserves of oil in the world behind Saudi Arabia and Venezuela. Its workers largely live in Fort McMurray, a former frontier outpost-turned-city whose residents come from all over Canada. About 1,921 structures were destroyed in Fort McMurray, but 90 percent of the city remains intact, including essential infrastructure like the hospital, water treatment plant and the airport. Oil sands facilities were largely untouched.
The effects on the oil sector have also prompted private sector forecasters to trim their 2016 economic growth predictions for the entire country.
"The spillover is a shock to Canada I think it highlights the importance of the sector," said Craig Wright, the chief economist for the Royal Bank of Canada. "When a community that has 90,000 people is impacted like this and it drives down Canada's GDP it drives home the point fairly sharply."
Wright said taking 1 to 1.2 million barrels of oil per day off the market for between two and four weeks has ramifications for the entire country.
"In the past Canadians may thought high oil prices were good for Alberta and maybe we didn't collectively appreciate that it is also good for Canada," Wright said.
"Maybe the silver lining is that people realize that what's bad for Alberta is bad for Canada. Maybe there'll be a rethinking of the sector."
Canada has had trouble getting new pipelines built to transport Alberta's growing oil sands production because of environmental concerns.