MNI INTERVIEW2: Modest Alberta GDP Fire Damage, BOC Can Hold

Premier Danielle Smith told MNI that Alberta's economy has been resilient to wildfires and the Bank of Canada can take some time considering further interest-rate cuts, saying policy stability and a recent inflation slowdown will aid consumer confidence.

 

"My understanding is that all of the oil sands operations are now back in operation, that the threat has subsided," Smith said in an interview Thursday. "It did impact I think about 7% of our production for a couple of weeks, but my anticipation would be that the rest of the year we'll be able to see an increase, and it will very likely be a very small impact on those companies."

 

Bank Governor Tiff Macklem flagged potential economic damage from the wildfires, adding to his list of concerns at the end of a press conference for the June 4 decision to hold rates. The federal government said Thursday wildfires burned at least 3.5 million hectares nationally versus the 10-year average of 820,000 hectares, and said dry and warm conditions will continue through August.

 

Premier Smith sees interest rates at a sustainable level and alluded to past drops in borrowing costs feeding Canada's long housing and consumer debt boom. That's a different tone from several provincial leaders last year who said the Bank was slow to cut rates to support growth as inflation slowed. 

 

 

"Interest rate stability is important. If it goes too high, it becomes really unaffordable for home buyers, especially first-time home buyers. If it goes too low, it ends up causing over-borrowing," Smith said.  

 

The Bank cut rates seven times between last June and March to lead the G7 on stimulus as inflation finished a journey from a peak of 8% back to its 2% target. Economists surveyed by MNI in the last week are split 8-5 in favor of a cut at the next meeting July 30, arguing the economy is already entering a recession because of the U.S. trade war. Those seeing a rate hold point to core inflation around 3% and Macklem said he's become more concerned about that pressure. (See: MNI INTERVIEW:BOC Still On Cut Path As GDP Falters- Ex Adviser)

 

The Bank in April laid out two scenarios based on the intensity of the trade war where GDP stalls this quarter or shrinks at the start of a longer downturn. Significant shutdowns in Alberta's oil and gas production could have grown the downside risks because energy is Canada's biggest export category. Lost work hours would also add to the recent climb in unemployment that combined with the trade war has shaken consumer confidence.

 

 

Consumers are also getting a boost from the federal government's elimination of the retail carbon tax, she said. "Changing those kinds of policies that are unnecessarily and arbitrarily inflating the cost of everything I think is going to be the most important to be able to protect consumers and to give a bit of a boost to consumer spending." Headline inflation slowed to 1.7% in April from 2.3% in March as gasoline prices dropped 18% from a year ago. 

 

Alberta's economic prospects are tied over time to global energy prices and Smith said this year's expansion of the TMX pipeline has reduced the discount on Western Canada Select oil to Texas crude. Her government projects West Texas oil to average USD68 a barrel this year, below the USD74 a barrel needed to balance the Alberta budget, she said. 

 

Asked about the impact of low oil prices on attracting new projects, she said stability in the market and geopolitics is probably more influential. "The stability that you would see somewhere between sixty-five dollars and seventy-five dollars seems to be the level that not only protects consumers, but also creates enough incentive for companies to invest," Smith said.