The disruption to the U.S. economy from hurricanes Katrina and Rita will result in lower growth for the second half of 2005, and slightly stronger growth in 2006, but the effects on Canada should be modest, says the deputy governor of the Bank of Canada.

Speaking today to the Edmonton CFA Society and the Treasury Management Association of Canada, David Longworth said, “In light of the particular nature of the rebuilding challenge following Katrina, the disruption to the U.S. economy from these calamities should have a different pattern from that of previous hurricanes.” He noted that the negative effects on U.S. output are likely to be felt in both the third and fourth quarters of this year, resulting in somewhat lower growth than previously projected in 2005, followed by slightly higher growth in 2006.

“The overall impact on Canadian economic activity will probably be modest,” he added. “If one looks through these hurricane effects, the information received since the July [Update to the Monetary Policy Report] indicates that, broadly speaking, the global and Canadian economies have evolved in line with expectations. But world energy prices have, of course, moved above the levels assumed at that time.”

He said when the September inflation data is released next month, a temporary spike in headline inflation can be expected in response to higher prices for gasoline, heating oil, and natural gas; “but this should not have a large effect on core inflation. Indeed, part of the spike in gasoline prices at the pump has already reversed,” he said.

In its July update to the MPR, the Bank of Canada noted that the economy was operating close to its production capacity, with expected growth of 2.7% in 2005 and 3.3% in 2006. Based on this outlook, inflation was expected to be at 2% by the end of next year.

“The risks to the Bank’s outlook for the Canadian economy through 2006 appear to be reasonably balanced. As we discussed in our July Update, these risks relate primarily to the future path of oil and non-energy commodity prices, the pace of growth in China, and the ongoing adjustment of the Canadian economy to global developments,” Longworth explained.

However, he warned that beyond 2006, “there is an increasing risk that the correction of global current account imbalances could involve a period of weakness in world aggregate demand.”

“With our economy operating close to capacity and the stance of monetary policy still stimulative, we will be monitoring developments closely and continuing to assess underlying economic trends and their implications for keeping inflation on target,” he concluded. “In our October Monetary Policy Report, we will be updating our economic projection and evaluating the risks to the outlook.”