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GDP expected to grow despite financial hit due to flooding

TD Bank is increasing its forecast for Alberta’s gross domestic product (GDP) in 2013, despite a prediction that more than a billion dollars could be subtracted from economic activity in June due to severe flooding in Calgary and the rest of the province.

Economists at the bank reported that disruptions from recent floods could subtract between $500 million and $1.5 billion from economic activity in Alberta in June.

This amount equals between 0.2 per cent to 0.5 per cent of Alberta real GDP and 0.03 per cent to 0.09 per cent of Canadian real GDP.

“Natural disasters tend to share the same pattern of disrupting economic activity in the short term. However, as the recovery begins – typically in short order – a large part of the losses to production, spending and labour hours are quickly recouped,” said the report, Economic and Fiscal Impact of Flooding in Alberta.

“And, somewhat paradoxically, the significant rebuilding that follows often provides a net boost to economic growth partly reflecting the way gross domestic product (GDP) is calculated.”

The damage to capital assets in Alberta is estimated by TD economists at about $3 billion to $5 billion, or 1.0–1.7 per cent of provincial GDP.

Calgary was hit hard by the natural disaster.

The industries that are likely to be hit the hardest are on the service side, including retail and wholesale trade.

Enmax announced on June 28 that power was restored to the system in downtown Calgary.

In about seven days, Enmax restored power for 34,000 customers left without electricity as a result of the flood.

In addition, damage to transportation infrastructure, such as the Trans Canada highway and rail system, will weigh on transportation services and manufacturing.

According to the City of Canmore, the Trans-Canada Highway is open to four lanes between Banff and Canmore, for both private and commercial vehicles.

Crews have constructed a detour road and culvert bridge at Carrot Creek to repair the damaged west-bound lanes.

This temporary solution will be in place through the summer while a permanent replacement bridge is being built.

The Town of Canmore declared a state of local emergency when Cougar Creek overflowed and flooded the Trans-Canada Highway, which was closed east and westbound.

While employees of oil and gas producers headquartered in Calgary have been affected, energy production in the province (which accounts for 29 per cent of real GDP) suffered only minor setbacks.

The rebuilding of damaged infrastructure is likely to begin this summer and provide a boost to the Calgary and Alberta economies.

A risk to both the timing of spending and cost of rebuilding relates to the supply of available labour. Alberta has one of the tightest labour markets in the country, with an unemployment rate of 4.8 per cent in May.

As a result, the surge in hiring within the construction sector could lead to timing delays and drive up labour costs.

Recruiting from other provinces and abroad could help to mitigate this risk.

“It is important to note that in terms of economic growth accounting, damages to physical assets do not have a direct negative effect on GDP,” said the report.

“However, the reconstruction process that follows does provide a boost to GDP.”

This tendency to boost growth may cause any stimulus spending to have a greater impact than implied by loss estimates alone because damage estimates may not include associated labour costs.

According to the TD Bank report, not all of the losses in service sector activity are likely to be fully made up, but they anticipate any losses are likely to be offset this year by reconstruction activity and public spending.

For this reason, TD Bank’s 2013 real GDP growth forecast has increased to nearly 3.0 per cent compared to an April estimate of 2.5 per cent.

The revised estimate for 2014 has also been increased to between 3.5-3.7 per cent.

In April, the forecast for next year was 3.3 per cent.

The Alberta government has approved $1 billion as part of the first phase of emergency recovery and reconstruction funding for southern Alberta families and communities.

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