There’s no question that vaccines are a game changer in this pandemic. They render the virus much less dangerous. They make it also much less transmissible, and so clearly alters the equation quite significantly with big positive economic consequences. With the warning that another wave of infection seems fairly likely as I record this, we should nevertheless see, over the coming few quarters, big declines in the rate of infection, huge drop in hospitalizations and [an] even bigger drop, we think, in fatalities. And herd immunity is the ultimate goal of vaccinations, and that may or may not ultimately prove to be an elusive goal actually so long as children can’t be inoculated, but there should be very significant progress made along the way to that aspiration.

And so, for instance, we can say as the most vulnerable people get inoculated, fatalities should fall quite significantly over the next few months. As frontline people are inoculated subsequently, we should see big drops in infections as well, and we think the economic rebound in all of that should be fairly frontloaded. We saw that governments very reluctantly shut down last fall, and they largely did it when their hospitals neared capacity. And so as hospitals hopefully edge away from that capacity over the next few months, we should see some pretty significant economic reopening. We’re, in fact, already starting to see some of that in quite a number of jurisdictions and so that’s a promising thought.

I should say in terms of the economy more generally, there’s already a recovery substantially underway. That’s a point worth making, I think. The second wave economic damage at the end of 2020 and early 2021 was considerably milder than we’d expected, and we’d actually been fairly optimistic in terms of our expectation, and so it really was very mild. We actually now think that North American economies will likely be bigger over the second half of this year than they were before the pandemic and so not that far away from setting records for size. Still some further work to be done in terms of fully normalizing economies, but quite significant work there.

And so, really, 2021 is set to be the year of the vaccine. It’s a year, I think, that we’ll enjoy a profound economic recovery. We have above-consensus economic forecasts, in part because of just how effective the vaccines seem to be and how quickly they’re starting to be distributed. But also, I should say, in part because above-consensus forecasts have been the winning strategy since the very beginning of the pandemic so far, and we also don’t think there’s going to be that much scarring. And so I guess the bottom line is we feel pretty good about 2021 from an economic standpoint.

U.S. has now delivered several massive fiscal stimulus packages over the last year. And so they did a big one in the spring of 2020, they did quite a considerable one at the very end of 2020, and, as we record this, it now appears another enormous one is on its way out the door. And this most recent package is truly gigantic. It’s set to be US$1.9 trillion. That’s almost 10% of the size of the U.S. economy, and so it’s going to have quite a real effect and we are fully budgeting for household incomes to soar. In fact, they’ve already soared on the back of earlier rounds, but they’re set to rise even further.

It’s probably fair to critique it and say it’s arguably too big relative to the economic hole. The U.S. economy isn’t all that radically far from normal right now, and so my suspicion is it’s a bit more than is actually needed, but nevertheless, that’s how much we are getting. And we should see spending rise somewhat. So there should certainly be some economic boost from it. I would warn that we don’t expect all of it to be spent. That’s been the experience from other earlier rounds and so that’s probably going to play out again. People just don’t have a big need to increase spending this much, especially when there are constrictions on what they can spend until the pandemic is over. Nevertheless, it should boost economic activity. It should push the U.S. to the front of the growth charts, and so we have the U.S. economy growing at six percent in 2021 and certainly a few percentage points of that is because of this extra fiscal stimulus.

There probably will be some spill over into other countries. That’s to say some of the money will trickle beyond U.S. shores and help global growth. In fact, the OECD has recently estimated there could be an extra percentage point of global growth in 2021 just from this one stimulus package. And for Canadians watching, it’s likely a disproportionate effect for Canada, given the proximity of the two countries.

Now, one concern about big fiscal stimulus packages is sometimes you get a bit of a hangover later. When the stimulus eventually fades, there’s this new hole in the economy. People got used to the stimulus. And so that is an issue. It’s probably more of a 2022 issue at this point in time, but I’m not convinced it’s going to be overly problematic just because people spent a small enough amount of the recent rounds of stimulus that they actually saved a chunk of it and we’ve seen they actually end up smoothing their spending over this period of a few years as opposed to using it all at once, and that should help the fiscal cliff concern.

And then the other concern, and this is a valid concern, is, of course, every time all of this fiscal stimulus gets delivered, it just means more public debt. And so we’re seeing public debt levels rise to record or near-record levels just about right across the developed world and it doesn’t look like there’s any kind of insolvency coming. We’re not seeing countries struggle with it because this was also a very low interest rate environment, but nevertheless, there is a piper to be paid at some point in time for this. It’s not free money. And again, refer back to the thought that maybe this is a little bigger than it needed to be but, of course, the U.S. has a new president eager to make his mark and this is very much part of that effort.

Inflation’s been low through this pandemic so far, and that makes sense. That’s what happens when you’re in a recession and when unemployment rates go very high. So that’s been the experience so far, but we have seen inflation fears rise significantly recently. We have observed commodity prices going up as well and, of course, those can contribute to inflation. And actually, we should budget for something of a spike in inflation numbers just over the next few months, mostly because we’re losing some of the oil price drops from 2020 out of the annual equation and we’re picking up some of the recent rebound. I don’t think that spike’s going to stick around for long, but we are going to see a bit of that. So tongues will likely continue to wag on the subject.

In the end, I’m not convinced the extra inflation is likely to be all that enduring. Our base case forecast is for inflation to rise over the next few years, but really only fairly moderately to fairly normal levels, so no great fireworks are expected. And so I guess I would say there are new upward risks and pressures. This is why people are concerned and watching inflation quite closely. Some of those upward risks and pressures include all of the money printing that central banks are doing. In the U.S., the central bank has a new mandate that actively looks for a little bit more than two percent inflation for a period of time. There’s always a suspicion that when debt levels go up, maybe countries will try to inflate some of it away. I’m personally dubious, but nevertheless, that enters the conversation.

There is some supply chain onshoring happening as well, and so that is to say as you see perhaps medical supply chains brought domestic, it costs a little more money to make things domestically instead of outsourcing them to cheaper emerging market countries. And some countries, including Canada, have carbon taxes that are going up. And that can add some inflation as well.

But when I think about all of those factors, and again, it is five new upside pressures on inflation, four of the five are very mild. Really, the only one that could prove a powerful inflationary effect would be all of the money that’s been printed by central banks. And I guess I would say to that it’s a risk. It’s a risk we’re aware of. However, a decade ago, we did not see inflation rise at all in response to the money printing that happened then.

We can look at Japan over the last 20 years and see Japan was printing money almost throughout, even at times when banks weren’t deleveraging, and they really haven’t generated very much inflation. In fact, there’s a reason central banks stopped focusing on the money supply in the 1970s. They used to use it as a tool for influencing inflation. They realized it didn’t work very well. There really isn’t much of a link. We’ve spent quite a bit of time recently looking to build and find models that connect the money supply to inflation, and they really just don’t exist. There isn’t a good connection between the two.

And in terms of understanding why that is, well, we can see, for instance, out of all the money central banks have printed, a lot of it has ended up at chequing accounts and savings accounts in banks. It hasn’t actually been deployed into the economy. And an even bigger chunk of it has actually been sent right back to the central bank in the form of excess reserves. And so the money isn’t actually sloshing around quite as much as it looks like, at least from a monetary stimulus perspective.

And so I think in the end we can expect inflation to go up somewhat, but we’re not expecting a problem in the inflation space. And I would just remind people as well, keep in mind there are downside pressures as well that need to be factored in. This is still an environment with higher-than-normal unemployment rates. That’s probably the case for the next year or even the next two years, not classically an environment that generates a lot of inflation.

Recall even before the pandemic, we weren’t exactly seeing a lot of inflation even though technically economies were supposed to be overheating a little bit. It’s a long time since we’ve seen much of a wage price spiral. We don’t know if that can happen in a modern economy with less unionization and a globalized labour market.

And don’t forget as well, demographics seem to be profoundly deflationary as we see countries get older, as populations grow less quickly. That’s been the experience in Japan. To some extent, that is now the experience in Europe and there is a bit of that also dribbling its way into the North American space.

And so in the end, yes, let’s forecast a bit more inflation. I would stop short of predicting outright trouble.

We expect surprisingly few lasting implications from COVID-19 on the economy, and so many things should snap back very quickly. As soon as the pandemic and the associated restrictions are done, we think socializing and personal travel, restaurant usage, live entertainment – we think all of that essentially returns completely back to normal as soon as the rules allow it to, and so that should snap back.

We look at economic variables like unemployment and these kinds of things. It’ll take a little longer to work back. We think over the next few years, we will see normal-looking unemployment rates and this sort of thing. Productivity growth was never actually all that affected, but we don’t see a reason why productivity growth can’t be normal thereafter. You could maybe even spin a tale of productivity growth picking up from here, but at a minimum, there shouldn’t be any lasting damage done, I don’t think.

And then we think about longer-term consequences, maybe factors that will take a few years to normalize, but will still ultimately normalize. And so, for instance, I would say look at the preference for suburbs and rural areas over downtowns and cities right now, and actually I feel reasonably confident in saying that does eventually more or less fully reverse.

And don’t underestimate the power of urbanization as a force that’s really formed humanity for tens of thousands of years. And lots of reasons why people want to live in cities, including access to good-paying jobs and companies like to be there. Its innovation hubs and governments find it easier to deliver services in cities and that’s where high-quality education and health care and culture and these sorts of things tend to be. And so I suspect we will see that snap back over the span of multiple years. Similarly, no reason that larger governments need to stay larger forever. The pandemic needs will fade alongside the pandemic.

But there are some things I think that will be permanent. So, for instance, unfortunately, my suspicion is that public debt will be permanently higher. I’m not expecting a heroic politician in the future to pay all of that down and so I think that, unfortunately, sticks.

But there aren’t that many things that are truly permanent that remain at this level of intensity. Other items that we think stick around will probably become a little bit less aggressive in their existence. And so, for instance, we can say online shopping, certainly more reasonably than there was before the pandemic, but less than there is today as many stores reopen. The commercial real estate conceivably certainly less than before the pandemic, but more than the need is right now with so many people working from home. It’s the same, I suspect, with business travel, the same with working from home. Certainly more working from home is likely than before the pandemic, but not nearly this much. And even interest rates as well, in the sense that we do think interest rates will be permanently lower than they would have been because of the pandemic but that doesn’t mean as low as they were last August forever, it just means at all times maybe they’re 10 or 20 basis points below where they would have been without the existence of the pandemic.

And so certainly, we can pick and choose and find some lasting consequences in all of this and, indeed, some permanent ones, but even those are likely to de-intensify, and I think in general I can say fewer lasting consequences than commonly imagined. That’s very much been the theme when you look back at the Spanish flu or you look at other seminal events that, in theory, could have had very lasting consequences. Very often they didn’t. And so I think it’s going to be a similar story with COVID-19.

Housing is very hard to predict right now, and so full disclosure: almost no one expected a housing boom during the deepest recession in our lifetimes. Classically, during recessions, one sees a much weaker housing market as opposed to a much stronger housing market, and particularly when you combine with the fact that immigration shrank enormously over the last year. Normally, that’s the driver of population growth and of new housing demand. And so the strength so far, quite frankly, has been surprising and it gives us a little less confidence in terms of our ability to predict the future from here.

I suppose in trying to understand the housing strength, we could say, well, housing was certainly on the mind with many people living in their homes 24 hours a day and so that changed the thought process to some extent.

Clearly, mortgage rates were and are extremely low right now, and so that has driven something of the housing boom, though you could equally observe that normally mortgage rates fall during every recession and don’t always result in such a boom.

And so I guess I would say this. Going forward, our suspicion is that housing will become a little bit less hot. It’s hard to imagine it remaining this red hot indefinitely. Likely to cool somewhat. Mortgage rates likely to become a little bit less low and so on, but we’re not seeing signs of distress. And so very often with a recession, or even with a housing boom, you start to see things like foreclosures rising, mortgage delinquencies become problematic and that kind of thing. We’re really not seeing that right now. In fairness, much of that is because of so much government support, but we’re not convinced that government support is particularly going away.

And so as we look forward, a housing market that’s likely to be a little bit less hot, but probably not one that’s going to be correcting or anything quite like that.

And then pivoting over to the long-term story, the long-term one is one in which we expect the Canadian population to continue to rise, conceivably fairly forcefully on the back of quite a lot of immigration. That should provide quite a lot of support in particular for urban housing markets. And I suppose I would add to that and say based on our view that cities stage a revival despite a bit of a retreat during the pandemic, our suspicion is there could be room for even more catch-up growth in cities and perhaps even more so in downtowns that have lagged somewhat over the last year.