May 15, 2015 by Greg Meckbach, Associate Editor
Severe winter weather likely resulted in a dip in gross domestic product in the first quarter in both Canada and the United States, the Bank of Montreal’s chief economist suggested Thursday to insurance professionals in Toronto.
Douglas Porter, chief economist of BMO Financial Group, suggested to Centre for Study of Insurance Operations (CSIO) members that the U.S. economy likely shrunk in Q1.
In a report released May 8, BMO Capital Markets Corp. said it cut its forecast – of real growth in the gross domestic product in 2015 – by 0.3 percentage points in Canada, from 2% to 1.7%. It also revised its forecast for U.S. real GDP growth, to 2.5% from 3%.
BMO Capital markets had previously forecast slight growth in the U.S. in the first quarter, but Porter suggested Thursday that will likely change.
“We think the second estimate is going to show the U.S. economy actually shrunk in the first quarter of this year,” Porter told CSIO members Thursday after the formal portion of the meeting, held at the National Club across the road from BMO’s head office. “We saw that last year in the first quarter and we think both were held back by very tough winters.”
Winter damage in the U.S. and Canada in 2014 was the fourth costliest natural catastrophe event that year, Munich Reinsurance Company stated in Topics Geo 2014, a publication released in March.
“A series of frigid air masses surging south from the Arctic brought record cold temperatures to the eastern United States and Canada,” Munich Re said in the report, adding that catastrophe had overall losses of US$2.5 billion and insured losses of US$1.7 billion.
Then in April, Munich Re said – based on preliminary data from Munich Re and Verisk Analytics Inc.’s Property Claims Services – that winter storm losses in the U.S. this past winter caused direct economic losses of US$3.2 billion and industry-wide insured losses of US$2.3 billion.
“We had the same winter, if not worse, here in Canada,” Porter (pictured below right) told CSIO members Thursday. “We are a little bit more used to winter weather but it has affected the Canadian economy as well. We had a bit of an off first quarter last year. It looks like we also declined in the first quarter of this year as well. I think a lot of that weakness is temporary.”
But the recent drop in crude oil prices will affect Canadian economic growth this year, he suggested, adding Alberta, Newfoundland and Saskatchewan are “facing a real slowdown.”
BMO Capital Markets is forecasting a drop in GDP in Newfoundland and only 0.4% growth in Alberta in 2015. The province with the highest growth forecast – at 2.6% – is British Columbia, while Ontario is second at 2.5%.
He suggested there are several reasons Ontario’s growth will not be higher.
“One is we just don’t have the industrial capacity we used to have,” Porter said. “During the recession and the aftermath, many many manufacturers closed up their gates and left.”
He referred to the closure in 2014 of both the H.J. Heinz Co. ketchup plant in Leamington and the Kellogg Canada Inc. cereal factory in London. Porter also cited the shutdown in 2011 of Ford Motor Company of Canada’s St. Thomas assembly plant at Talbotville, immediately south of the London city limits.
“Even as recently as last year we are still seeing a number of big plants that have been around for 100 years … shutting their doors,” he said. “What’s happening is the auto plants we have are almost operating flat out. We have had so little investment in recent years, especially in the auto sector, that there really isn’t room to grow, for the manufacturing sector. Now this is not necessarily a permanent feature. If we started to get new investment … we could start growing again rapidly but I think there is just a limiter on the Ontario economy at this point, and 2.5% in this world is actually pretty good.”
BMO Capital Markets reports that the price of West Texas Intermediate crude oil was US$97.94 in 2013, rising to US$105.79 in June 2014 and dropping to US$53.34 last month.
“Our view is that oil prices are likely to stay fairly close to current levels through the rest of this year,” Porter said, adding prices will average US$65 a barrel next year and about $75 a barrel in 2017-18.
“Today’s very low prices are not going to stay around for long,” he said. “There is next to no new investment going on in the sector right now at $60 a barrel, so these are not sustainable for long.”
However, he added BMO Capital Markets analysts “don’t think oil prices are going to get back to that $100 level.”
But oil is not the only Canadian product whose price is dropping.
BMO Capital Markets reports natural gas was trading at US$4.59 per million British thermal units in June 2014, dropping to US$2.63 in mid April. Copper, which was trading at US$3.24 per pound last year, was down to US$2.72 as of mid April.
“Most commodities (other than crude oil) have been quietly weakening for years,” Porter said Thursday.