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by  Eric Lascelles May 11, 2021

What's in this article:

Monthly webcast

Our monthly economic webcast for May is now available, entitled “Pushing past the third wave.”


This week’s #MacroMemo reviews the latest infection, lockdown and vaccination statistics. It then assesses the stage of the U.S. business cycle, investigates middling economic data, provides an update on U.S. fiscal plans, and evaluates what structural changes may be occurring in the economy.

The balance of recent developments continues to skew more positively than negatively. Negatives include:

  • Recent economic data has been merely mediocre in the U.S. and weak in Canada.
  • Inflation is spiking in April (though this was long anticipated).
  • Virus variants remain concerning, including the new Indian variant.
  • While we were ahead of the pack in predicting a third viral wave, it has proven more aggressive and long-lasting than we had initially anticipated.

But the positives ultimately win out:

  • The third wave is ebbing, not just in the developed world but now at the global level.
  • Vaccinations continue to outpace expectations with manufacturers increasing their supply commitments.
  • Vaccine effectiveness is proving high in a real-world setting.
  • The business cycle may be advancing, but is still more early cycle than mid or late cycle.
  • We continue to anticipate rapid economic growth over the next several months.
  • We expect structurally faster productivity growth over the coming decades.

Global infections falling

After several months of ascent, the global COVID-19 infection rate is now seemingly turning down (see next chart). It is the same with global fatalities.

Global COVID-19 cases and deaths

Global COVID-19 cases and deaths

As of 05/09/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

The downward trend has been evident across developed nations for several weeks, but is a new phenomenon in the emerging market world (see next chart). The developed world infection rate is now lower than it was during the lull between the second and third waves, though it has not yet reached the lows of last summer. While emerging markets are improving on the aggregate, their infection rate remains extremely high.

COVID-19 emerging market versus developed market infections

COVID-19 emerging market versus developed market infections

As of 05/09/2021. Calculated as the 7-day moving average of daily infections. Source: WHO, Macrobond, RBC GAM

Further, not all emerging market nations are actively improving. India is the most concerning country in terms of the sheer number of new infections it generates each day and the rate of growth. It continues to set new records, albeit at what appears to be a decelerating rate (see next chart).

COVID-19 cases and deaths in India

COVID-19 cases and deaths in India

As of 05/09/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

In the developed world, large European nations continue to improve, including France, Germany and Italy. The U.K. continues to excel. The U.S. infection rate also continues to fall, despite ever-fewer restrictions (see next chart).

COVID-19 cases and deaths in the U.S.

COVID-19 cases and deaths in the U.S.

As of 05/09/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

Canada also continues to improve, with large provinces on the mend, including Ontario, Quebec and British Columbia (see next chart). Fatalities are also now falling, and never exceeded a third of second-wave levels. However, the absolute level of infection remains quite high in an absolute sense. Some provinces, including Alberta and Nova Scotia, are still (or newly) grappling with rising infections (see next chart).

COVID-19 cases and deaths in Canada

COVID-19 cases and deaths in Canada

As of 05/09/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

Spread of COVID-19 in Nova Scotia

Spread of COVID-19 in Nova Scotia

As of 05/09/2021. Calculated as 7-day moving average of daily cases and total cases. Source: Government of Canada, Macrobond, RBC GAM

Sluggish third-wave improvement

While no two countries are precisely the same, a common theme of the third wave has been a rapid deterioration followed by relatively sluggish improvements (refer back to the Canadian chart). The improvements underway, while entirely welcome, are coming much more slowly than the deterioration did, and also than the rate of improvement after the second wave.

This is unfortunate as it argues that the return to a low number of infections may have to be measured in months rather than weeks. Of course, the rate of improvement could accelerate as vaccination campaigns hit critical mass and as summer weather arrives. And politicians will likely decide that they can tolerate somewhat more infections than in the past since these should be associated with substantially fewer fatalities due to the targeted inoculation of the most vulnerable people first.

Indian variant

It appears that The Big Three have become The Big Four as the Indian variant joins the British, South African and Brazilian variants as a “variant of concern.” Let the record show that there are many, many other strains of the virus, but those have not had as much success replicating and don’t appear to have markedly higher fatality expectations than the original strain.

Alas, little is known about whether the Indian variant is substantially more contagious or deadly. It seems very likely to be more contagious than the original strain, given India’s current woes. But it is unclear whether it is more contagious than the British variant, which has spread with particular ferocity around the world.

Little is also known about the deadliness of the Indian variant. Our extremely rough calculations argue it may not be more deadly than the original strain, given that:

  • India’s second wave reported a 1.2% case fatality rate at the wave’s peak. This was presumably due to the original strain.
  • The current Indian wave is logging a 0.9% case fatality rate. This is presumably disproportionately due to the Indian variant.

Government restrictions

Government restrictions continue to tighten in Canada, with additional provinces locking down in recent weeks (see next chart). Ontario remains the province with the strictest rules, followed by Quebec.

COVID restrictions tightened across the country

COVID restrictions tightened across the country

As of 04/28/2021. Atlantic region includes New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island; Prairies region includes Alberta, Manitoba and Saskatchewan. Source: Bank of Canada, RBC GAM

Internationally, more countries are easing restrictions than tightening them. The divide between the loosest countries and the most restrictive ones is the largest since last summer.

Severity of lockdown varies by country

Severity of lockdown varies by country

Based on latest data available as of 05/02/2021. Deviation from baseline, normalised to U.S. and smoothed with a 7-day moving average. Source: Google, University of Oxford, Macrobond, RBC GAM

We continue to flag the risk that some countries are re-opening prematurely given still-elevated infection numbers. But warming weather and rising vaccinations will hopefully quell that concern.

Restaurant reservations

Data on restaurant reservations reveals some fascinating patterns. Globally, restaurant reservations are now approaching their highest level since the onset of the pandemic, though still around 30% below normal. But the experience is quite varied at the national level (see next chart).

Restaurants re-open for dine-in service in some countries

Restaurants re-open for dine-in service in some countries

As of 05/05/2021. 7-day moving average of year-over-year % change. Seated diners from online and phone reservations, and walk-ins, based on a sample of restaurants on OpenTable. Source: OpenTable, RBC GAM

Australia, which has been nearly virus-free for some time, now reports restaurant reservations running nearly double the pre-pandemic rate. This is amazing, though likely inflated by the fact that restaurants there still have minimum spacing requirements, and so many restaurants likely require reservations in advance.

Elsewhere, Mexico has returned to normal, the U.S. is rapidly approaching normal, while Canada remains extremely depressed given aggressive lockdowns. The same goes for the European Union, while U.K. restaurants are now mounting an epic comeback.

Vaccinations rolling along

Nearly 1.3 billion shots have now been administered at the global level, with 21 million new inoculations per day (see next table).

COVID-19 global vaccine ranking

COVID-19 global vaccine ranking

As of 05/09/2021.Cumulative total doses administered by country per 100 people. Source: Our World in Data, Macrobond, RBC GAM

Israel remains the most inoculated nation on a per-capita basis, at 121 doses per 100 people, but this still means that no more than 60% of the population has been fully inoculated. Rather than reflecting vaccine skepticism, this appears to be due to the country’s enormous youth population, which is around a third of the total. As a result, as we have highlighted in the past, herd immunity (getting to approximately 75% of the population with immunity) will require children to be inoculated as well, especially given that the vaccines are not 100% effective.

The U.K. and U.S. are now up to 78 doses per 100 people. Canada and the EU trail well behind, with 42 and 37—41 doses per 100 people, respectively. But these latter regions are moving quickly. Indeed, Canada, Germany, Spain and Italy are now inoculating at a slightly faster rate (on a population-adjusted basis) than the U.K. or U.S.

Another important threshold

A handful of researchers and experts have argued that getting 40% of a population immunized is a key threshold for controlling the pandemic. There is nothing magical about this – it is well short of herd immunity – but it would appear that this level of immunity allows for a significant easing of economy-relevant restrictions without triggering another virus wave. The definition is slightly vague – is it the fraction of the population with two doses or one, and shouldn’t the efficacy of the vaccine being used matter? – But the U.S. is arguably now past that point and reaping the benefits. Canada has now given one-third of its population the vaccine, and so is also nearing this benchmark.

Total vaccinations

Monitoring the number of vaccines per capita remains the best way to understand which countries are closest to a return to normality. However, it is useful to occasionally reflect on which countries have delivered the most jabs in total. Given the logistical challenge of producing/acquiring and delivering inoculations, big countries deserve some credit for their hard work (see next chart).

Cumulative doses administered by country

Cumulative doses administered by country

As of 05/09/2021. Cumulative total doses administered by country. Source: Our World in Data, Macrobond, RBC GAM

By this metric, Israel’s accomplishments look positively pedestrian – just 10 million doses given – versus Canada at 16 million and the U.K. at 53 million. And these, in turn, look tiny compared to the world’s three most populated countries. China has now delivered 324 million inoculations, the U.S. has done 260 million and India has done 168 million. The U.S. is doing well on both an absolute and a per-capita basis, but China and India arguably deserve more respect than they are getting given their huge number of overall inoculations, even if the per-capita rate lags.

Vaccine demand

The Pfizer vaccine is increasingly being approved for ages 12 to 16, expanding eligibility. Tests on even younger groups are underway.

The constraint on inoculations is beginning to shift from supply to demand in parts of the U.S., in Israel and in other highly vaccinated countries. In addition to previously discussed carrots such as having governments or companies pay people to be inoculated, some U.S. employers are now requiring inoculation against COVID-19 for new hires. This appears to be legal, though only 4% of U.S. firms indicate they plan to do this.

Vaccine supply

Vaccine supply news remains mostly constructive. Pfizer has now expanded its production target for 2021 from 2.5 billion to 3 billion doses. For 2022, it has increased its target from 3 billion to 4 billion doses.

Moderna has been a significant laggard and much less reliable in its deliveries. Nevertheless, the company has upgraded its 2021 production forecast from a minimum of 700 million doses to a minimum of 800 million. And it now projects producing up to 3 billion vaccine doses in 2022.

The world is also on the cusp of some countries having a significant vaccine surplus. The U.S. has announced plans to share up to 60 million doses of the AstraZeneca vaccine. This is less because the country genuinely has too many doses and more because it has opted not to approve the AstraZeneca vaccine for domestic use. But the time is not too far away that vaccine diplomacy will begin on a much greater scale in the U.S. China is already well underway in its efforts to curry global favour.

Business cycle update

Each quarter, we update our U.S. business cycle scorecard, attempting to glean key insights into the economic and financial market outlook. The latest effort has yielded the same main conclusion as a quarter ago (see next graphic) – that this remains an “early” point in the business cycle.

U.S. business cycle scorecard

U.S. business cycle scorecard

As of 04/29/2021. Darkness of shading indicates the weight given to each input for each phase of the business cycle. Source: RBC GAM

However, that understates the nuance of the latest assessment. We find that the “mid” cycle argument has grown notably over the past quarter, and there are even some indicators bleeding into the “late” cycle diagnosis (see next chart).

U.S. business cycle score

U.S. business cycle score

As of 04/30/2021. Calculated via scorecard technique by RBC GAM. Source: RBC GAM

Such inputs as the amount of economic slack have now seemingly transitioned to “mid” cycle now that so much of the output gap has been closed (see next chart).

Still considerable room for catch-up growth in coming years

Still considerable room for catch-up growth in coming years

As of Q1 2021. Shaded area represents recession. Source: Congressional Budget Office, Macrobond, RBC GAM

Similarly, our metric of risk appetite shows a level of confidence and enthusiasm in markets that is more normally associated with “mid” cycle (see next chart).

Investors switch to risk-on mode

Investors switch to risk-on mode

As of Mar 2021. Measures risk appetite based on 45 normalized inputs. Grey area represents recession. Source: Bloomberg, Bank of America Merrill Lynch, Consensus Economics, Credit Suisse, Federal Reserve Bank of Philadelphia, Ned Davis, Haver Analytics, RBC GAM

But, to reiterate, there are still more “early” cycle readings out there than anything else, including the fact that central banks have not yet lifted their policy rates off of the floor (see next chart).

U.S. fed fund rates trajectory

U.S. fed fund rates trajectory

As of 04/27/2021. Shaded area represents recession. Source: Federal Reserve Board, Macrobond, RBC GAM

Further, while it is undeniable that the stages of the business cycle are being eaten through more quickly than during the usual cycle, one of the best metrics of year-ahead recession risk – the slope of the yield curve – is signaling a shrinking risk rather than a growing one (see next chart).

Yield curve-based U.S. recession risk has fallen significantly

Yield curve-based U.S. recession risk has fallen significantly

As of Mar 2021 for NY Fed model, as of 04/23/2021 for RBC GAM estimates. Probabilities of a recession 12 months ahead estimated using the difference between 10-year and 3-month Treasury yields. Shaded area represents recession. Source: Federal Reserve Bank of New York, Haver Analytics, RBC GAM

We do concede that this business cycle could well prove shorter than normal, but perhaps on the order of a five year cycle (versus the recent 10-year norm), rather than a one-year cycle.

From a financial market perspective, risk assets such as the stock market tend to perform best at a fairly early point in the cycle (see next chart). But even as the cycle shifts from “early” toward “mid” (and eventually toward “late”), stock market returns tend to remain positive and fairly good.

Annualized S&P 500 return ranges by cycle phase

Annualized S&P 500 return ranges by cycle phase

As of 03/12/2021. Shaded area represents range. Based on data from 1949 business cycle onwards. Source: Macrobond, RBC GAM

Economic developments

On the whole, recent economic data has been mediocre to slightly weak. However, there are good reasons for this. In the U.S., the sugar high of massive government cheques in March has faded into a minor and temporary headache in April. In Canada (and many other developed nations), third-wave lockdowns have done a bit of economic damage.

U.S. weakness

U.S. consumer spending appears to have softened somewhat in April after exploding higher in March (see next chart). Growth should resume in subsequent months as the stimulus-cheque distortion fades.

U.S. aggregated daily card spending

U.S. aggregated daily card spending

As of 05/01/2021. Total card spending (7-day moving average) includes total BAC card activity which captures retail sales and services paid with cards. Does not include ACH payments. Source: Bank of America COVID-19 and the consumer weekly publication, RBC GAM

U.S. job creation in April also failed to meet lofty expectations. Versus a consensus forecast for one million new positions, the economy “only” created 266,000 new jobs. The unemployment rate accordingly rose by 0.1ppt to 6.1%. But this isn’t overly worrisome in the context of the aforementioned economic hangover. Most indicators continue to point to further robust job creation. Weekly jobless claims have, if anything, accelerated their decline (see next chart).

U.S. jobless claims reached pandemic low

U.S. jobless claims reached pandemic low

As of the week ending 05/01/2021. Shaded area represents recession. Source, Department of Labor, Haver Analytics, RBC GAM

U.S. output-employment mismatch

The U.S. employment recovery over the past year has been impressive. Yet it is nevertheless difficult to reconcile how economic output has almost completely recovered its lost ground while employment remains 5.4% below the pre-pandemic peak.

Mathematically, this sizeable difference can only be explained via a productivity spike. What remains unclear is whether these gains can be sustained. Although we do look for somewhat faster productivity growth over the long run relative to the decade just completed, the pandemic-era productivity growth has been a good four times faster than the recent norm. This pace definitely isn’t sustainable. But are the gains already made likely to stick?

The decline in low-productivity sectors such as tourism, accommodation and food services has artificially boosted the productivity figures simply because these sectors were previously pulling down the average. Any gain derived from this compositional shift should fully unwind as the pandemic fades. But this is a fairly small contributor.

It makes sense that pandemic restrictions may have substantially boosted productivity – given savings on office costs and business travel, reduced commuting time, higher automation, the shift to online shopping and the pivot from in-restaurant dining to takeout. Yet only some of these gains will prove enduring when the pandemic ends. Further, these factors cannot entirely explain the U.S. boost as we do not observe the same kind of productivity jump in other countries despite very similar pandemic incentives.

One difference between the U.S. and many other countries is that U.S. fiscal support was oriented more toward providing compensation to unemployed people, and less toward keeping excess employees on the payroll. As such, some part of the superior U.S. productivity jump may reflect the fact that the companies in some countries were discouraged from shrinking their workforce to the appropriate size, with their productivity accordingly suffering.

However, Canada’s mix of labour market supports was not so different than the U.S. Yet Canada has now recovered 90% of its lost jobs whereas the U.S. has only recovered 63% of its lost jobs. This is bad for American workers, but good for American productivity (and corporate profits).

Another possible explanation is that employment is not as nimble as economic demand. As demonstrated by the U.S. manufacturing sector, employment did not fall as precipitously as output during the initial phase of the pandemic, and it has not recovered as impressively in recent months (see next chart). Companies tend to hoard labour during sharp economic downturns and struggle to add workers as quickly as they would like during rapid recoveries.

Perhaps the uniquely American aspect of this is that the U.S. economy has recovered so quickly, whereas the recovery has been more tentative elsewhere. It could just be that employment will have to catch up to economic activity over the coming year. One might sustain a mismatch temporarily by forgoing certain non-urgent maintenance, administrative or R&D tasks. But eventually these things have to be done.

U.S. manufacturing output was hit harder but has recovered at a faster pace than employment

U.S. manufacturing output was hit harder but has recovered at a faster pace than employment

Employment as of Apr 2021, industrial production as of Mar 2021. Source: Macrobond, RBC GAM

In the end, while we have an inkling as to why U.S. productivity growth has been so strong, we don’t fully understand why the experience has been so different than in other countries. Some of the spike will likely be given back as post-pandemic conditions normalize and hiring catches up to demand. But some will probably stick – a permanent innovation dividend from the way that the pandemic upended business practices.

From a labour market perspective, however, it means that unemployment will remain elevated even after the economy has exceeded pre-pandemic levels. This is a challenge for workers, but means that inflation is less likely to overheat, and gives the U.S. Federal Reserve a bit more breathing room.

Still plenty of room for economic optimism

Despite the lagging spending and employment indicators, there remains plenty of economic optimism in the U.S. The country’s Daily News Sentiment Index is the most optimistic it has been since the pandemic, and is now actually a little happier than normal (see next chart).

Daily News Sentiment Index in the time of COVID-19

Daily News Sentiment Index in the time of COVID-19

As of 04/05/2021. Source: Federal Reserve Bank of San Francisco, Macrobond, RBC GAM

And while spending may have stumbled, our overall real-time economic activity index continues to ascend (see next chart). Reflecting that, the Atlanta Fed’s GDPNow index is tracking a stellar 13% annualized gain for second-quarter GDP.

U.S. economic activity accelerates as states lift restrictions

U.S. economic activity accelerates as states lift restrictions

As of 05/01/2021. 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

U.S. inflation about to spike

As we have highlighted for some time, year-over-year inflation readings should spike in March and April. The March jump was reported a month ago. The April spike will be reported for the U.S. shortly, and is expected to take headline CPI (Consumer Price Index) from an already warm 2.6% year-over-year to a toasty 3.6%. The jump in core inflation should be somewhat less extravagant, from 1.6% to 2.3%. That should be roughly the high-water mark as base effects and a variety of other forces exert their maximum influence.

That said, commodity prices have continued to move higher since then, presenting the possibility of a bit more pressure in subsequent months.

Furthermore, it feels as though there is always some new idiosyncratic force nudging inflation slightly higher. The latest is the cyberattack on Colonial Pipeline, an oil pipeline that normally provides 45% of the fuel consumed on the East Coast. Operations have temporarily been halted as a solution is sought. The company is aiming to resume operating by this weekend. So far markets are fairly calm, with gasoline futures up only modestly.

Canadian pothole

Canadian economic data fell into a somewhat deeper pothole than the U.S. in April, as one would expect given much more aggressive pandemic restrictions over the month. Core retail sales are estimated to have shrunk by around 4% in April, and small- and medium-sized businesses reported being less open during the third wave (see next chart).

Canadian businesses shuttered again during third wave

Canadian businesses shuttered again during third wave

As of 04/13/2021. Source: Canadian Federation of Independent Business, RBC GAM

Meanwhile, Canadian employment also fell in April, by a substantial 207,000 positions. The composition of the weakness was as one would have expected – disproportionately in Ontario (where the lockdown was particularly aggressive) and skewed toward food services and retail.

A last Canadian note: Line 5, a major oil pipeline carrying petroleum from Western to Eastern Canada via the U.S., is under threat of shutdown after the Governor of Michigan ordered it closed for environmental reasons. The shutdown order was originally made in November, but with a delayed deadline of May 12.

It appears that the pipeline will continue to be used despite this order as the matter is contested in federal court. There had originally been some hope that President Biden might intervene given warmer Canada-U.S. relations on his watch, but he also seeks to be known as a pro-environment president and is close to Michigan’s Governor. In turn, it appears up to the courts. The odds are apparently fairly good that the pipeline will be allowed to continue operating. This is in part because it may be a matter of federal jurisdiction, and in part because the 1977 Transit Pipelines Treaty prevents either country from stopping the flow of cross-border petroleum products.

As for consequences, any shutdown – while unlikely – could have a significant effect on the supply of petroleum products to central Canada. Ontario and Quebec receive almost half of their gasoline via the pipeline, and Toronto’s Pearson Airport receives all of its jet fuel from the pipe. The supply of propane would also be affected. These products can be brought to Central Canada via rail and boat if needed, but at a greater expense and with particular complications in the winter.

U.S. fiscal plans

After a flurry of stimulus packages at the turn of the year and despite bold promises for further programs, the rate of fiscal news slowed over the past few months. To recap where things now stand, the Biden administration has formally laid out two additional stimulus programs:

  1. The American Jobs Act is oriented toward infrastructure.
  2. The American Families Act would provide further pandemic financial relief.

There are a few ways these proposals could be implemented. A bipartisan deal could conceivably be reached by the end of the summer. But it would probably have to be fairly small (at around $1 trillion), focus mainly on infrastructure and abandon aspirations of tax hikes.

Alternately, the Democrats could push forward alone, implementing a larger package (perhaps $2 trillion), also with a time horizon of late summer, and using the reconciliation process to get around the lack of Republican support.

Finally, and considered most likely by Washington experts, is a two-bill solution. It would combine a smaller bipartisan bill (of approximately $500 billion and mostly infrastructure-oriented) over the summer with a Democrat-only bill in the fall (worth perhaps $1 trillion). The latter would address tax hikes and other priorities and be implemented using the reconciliation process.

The month of May is likely to be spent gauging the extent to which a bipartisan approach is realistic.

As such, we can say a few things of relevance to investors:

  • Another significant fiscal package of some description is likely coming.
  • The next package is unlikely to be implemented over the next month or two – late summer is a common (though not universal) theme.
  • Tax increases are not guaranteed, though they do seem fairly likely. But recall that the Democratic Party majority is razor-thin in the Senate and not exactly huge in the House of Representatives. Some of the tax increases are likely to be watered down.
  • The 2022 midterm election is increasingly on the minds of many, with Democrat losses the default expectation, potentially to the point of losing a chamber, or both. This presents something of a wildcard. It could embolden the Democrats to get big things done now. Or, it could make them wary of overstretching and being rebuked by voters in 2022.

More generally and with reference to the global situation, this is a time of considerable policy ferment. Beyond the pressing matter of addressing the pandemic, the most obvious trend has been a shift toward the political left, with a greater focus on such matters as inequality and the environment. Policy uncertainty will be high for the foreseeable future. Even after the U.S. nails down its own fiscal path, many other countries have yet to implement the kind of infrastructure programs that frequently follow deep recessions.

Structural changes ahead?

An important job for forecasters is to anticipate when key structural themes are about to change, as this often affects the economic and market outlook for years to come. The following list is by no means universal, but highlights a few such issues currently under debate, and our views on them (see next table).

Key structural themes about to change?

Key structural themes about to change?

As of 04/24/2021. Source: RBC GAM

  1. Inflation regime

Is the developed world shifting from the low inflation regime of the last several decades to a high inflation regime? This seems unlikely. Yes, inflation will be quite high over the next few months and then slightly elevated over the next few years. But, from a structural standpoint, it is far from obvious that inflation has to be high over the next several decades. If anything, the long-term forces still argue for deflationary pressures to dominate.

  1. Stimulus delivery

Is the world pivoting from a period of maximum stimulus delivery to one of stimulus removal? Yes, this is likely, and important. However, the timing matters. China may already be beginning to pivot, but most countries will not be seriously removing monetary stimulus until the second half of the 2022 at the earliest, and many may delay until 2023.

On the fiscal front, a great deal of fiscal stimulus continues to be delivered, but earlier initiatives are nevertheless already expiring. For instance, the recent $1,400 cheques issued to most Americans have now been delivered, and the lack of further largesse on that order in subsequent months is already beginning to weigh on retail sales. Households have done a good job of saving a large fraction of the stimulus from the past year. This means the eventual fiscal cliff should be somewhat smoother as that money dribbles out over time. Yet the prospect of a fiscal headwind toward the end of 2021 and into 2022 is real.

What is unclear is a) whether markets will focus on this in advance, or instead wait until the impulse actually arrives; and b) the extent to which markets throw a taper tantrum as they did in the 2010s as monetary stimulus began to be removed.

  1. Business cycle

As discussed earlier in this note, is the economy sprinting from early in the business cycle to late cycle practically overnight? No – this may be a shorter cycle and it is undeniably moving quickly, but it isn’t moving quite that fast.

  1. Productivity growth

As discussed in our prior #MacroMemo, we do think the developed world may be evolving from a low productivity growth era to a faster one. The pandemic has stirred up some new ideas, there are enthusiastic plans to invest in new technologies and to spend on capital, and the world’s scientists are making important breakthroughs in economically relevant realms. This is good for economic growth, corporate earnings growth, and hopefully also wage growth.

-With contributions from Vivien Lee and Sean Swift

Interested in more insights from Eric Lascelles and other RBC GAM thought leaders? Read more insights now.


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Past performance is not indicative of future results. With all investments there is a risk of loss of all or a portion of the amount invested. Where return estimates are shown, these are provided for illustrative purposes only and should not be construed as a prediction of returns; actual returns may be higher or lower than those shown and may vary substantially, especially over shorter time periods. It is not possible to invest directly in an index.

Some of the statements contained in this document may be considered forward-looking statements which provide current expectations or forecasts of future results or events. Forward-looking statements are not guarantees of future performance or events and involve risks and uncertainties. Do not place undue reliance on these statements because actual results or events may differ materially from those described in such forward-looking statements as a result of various factors. Before making any investment decisions, we encourage you to consider all relevant factors carefully.

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© RBC Global Asset Management Inc., 2020