Our monthly economic webcast for June is now available, entitled “Inflation worries mount.”
This week’s note reviews the latest virus developments, including a discussion about two worrying new variants. Vaccine news is then discussed, followed by a variety of economic developments. We also compare the economic damage inflicted during the second wave to the third wave. In closing, we review whether globalization is actually in retreat, and provide an update on a range of geopolitical items.
Recent developments are mixed overall, with some very good news offset by some very bad news.
The positive developments are:
- The third virus wave is now in rapid retreat for both developed and emerging nations.
- Vaccination campaigns continue to proceed briskly.
- Many jurisdictions are beginning to reopen their economies.
- The latest economic data confirms the beginning of a post-lockdown rebound.
- The new virus variant from India (subtype 2) appears not just to be more contagious but also somewhat better at bypassing vaccines.
- Vietnam reports another variant that may also be more contagious.
- Vaccine demand is beginning to ebb in some developed countries, suggesting vaccination campaigns may fall short of achieving herd immunity.
- Economic surprises are becoming less reliably positive, though they aren’t outright negative.
Third wave in retreat
The rate of new COVID-19 infections is now declining quite nicely at the global level, with fatalities also now falling (see next chart). Relatedly, the global transmission rate is now on the cusp of its lowest level since the pandemic began (see subsequent chart). Essentially, this means that COVID-19 is retreating as rapidly as it ever has.
Global COVID-19 cases and deaths
As of 05/30/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM
Global transmission rate hovering around key threshold of one
As of 05/30/2021. Transmission rate calculated as a 7-day change of underlying 7-day moving average smoothened by a 14-day moving average of daily new cases. Source: WHO, Macrobond, RBC GAM
Both developed and emerging nations are now improving significantly, with most on the mend (see next chart).
COVID-19 emerging market versus developed market infections
As of 05/30/2021. Calculated as the 7-day moving average of daily infections. Source: WHO, Macrobond, RBC GAM
India’s improvement has been particularly prominent: its caseload is now down a remarkable 47% from its peak and still falling rapidly (see next chart). This is promising in that it means its worrying variant can ultimately be controlled (unless India has achieved herd immunity the hard way – via infection).
COVID-19 cases and deaths in India
As of 05/30/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM
While most emerging market countries are now getting better, a few are not. South Africa’s infection count has tripled over the past month. China is also experiencing its highest daily infection rate since its initial tussle with the virus in early 2020. The absolute numbers are still quite small, however, and we believe China has the necessary policy levers to control such outbreaks (see next chart).
COVID-19 cases and deaths in China
As of 05/30/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM
U.S. daily infections continue to edge lower despite little social distancing. At the same time, the Canadian numbers continue to improve significantly with greater help from social distancing (see next chart). In fact, Canada’s caseload is now almost back to its trough level after the second wave.
COVID-19 cases and deaths in Canada
Even the number of variant cases is now in decline in Canada – arguably a necessary condition given that variants represent most cases (see next chart). Nevertheless, it is a positive development to the extent that the variants are more contagious than the original virus and thus less amenable to taming.
Growth rate of variant cases in Canada
As of 05/21/2021. Week-over-week growth in total new variant cases. Source: Government of Canada, RBC GAM
Even Japan is finally managing to pare its new cases per day despite a lagging vaccination campaign (see next chart).
COVID-19 cases and deaths in Japan
Beneath this mostly good news is a worrying undercurrent. Earlier we fretted about the variant from the U.K. and highlighted the potential for a third wave even as the second wave was in retreat. Today we worry about the variant from India (and now one from Vietnam) and consequently the potential for a fourth wave even as the third wave happily declines.
Variant from India
The U.K. has reported a rising fraction of cases from this variant (see next chart – alas, it was not possible to update to the latest week due to problems with the reported data). British health experts expect subtype 2 of the strain to shortly become the dominant one in the U.K.. What’s more, the evidence so far is that the variant has expanded far more quickly than any other variant did when they first began to spread, despite a higher level of vaccine-induced immunity today. The best guess is that subtype 2 of the variant from India is around 50% more contagious than the one from the U.K., and approximately 125% more contagious than the original virus.
Variant share of cases in U.K.
As of 05/23/2021. Share of cases by variant. Source: GISAID, RBC GAM
The next few weeks will be telling. The overall number of new British cases per day has now begun to inch higher again (see next chart). Given the rate at which the variant is multiplying, there could be quite a significant rise in U.K. cases over that timeframe. But this is not quite certain: the variant from India is disproportionately spreading within unvaccinated pockets of the country, and so its spread may be undermined as it reaches the limits of these pockets.
COVID-19 cases and deaths in the U.K.
The main revelation over the past week comes from Public Health England. It released the unfortunate finding that subtype 2 of the variant from India may not just be more contagious than prior strains, but also somewhat more resistant to vaccines. For those who are fully inoculated with two doses, the difference is fairly small. For the Pfizer vaccine, compare 88% efficacy against the variant from India versus 93% efficacy against the variant from the U.K. For the AstraZeneca vaccine, compare 60% efficacy against the variant from India versus 66% efficacy against the variant from the U.K. But among people who have only had a single vaccination, the efficacy against the variant from India is just 34%, versus 51% effective against the variant from the U.K. (the numbers are similar for Pfizer and AstraZeneca in this case).
In short, there is the real risk of a fourth wave as the second variant from India spreads globally, especially if second jabs are not quickly delivered into waiting arms.
Variant from Vietnam?
Adding to the risk of further viral waves, Vietnam has just announced the discovery of yet another new variant. The country identifies this one as possessing a combination of characteristics from the variants from the U.K. and India. Further, they posit that it is potentially more transmissible by air than the others.
It is undeniable that Vietnam is now experiencing its worst outbreak of the pandemic. This could mainly reflect the fact that the variants from the U.K. and India – the dominant strains in the country at this point – are more contagious than their predecessors (see next chart).
COVID-19 cases and deaths in Vietnam
There appears to be a never-ending parade of new and more transmissible variants. Just when social distancing rules and vaccination campaigns reach the necessary level to quell one variant, another seems to pop up.
International scientists have not had a chance to study the purported variant from Vietnam yet. It is entirely possible that it is not as dangerous as it first seems. For example, other forms of the virus also appear to possess some capacity to transmit via aerosol rather than just droplets. Furthermore, the variants from South Africa and Brazil were expected to be more problematic than the variant from the U.K., but have failed to gain nearly as large a foothold. So there is precedent for a theoretically dangerous variant failing to meet expectations.
The world has now administered nearly 1.9 billion vaccine shots globally. That’s an average of 32 million doses per day. The rankings remain familiar, with the United Arab Emirates and Israel near the top, the U.K. and U.S. leading among large nations, with Canada somewhat further behind and the European Union a bit further back again (see next table).
COVID-19 global vaccine ranking
As of 05/30/2021. Cumulative total doses administered by country per 100 people. Source: Our World in Data, Macrobond, RBC GAM
It is notable that the rate of inoculation among leading nations is no longer actively rising. Most are now vaccinating at a steady rate or even slowing their pace (see next chart).
Coronavirus vaccine daily doses administered
As of 05/30/2021. 7-day moving average number of new daily coronavirus vaccine doses administered per million. Source: Our World in Data, Macrobond, RBC GAM
To the extent that the rate of vaccine production hasn’t slowed, this presumably means that emerging market nations are or will soon receive rising allotments.
The world remains on track to produce between 11 and 12 billion doses this year – enough to inoculate 75% of the global population. To the extent children are presently excluded from the vaccination campaign, that number of doses could theoretically inoculate all of the world’s adults. More realistically, assuming younger children do get inoculated and recognizing the logistical challenges inherent in reaching remote communities, the global campaign will extend into 2022, but not necessarily for the years and years that some fear (setting aside the potential need for regular boosters, either to replenish immunity or to protect against new variants).
Vaccine demand slowing
We suspect the main reason that the rate of vaccination is slowing in some developed countries -- most prominently in the U.S. – is that demand is abating. Those who want to be inoculated increasingly have been, leaving a more reluctant group to be persuaded. One betting market now indicates that there is a less than a 20% chance that 80% of the U.S. population will be fully vaccinated before the spring of 2022. There will certainly be enough vaccines for them, so this is a matter of demand.
There was some initial concern whether viral vector-based vaccines such as the one created by AstraZeneca could be topped up by future boosters. Tests have recently established that the risk of recipients’ immune systems fighting off later booster shots (and thus rendering them ineffective) is low.
Elsewhere, the U.K. is apparently now backing away from the idea of a vaccine passport system due to a combination of ethical and legal concerns. This may slow the country’s reopening.
Economic surprises less positive
Economic surprises are becoming less reliably positive than they were over the past year (see next chart). This is particularly visible in the U.S., which arguably makes sense now that so much positive economic news has already arrived. It is also consistent with our view that other countries have the capacity to play catch-up to the U.S. economy over the second half of the year.
Reflecting all of this, our own GDP forecasts for the year ahead are no longer universally above consensus. Now, they are a mix of on- and slightly above-consensus forecasts.
Global economic surprises remain positive, though slipping lower
As of 05/28/2021. Source: Citigroup, Bloomberg, RBC GAM
The U.S. PCE (Personal Consumption Expenditures) deflator for April has arrived. It takes on an outsized importance for three reasons:
The deflator slightly exceeded expectations, but was nevertheless not as hot as the CPI measure, rising to +3.6% YoY. The core measure, on the other hand, essentially matched core CPI, at +3.1% YoY. Next month may bring a bit more heat, after which we expect the rate of inflation to start edging back down.
U.S. tax distortions
U.S. personal income and spending was artificially high in March due to the arrival of $1,400 fiscal stimulus cheques for most Americans. In April, there was something of a hangover. Personal income rose by a colossal 20.9% in March, then plummeted by 13.1% in April. If anything, spending was surprisingly resilient, increasing by 0.5% after a 4.7% gain in the prior month. While the latest figure is not impressive by the standards of the post-pandemic recovery, it is still the equivalent of a muscular 6% annualized gain.
April economic data was also visibly softer elsewhere. For example:
- There was a 1.3% decline in durable goods orders relative to the prior month.
- A Chicago Fed National Activity Index was also less impressive in April than in earlier months.
But, critically, the U.S. May data should mostly be better. Real-time data remains consistent with a further economic rebound.
Real-time U.S. data
Our U.S. economic activity index shows further growth into May (see next chart).
U.S. economic activity accelerates as states lift restrictions
As of 05/15/2021. Economic Activity Index is the average of nine high-frequency economic data series measuring the percentage change versus the same period in 2019. Source: Bank of America, Goldman Sachs, OpenTable, Macrobond, RBC GAM
Even previously beleaguered sectors are doing surprisingly well. Credit and debit card spending on lodging – hotels and the like – is now just 5% below the equivalent time period in 2019. Credit and debit card spending on restaurants and bars are actually 13% higher than they were two springs ago. Conceivably some of that increase is because food costs have gone up and people are tipping waiters more after a difficult period for the industry, but it is nevertheless more money than usual going into the industry.
Meanwhile the weekly jobless claims data continues to improve. This points to what should be a fairly good U.S. payrolls number for May, to be released at the end of this week (see next chart).
U.S. jobless claims reached pandemic low
As of the week ending May 15, 2021. Shaded area represents recession. Source: Department of Labor, Haver Analytics, RBC GAM
Canadian weakness in April
Canadian economic data was most definitely weak in April. This was expected given the lockdown that occurred across the country in response to the third wave of infections. Retail sales were reported to have increased by 3.6% in March, but then fell 5.1% in April. We expect a tentative rebound in May, followed by a more enthusiastic bounce in subsequent months.
Canadian Q1 GDP will be released shortly after this is written, and is expected to rise by nearly 7% annualized, spurred by a solid 1% gain in the final month of the quarter. However, the flash estimate for April should reveal a moderate – if temporary – GDP decline.
Canadian CPI in April followed the U.S. lead higher, but not to the same extent. Whereas the U.S. reading is now a lofty +4.2% YoY, Canada’s print is a less extreme +3.4% YoY. The weaker U.S. dollar likely explains part of the difference. Canadian core inflation remains entirely normal looking, up +2.1% YoY.
Second wave versus third wave
Although the third wave is not quite over yet, we ultimately anticipate an equivalent or lesser amount of economic damage from the third wave than the second wave. And recall that the second wave did surprisingly little economic damage.
This view is partly motivated by theory: people and businesses are theoretically getting better at operating through lockdowns now that they have endured so many.
It also has an empirical basis. Our lockdown index shows that none of the examined countries experienced a greater shift or absolute level of lockdown in March through May of this year than in October 2020 through January 2021 (see next chart). Note that the level of lockdown is defined by a mix of:
- Oxford stringency data that attempts to gauge the strictness of government rules
- Google Mobility data that examines the extent to which people are actually moving around.
Severity of lockdown varies by country
Based on latest data available as of 05/27/2021. Deviation from baseline, normalised to U.S. and smoothed with a 7-day moving average. Source: Google, University of Oxford, Macrobond, RBC GAM
For its part, the U.S. didn’t lock down much at all in response to the third wave, so there is no debate whatsoever about the magnitude of any economic damage in the U.S. The second wave was much worse.
Globally, the retreat in commercial flights has been less extreme across the third wave than across the second wave, though the series is admittedly not seasonally adjusted and seasonal effects are likely considerable (see next chart).
Commercial flights tracked by Flightradar24
As of 05/19/2021. Includes commercial passenger flights, cargo flights, charter flights and some business jet flights. Source: Flightradar24 AB, RBC GAM
Interestingly, although Europe has definitely suffered somewhat from an economic standpoint during the third wave, this is not visible in the Eurozone services PMI (Purchasing Managers’ Index). The first wave decline in the activity metric was huge, the second wave drop was notable, but there hasn’t been a drop at all in the metric during the third wave (see next chart).
Eurozone has performed worse than U.S. across pandemic
Eurozone Purchasing Managers’ Index (PMI) as of May 2021, U.S. PMI as of Apr 2021. Source: IHS Markit, ISM, Haver Analytics, RBC GAM
In Canada, the fraction of small- and medium-sized businesses reporting being open has declined, but less abruptly and to a higher low than in the second wave (see next chart).
Canadian businesses shuttered again during third wave
As of 05/11/2021. Source: Canadian Federation of Independent Business, RBC GAM
Finally, Canadian employment shed 265,000 jobs in December and January of last year during the second wave. The loss in April was 207,000, with the consensus anticipating a further 22,500 lost jobs in May. If this sticks, and given the reasonable expectation for growth in June, it would argue for slightly fewer job losses during the third Canadian wave than during the second.
Overall, while the data is not unanimous, it appears that the third wave was probably no worse than the second wave from an economic standpoint, and possibly even slightly milder. Nevertheless, some damage has been done.
Less gloom on globalization
It is undeniable that globalization is advancing less quickly than it did a quarter century ago (see next chart).
Trade growth has been decelerating compared to GDP growth since the turn of the century
Ratio of 5-year growth of export of goods and services to that of GDP. Shaded area represents U.S. recession Source: Organisation for Economic Co-operation and Development (OECD), Haver Analytics, RBC GAM
Trade growth outpaced GDP growth by more than a factor of two during the peak globalization era of the late 1990s. That rate slowed to around 1.5 times during the first decade of the new millennium, and then again to just over 1.0 times over the past decade. In 2020, during the pandemic, it collapsed to less than 0.5 times.
What explains this decline? Before the pandemic, several forces were already at work:
- Prior major trade deals such as NAFTA (North American Free Trade Agreement) and the integration of the European Union (E.U.) had already been fully implemented, extracting all of the additional trade growth they were going to achieve. To be clear, the level of trade is still higher due to such initiatives, but no longer actively growing more quickly than otherwise.
- There have been some new trade deals over the intervening years. These include the USMCA (U.S.-Mexico-Canada Agreement) and the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), alongside several bilateral deals between the E.U. and Canada, Mexico and Japan. These were fairly limited in their effect, if only because the barriers were already pretty low beforehand due to prior rounds of tariff-cutting.
- The Trump era, of course, then brought additional U.S. tariffs, and Biden has not been quick to reverse them.
- The world is becoming increasingly homogenous: worker skills, productivity levels and wages are all converging. This reduces the gains from trade.
- Over time, as automation incrementally replaces manufacturing workers, the benefits of trade diminish since the robots could just as easily be located in one country as another.
And then the pandemic itself reduced trade along with nearly every other economic variable, and created an appetite for on-shoring certain supply chains. Governments may also now be attempting to rebalance the equation toward workers and away from capital, which could create a further headwind for globalization.
However, we are dubious that the world is truly set to de-globalize. More likely, there will be a return back to the pattern of the decade before the pandemic, with global trade growing approximately in line with global GDP. In other words, neither globalization nor de-globalization, but on a knife’s edge between the two. This is consistent with the latest OECD forecast (see next chart).
Trade to grow in line with GDP
World trade of goods and services. Trade volume and GDP forecast from OECD Economic Outlook, Dec 2020. Source: OECD, Haver Analytics, RBC GAM
What supports the view that trade will significantly recover?
- Trade is always a high beta variable. When the economy shrinks, trade shrinks by even more. But the opposite is also true on the way back up. Little has been permanently lost over the past year.
- The high cost of shipping containers right now should be a temporary phenomenon as demand preferences revert back to normal after the pandemic.
- There is some evidence that container ship production has historically been subsidized. However, that is arguably a conscious decision by export-reliant countries like China. As such, it seems unlikely to change.
- Supply chain on-shoring should ultimately be fairly small, fragmenting the production of certain medical items (such as masks and vaccines) into domestic markets, but not entire large industries. While the U.S. has big aspirations to reduce its reliance on China across a much wider set of products, this will be a gradual affair and it will likely have to settle on shifting production for most of those goods to allied nations (probably still mainly in Asia) as opposed to bringing them entirely within the U.S.
- If labour costs are set to become less important over time (due to wage and productivity convergence, plus automation), there are still plenty of factors that might justify producing in one country versus another. These include different economics of scale, proximity to companies up and down the supply chain, proximity to competitors and innovation hubs, proximity to the customer, the cost of electricity, the corporate tax rate, and the regulatory environment.
- Even if the growth in the sheer quantity of containers shipped were to stagnate, the value of traded goods should continue to rise given the shift toward smaller high-tech products like computer chips. Further, there remains plenty of room for growth in the provision of international services such as banking, consulting, entertainment and tourism.
To reiterate, while trade growth in the future is unlikely to be as impressive as it was in the late 1990s or even the 2000s, it seems far from certain that it will end up significantly worse than it was before the pandemic.
The period of intense globalization was good for economic growth, for multinational profits and for holding down inflation. With sideways globalization, we lose a bit from each of these categories. But arguably the main loss on each of these fronts occurred over a decade ago. That’s when trade growth ceased to outpace economic growth.
Indeed, economic growth was palpably slower over the past decade. Multinationals still seem to be doing fine, though they have enjoyed higher profit margins for other reasons such as rising firm concentration. Inflation was not obviously higher over the past decade, though, again, there were many other competing influences. But the main point is that any shift in what constitutes normal growth, profits or inflation should already have appeared in the data long ago. Further, we figure that peak globalization was only subtracting a few tenths of a percentage point off of inflation per year.
As a general rule, geopolitical risks rarely flare to a level of high economic and financial market significance. On the occasion that they do, their effect usually abates fairly quickly. But it can’t be denied that a lot is happening on the geopolitical front at present, and so some attention is merited.
Biden foreign policy
Most of the focus on the Biden presidency has been with regard to various domestic budgetary initiatives. But Biden has also engaged in a few foreign policy pivots. Shortly after taking office, the White House restored aid to the Palestinians, halted weapons sales to Saudi Arabia and the United Arab Emirates, and has proposed rejoining the Iranian nuclear deal abandoned under Trump.
While Democrats have not traditionally been pro-free markets, the aggressiveness with which Biden has pushed “Buy American” initiatives has nevertheless been surprising. He has also, relatedly, ordered a review of a wide range of supply chains in an effort to reduce foreign reliance on countries with different values (code for China and a handful of others), including the production of semiconductors, pharmaceuticals, electric car batteries, public health, defense, information technology, biological preparedness, Rare Earths, energy and food production. We ultimately expect most of any supply chain shift to be toward allies in Asia and elsewhere rather than a massive increase in U.S. self-reliance.
The recent Israel-Gaza conflict was the most intense battle between the two parties in many years. A tentative cease-fire has now been reached, with the U.S. Secretary of State visiting in an effort to further stabilize the situation. Most pundits are dubious that a tidy and lasting solution can be found given that decades of effort have failed to yield a compromise.
While this conflict certainly affects the relevant parties, it may have less of an effect on financial markets (via oil prices) than in the past now that Saudi Arabia is arguably aligned with Israel and given that Iran and its proxy states are busy with other matters (next).
Iran is expected to have a new president shortly in the form of Ebrahim Raisi, a conservative politician. This is thought to complicate the effort to reach a new nuclear agreement between the U.S. and Iran, but not to the point of preventing the achievement altogether.
OPEC and its allies are already on a path of increasing oil production as the global economic revives and given that oil prices are now higher than they were before the pandemic. Iran has so far been an outlier in this effort given sanctions that limit its oil exports. But a deal with the U.S. – rumoured to already be well underway – would presumably unleash additional oil production, lowering prices. OPEC is set to meet again this week, with no major change anticipated.
It is notable that President Biden has not lifted Chinese tariffs in the first five months of his presidency. While he has focused less on the roots of the economic imbalance between the two countries than the Trump administration, he has arguably focused more on Chinese human rights issues and on supply chain vulnerabilities (as discussed above). There is now a plan to investigate whether COVID-19 might have originated from a Wuhan virus laboratory.
The new administration is also asking China to live up to its commitment to purchase a large quantity of U.S. goods. In fairness, China could hardly have anticipated the pandemic and its effects on demand when it agreed to such a deal. The U.S. trade envoy and Chinese deputy premier are now meeting on such matters.
Although China ultimately reported in its latest census that its population had increased (slightly) over the past decade, the Financial Times reported that its population may have declined over the past year. Whether that is the true turning point or not, China’s population will shortly begin to decline. Suffice it to say that Chinese demographics are quite challenging. India and China have nearly identical populations of 1.4 billion, with India set to take over in the very near future given its ongoing population growth.
China has not taken this completely standing still, recently announcing that families are now allowed to have up to three children. This is a significant contrast to the one-child policy that long prevailed, and also to the two-child policy that was incrementally introduced in 2013 and 2017. However, the earlier changes did little to increase China’s fertility rate, which remains well below the 2.1 level needed to maintain a steady population. Fertility rates across most of East Asia are low even where family-size limits never existed. When combined with net emigration, China’s demographic challenges will persist for the foreseeable future.
In April, Russia had more than 100,000 troops staged along the Ukrainian border. Recall that Russia claimed Crimea and unofficially captured part of eastern Ukraine in 2014. Russia has since pulled back those troops. Foreign policy analysts debate the motivation and significance of these actions, but the consensus is that the moves were designed to capture U.S. President Biden’s attention and to remind the world that Russia remains both a global power and a potent military threat. Russia insists it was responding to NATO threats. In response to the flare-up, the Biden administration has imposed certain sanctions on Russia.
On a theoretically unrelated front, a Russian hacker syndicate shut down a major U.S. oil pipeline several weeks ago. While the pipeline is now operating again, the owners apparently paid $5 million in ransom to achieve this end. That will encourage future cyberattacks, and highlights the vulnerability of some critical infrastructure.
The recent Scottish election hurt Scottish aspirations for independence. The movement had a failed referendum to show for its efforts in 2014. British Brexit had rejuvenated Scottish interest in separating from the U.K. as the majority of Scots preferred to remain within the E.U. But the latest election left the Scottish National Party (SNP) an agonizing one vote shy of a majority (and only one seat up on its prior configuration), complicating any effort to formally pursue independence. A further key impediment is that the British government would have to approve any further referendum, and it has indicated it has no appetite for another such event so soon after the last one. The SNP has threatened to go to court. It would appear that any Scottish separation is further off than previously imagined, if it is to happen at all.
-With contributions from Vivien Lee and Sean Swift