Eric Lascelles: Hello and welcome to our latest video MacroMemo. There’s much to cover this week.

And we’ll talk as always about the latest COVID infections, and vaccination rates, and reopening trends. But we’ll also work our way into what the business cycle is telling us right now, whether we can expect all of the household savings that have accumulated over the pandemic to be deployed at some point in time.

We’ll take a look at the economic trend. We’ll take a glance at the U.S. housing market and whether it’s in a sustainable position. And of course, given how high inflation has been recently, we’ll spend a moment on that subject. And then finish with a thought or two about financial markets and the extent to which they might be starting to prefer good growth as opposed to great growth.

Let’s start with the infection numbers, as we always do. And we are right now seeing a global plateauing of cases, which is a welcome thing since we had seen quite an upward trend both in the emerging market and the developed market space until quite recently.

However, it is still the case that more countries are deteriorating than getting better with this Delta wave. And unfortunately, the U.S. does count itself in that deteriorating group. In fact, we’ve seen quite a significant spike in U.S. cases. It’s now over 100,000 per day. In fact, we’ve just seen one over 200,000, though there is a bit of volatility in the numbers. And so these are high figures. They’re not record numbers for the U.S., but they are massively greater than they were just a month ago.

All states are deteriorating at this point in time. We can see differences between states that are highly vaccinated and not. The ones that aren’t are seeing much greater increases, but nevertheless, everyone is deteriorating to some extent. And that does make sense. The Delta variant is highly contagious, and the U.S., even in its highly vaccinated states, isn’t at a point of herd immunity at this point in time.

Canada’s done very well up until quite recently, though is now also deteriorating. And that is to be expected given this Delta variant. We think Canada ultimately fares better than the U.S. and many others because it is among the very leaders in vaccinations, and it’s been a little bit more cautious in terms of reopening. But nevertheless, it seems like it will be hit to some extent by this wave as well.

There are also new concerns in China. And so, China has actually done very well during the pandemic, has kept cases to a bare minimum. And I should say, still not very many cases in China, but there has been some increase and it is, of course, the Delta variant.

And that’s a problem in the sense that China is one of a number of countries that have pursued a zero-tolerance approach. When they find a single case or a small number of cases, they lock down quite hard. And that’s worked so far. And Australia’s done that as well, as has New Zealand. It’s starting to get a little trickier. It’s not clear you can quite successfully do that with the Delta variant. And so Australia’s in this endless circle of harsh lockdowns and not quite managing to eliminate the virus.

And so we do fear China could find itself in a similar position. And it’s consequential for markets and for the global economy because China’s such a big share of the total. We’re already seen Beijing beginning to cancel major public events and that kind of thing. So China merits close examination, even though I suspect they won’t have very many cases.

And then it’s also worth acknowledging for all of the concern, and rightfully so, around this latest variant, there are some pretty remarkable improvements occurring in a handful of countries. And so the Indonesian caseload has fallen sharply. I can’t say I fully understand why, though it’s, of course, a good thing. Indonesia had been one of the most troubled countries until recently.

And then we’ve also seen the UK caseload fall significantly. And you can argue it’s because younger people have finally been vaccinated or electronic tracing app there that’s proving very aggressive is perhaps working as well. But there is some risk that decline in the UK is actually a temporary drop, an unwinding of a spike after the Euro football championships. And for that matter, the UK did reopen significantly three weeks ago. And so you could theoretically argue we should be seeing more cases around now from that. We actually are now seeing that the UK caseload, having spiked, having fallen back significantly, is no longer falling and, in fact, maybe starting to go up again. And so there’s a lot of ambiguity there. I don’t think the UK has hit herd immunity, so that’s not the solution for them at this point in time. I guess the question economically is whether they lock down again, if they do see their caseload begin to go back up.

I’m not convinced they will, simply because they’ve changed their attitude as to what constitutes a pandemic. And of their view, it’s really, pandemic is when you’ve got a lot of people in the hospital. And so far, they have managed to avoid that. And so, as much as vaccines are not proving a perfect impregnable wall versus the Delta variant, they are nevertheless succeeding in limiting hospitalizations.

So there’s been a five times reduction in UK hospitalizations versus the number of infections they’re experiencing. That’s in comparison to prior waves. And so from that perspective, the UK probably holds its nose and allows these numbers to remain fairly high.

It’s a bit of a different story in the U.S., though. And so, similar in that the U.S. cases are going up; similar in that the U.S. doesn’t have very many restrictions. Different in the sense that we’re seeing actually quite a high level of hospitalization in the U.S., similar to prior waves, and so we can’t say it’s not a serious issue there. And so that’s a challenge, but one we’re dubious that the U.S. will actually significantly lock down. So unfortunately, the payment will be in the form of sick people and human lives, not so much in terms of economic damage.

Let’s pivot from there into the vaccine space. And so, still seeing very nice progress on this front. There have now been an incredible 4.5 billion vaccines administered globally. That’s 42 million per day now. That’s the going rate, and that’s about as fast as we’ve seen. So it continues to be a gradual acceleration of supply.

We’re seeing a shift from developed countries toward emerging market countries, so more and more emerging market countries are getting that supply. That said, there is a risk to this shift and a risk to emerging market supply in that now some vaccine makers and some countries are recommending and implementing booster shots, recognizing that some of these vaccines seem to wane significantly in their efficacy after just six months or so. And so the boosters may yet shift that supply back to the developed world.

In the meantime, developed countries still scrambling to get their hesitant populations vaccinated. And so we are seeing more and more talk and, indeed, implementation of vaccine passports that give special rights to people, not just crossing borders, but in terms of doing things like going to restaurants and bars and so on. That’s the case in France. That might be the case in the U.K. eventually. Israel has reintroduced that kind of thing. Public support for those kinds of measures, fairly high in most countries. And so I think we’re going to see more and more of that, and that will encourage people to get vaccinated.

Simultaneously, some employers are also insisting that their employees get vaccinated. And so those are being challenged in courts, of course, but nevertheless, some people have been fired on that basis. And again, a stick, I suppose, to get more people vaccinated.

It seems to me enough time has passed that we can begin to talk with some level of confidence about vaccine efficacy against the Delta variant. And so these vaccines aren’t as good against the Delta variant. They weren’t meant to confront the Delta variant when they were built. But they are still fairly effective. And so, for instance, against symptomatic cases of the Delta variant, whereas Pfizer was originally thought to be 95% effective, and indeed was versus the original form of the virus, now seems to be a mid-80% effectiveness against symptomatic infection.

If you’ve seen numbers that were in the 60s, 64% to 69%, that’s against all forms of the virus, including asymptomatic, and there was never an original study done by Pfizer. We don’t know what the actual efficacy was for Pfizer against all forms originally, so we can’t quite make a comparison there. But the takeaway is less effective, but still fairly effective against hospitalizations. The Pfizer was originally nearly 100% effective. Now it’s about 93% to 96% effective. And so, still breakthroughs can happen. Breakthroughs are happening, but it is still highly protective and still an important way to limit the spread of the Delta variant.

On the subject of reopening, I can say that we saw very enthusiastic reopening in most countries across the first half 2021. That’s now gone roughly flat, so we’re not seeing countries as much reopen. And indeed, even as countries do in some cases reopen, their public are behaving more cautiously. Their employers in some cases are delaying a return to the office from the fall into 2022. And we’re seeing contact tracing applications like in the U.K. also proving effective. And so instead of locking down a sector, you simply say people who’ve been exposed to other sick people must isolate. And it’s just a different way, a less damaging way maybe of getting to the same sort of conclusion.

On the business cycle, and this is something we revisit every quarter, and we use the U.S. as our bellwether here, we continue to get an early-cycle reading. I will admit that was a bit of a surprise. We had early cycle last quarter. We thought maybe it would move into mid cycle. We had seen some evidence of an economy that had made progress, and some tightness was manifesting itself. That wasn’t actually the conclusion. We still have an early-cycle reading, but we can see some forward movement beneath the surface.

And so, for instance, the mid-cycle claim is now capturing 29% of the various inputs we apply to this model; it had been 22% the prior quarter. And if you add mid-cycle plus late-cycle claims plus end-of-cycle claims—and there are not a lot of those latter two, but some—that total rise is from 31% of the inputs to 45%. And so we’re still early cycle, but moving forward, getting closer to mid cycle, we think.

It’s fair to conceive this could be a shorter business cycle than in the past, but we’re talking in the realm of maybe 5 years as opposed to 10 years, not the kind of thing where the business cycle keels over a few months from now.

Arguably, the biggest question for economic forecasters right now is, what will households do with their excess savings. And so you should know that households have saved a lot more money than usual during the pandemic, to the tune of trillions of dollars. U.S. households have accumulated excess savings worth 11% of GDP; that’s more than $2 trillion. In Canada, it’s around 9% of GDP; that’s several hundred billion dollars. And it’s a similar story in other developed countries.

And so, forecasts depend critically on whether we expect that money to be spent completely or spent partially or not spent at all. And, technically, we haven’t seen any of that unleashed yet. Yes, consumers have been spending, but in actual fact, that’s been consistent with high savings rates still. So households are still accumulating savings; they’re just spending their own income right now.

And so, optimists will say, the very fact that we’ve seen savings continue to grow means there should be an even bigger wave of spending later. Pessimists say, the longer that households don’t spend this money, the less likely it is that it ever gets spent. And there’s some truth to both. I think it will be a mix of the two. But nevertheless, I would say I do tend toward the slightly more pessimistic reading.

And so, for instance, it’s worth appreciating that there is—excess savings aren’t just money that’s in a wallet. It’s not just money that sits in a bank account. It’s money that may have been used to buy investments. It’s money that may have been used for a down payment. That’s still wealth of the household that’s not available for spending.

And so, I think a lot of it’s gone in that direction. I don’t expect much of it to get spent. If you look at World War II, there were excess savings then. Some did get deployed over the subsequent decade, but only 20% of that excess savings ever got spent over 10 years. And so, I’m not looking for a huge, huge boom in spending going forward on this basis.

And even if it were unleashed, it would likely be unleashed under some duress. For instance, fiscal support going away, households having to spend some of the money they saved to fill that hole. But not really the sort of thing that sends the economy booming forward; the sort of thing that prevents it from dipping, perhaps.

A couple of other economic themes from me. On the economic growth front, we do see some deceleration still in the U.S. Our real-time activity indicator there suggests growth isn’t as fast as it was over the first half of the year, which we think makes sense. Economic surprise indices are no longer positive. They’re neutral, but they’re no longer positive. They had been positive for the last year, meaning it’s no longer obviously the best bet to have above-consensus growth forecast. And actually, we do have a little bit below-consensus growth forecast now for 2022.

For the moment, the Canadian economy is still accelerating, though, as it catches up after a challenging April and May.

A quick word on U.S. housing sustainability. Certainly, there’s been a boom there. I don’t think I see a bubble, though. And so, for instance, when we look at residential investment as a shared GDP, only now is it getting up to its historical norm. Really what the U.S. housing market has done has been very weak from a construction perspective for over a decade, and only now getting to more normal-looking levels. Looks nothing at all like the spike in the mid-2000s. And so I’m fairly calm and sanguine about the U.S. housing market. I don’t think there’s anything really to give back here, despite recent strength.

A quick work on inflation. And so, inflation has been very high. I guess that’s maybe the main observation. It’s been running at 5.4% annually in the U.S. and in the 3s for Canada. It seems to me that a number of forces are weakening, though. And so, commodity prices appear to be peaking. We see a prices paid index for manufacturers finally starting to fall. We see a supplier delivery index suggesting slightly fewer constraints there, though still quite significant. We see other countries with falling inflation. Canada’s inflation print just fell from 3.6% to 3.1% in June. In the eurozone, actually, their monthly price change in June was negative; there was a price drop from one month to the next.

And so that doesn’t guarantee it maps on to every other country, but there are global forces that are driving inflation right now. There’s a fair chance that the U.S. and others will also be seeing a peak fairly soon. And we still see real-time measures that peaked a few months ago as well.

And then let me finish just with a thought on markets. And so, during the initial phase of an economic recovery, good economic data is good for markets; great economic data is great for markets. It gets a bit more nuanced later, though. And so, as the recovery proceeds, and that’s maybe where we are now, good economic data is still good. It’s nice for earnings; it’s nice on a number of fronts.

Great economic data starts to be viewed in a bit of a more mixed way. And so still helps earnings, but also signals the potential for overheating, for inflation picking up, for central banks having to tighten rates at some point in time, even for the end of the business cycle. And so you start to see markets prefer good to great economic growth. And I think maybe we’re in that sort of realm right now, walking a tightrope in which we like good growth. We don’t like great growth. We certainly don’t like bad growth; that hasn’t changed. But nevertheless, in that position.

And so it’s a little bit of a trickier period for investors and for markets. Still very much usually consistent with reasonable market gains over time, but a bit less simple than it was over the first year of this recovery.

Okay. I’ll stop there and say thanks very much for tuning in. I hope you found some of this interesting and useful, and I hope you choose to tune in again in the future. Thank you.