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by  Eric Lascelles Mar 30, 2021

The economic reopening trends have varied across emerging and developed markets in response to the third wave. In this video, Chief Economist Eric Lascelles discusses these trends and provides his thoughts on the latest market performance and housing market strength.

Watch time: 11 minutes 43 seconds  |   Hover your cursor over the video to see chapter options

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Hello, and welcome to the latest weekly video MacroMemo. Lots to cover this week.

We’ll be talking about rising COVID infection numbers as that third wave now plays out. We’ll certainly acknowledge re-openings. Economically though, some slowing in that progress. We’ll talk about vaccinations and the rate of progress on that front as well. And then we’ll pivot into more classically economic subjects and we’ll acknowledge this recent Suez Canal blockage and some good economic data beyond that. .

We’ll look a little bit about what the business cycle says about financial markets and whether, for that matter, this might be a different kind of business cycle. And we’ll also take a peek at housing markets and the strengths there and how that might play out. But also how emerging market countries have done, relative to developed ones, in the context of this pandemic. And so plenty to cover off. .

Let’s begin with the latest infection numbers. And so we are seeing rising COVID-19 infections around the world. It does appear to be a third wave. It’s most notable in emerging-market countries, but also happening in developed countries. We have India and Brazil as examples of notable emerging countries that are seeing a big spike in cases. In the developed world, Europe. Many European countries are seeing a big jump as well. In Canada, the numbers are getting worse now, unfortunately, including in all of the largest provinces and in the U.S. that’s not quite the case yet. U.S. numbers are technically close to flat but we can see the majority of states now beginning to deteriorate and so likely some form of a wave there as well. .

And, of course, underneath all of this, it’s the new variants that are seemingly spreading more aggressively, and our tracking of that suggests that the number of new variant cases in Canada over the past week is 71% higher than the week before. The number of new cases in the U.S. 47% higher. So it’s very much variants beneath the surface that are exploding higher and becoming the dominant strain. .

In terms of re-openings. Well, the story’s increasingly mixed and so since January, there had been quite considerable economic reopening happening as our global stringency measures became less strict. However, we’re now seeing some flattening out of that. Not as loose as last fall. Not as strict as last January. And a great deal of divergence on a national level. And so for instance, the U.S. still very much enthusiastically reopening in some areas. In fact, stripping away almost all rules altogether. .

Conversely, we can say the Canadian situation has been getting easier. Fewer rules, but not quite as enthusiastically. And indeed, some backtracking recently. In parts of Europe, including France, officially the numbers are roughly flat, though we do know some parts of France are getting tighter and then Italy locking down quite a bit. So some countries tightening. Some countries loosening. My thinking is given this third wave we’ll see more tightening than loosening perhaps over the coming month. However, the good news story remains on the vaccine front. And so vaccinations continue to accelerate. We’re up to 535 million shots now globally. Israel still very much leading the way; 115 shots per 100 people and recognizing you need two shots for most of these vaccines. The UK is up to 50 shots per 100. The U.S. is up to 42. So big progress among those large, wealthy nations. Europe lagging at 15 per 100. Canada lagging as well at 13. Though again, in all cases, we’re seeing forward progress. In fact, in almost all cases we’re seeing an active acceleration. More people being inoculated each week than were inoculated the week before. .

And we can see success here as well in the sense that when you look at Israel, when you look at the UK, we’re not seeing signs of a third wave in those countries. They have benefitted from the vaccinations and that is very much changing the equation. I think that’s going to be a theme for a lot of countries going forward over the next several months, but not just yet. .

In the economic realm. Well, a few things to cover off here. And so one obvious one would be until recently the Suez Canal was blocked by a ship and that was a significant development. Thirteen percent of global trade goes through the Suez Canal. It has since been unblocked and so it was a very temporary effect but nevertheless, there will be ripple effects both in terms of getting ships that are backlogged through the Suez Canal and also unloading them or loading them, particularly in Europe. European ports will be inundated over the next few weeks. .

And so there will be some shortages, particularly in Europe. There will be probably somewhat higher inflation, particularly in Europe. Probably somewhat higher shipping costs for a period of time. And let the record show shipping costs had already roughly doubled since last summer. And so some stresses there that bear watching but ultimately, a very temporary shock. Something that we’ll see in the numbers for a month or so and then will vanish, much as the U.S. weather problems in February were very visible in February data and have then largely disappeared. .

In fact, as we look at U.S. data, the latest February numbers do continue to confirm precisely that. Durable goods orders were down in February. Personal income and spending was down in February. The income side, I should admit, in large part because there was such an enormous transfer of wealth the prior month on tax cuts and so incomes just couldn’t remain as elevated forever. .

But nevertheless, as we look beyond the February data, some of the real-time measures—in fact just about every real time measure—from March is showing quite an enthusiastic rebound, including our overall U.S. economic activity index. So we still think the economic picture is quite bright. .

I said we’d talk about business cycles and markets, and so let’s do precisely that. And so we’ve said in the past, we think this is an early point in the business cycle. That’s our diagnosis based on our scorecard approach. It’s worth asking though, what does that mean for financial markets? .

And historically that’s been actually fairly good for the stock market. In fact, we find that the U.S. stock market does best the earlier in the cycle you are. And so at the very start of a new cycle, the stock market generally does very, very well indeed. Early cycle it’s generally quite strong. Mid cycle does fairly well. Late cycle does okay. And then it slips into negative territory historically when you get to end of cycle, and of course recession as well. And so in general then the principle is you do want to be taking the greatest investment risks early in the cycle, and then incrementally less over time. As I said, we think this is an early point in the cycle, and so it is a time when you might expect pretty good stock market returns if the historical precedent is any guide. .

And then on the bond market side, we can say that the story’s a little bit different. And so bond yields actually a bit of a bimodal distribution. You see yields feeling the most upward pressure at the very start of the cycle, as a recession ends. And so that makes sense. Maybe explains some of what’s happened over the last seven months. And then you tend to see some upward pressure later, late cycle, as people are worried about overheating, and worried about inflation, and wondering whether central banks might be tightening, and that kind of thing. .

And so two periods of time when yields see upward pressure. A bit middling in between the two across much of the cycle, and of course a lot of downward pressure later. And so in the context of now, the upward pressure on yields makes sense over the last year or so. Conceivably though we might be coming toward the end of that to the extent that historical business cycle precedence hold. .

Now one question is, will historical business cycle precedence hold? Is this business cycle different? It’s certainly been a quick one so far. We saw a very brief recession, a fairly brief start of cycle. We’re already into early cycle. Is it possible, given forecasts, that the economies return to their prior peak before the end of this year? That we’re already at late cycle before 2020 is done? Could it just be a hyper-compressed cycle? .

I would say, I don’t think it’s quite as compressed as people think. Let’s recognize, even when economies get back to their prior peak, that’s different from saying they’re at their potential. There’s still a few years of work left to absorb the extra population, for instance, that grew over the last few years. And to absorb all of the innovation that took place over that period of time. So we’re still a few years away from reaching the economies’ potential. .

And let the record show that historically, when economies do reach potential, you normally have a couple more years of growth where you’re technically overheating, but nevertheless not in a recessionary position. And so I would say certainly plausible to say maybe this business cycle is only five years instead of ten years, or something like that. Ultimately we’ll just have to see. But nevertheless, I don’t think there’s any real concern that the business cycle is done by the end of this year, and that we run into trouble that quickly. I don’t think that’s all that realistic. .

Now one of the defining features of this pandemic period has been ebullience in housing markets. And it’s been a practically global phenomenon. It’s been very much contrary to what forecasters, yours truly included, had initially expected. Normally you get housing busts, not housing booms during recessions. .

But the strength of ultra-low interest rates were certainly a driving factor. People spent a lot of time in their homes, and so came to value them perhaps more, and to value space more. Households saved more money on average during the pandemic. They weren’t going on vacations and that sort of thing. And so ultimately it has created quite a housing boom. .

And I suppose the question then is whether this is sustained or what might happen going forward. And our default thinking is that housing cools somewhat. And again, it’s simply a mathematical fact that single family home prices can’t rise 4% a month for very long. And so that can’t persist indefinitely. We do know that mortgage rates have gone up somewhat. We know certainly the home prices have gone up quite a bit. And so to the extent there was a deal temporarily with extremely low mortgage rates, that deal is arguably gone in terms of the servicing cost of mortgages going forward. Conceivably the obsession with housing and bigger houses fades to some extent as people return to offices, and return to shopping malls, and third places over time. And there are some lagged issues to think about as well. Rental vacancies are high, unpaid rent is high, mortgage deferrals are not completely trivial. .

And so I guess we would say we do think housing slows to some extent. We’re not convinced there’s going to be a major policy change to drive it lower. So many of the supports are artificial, it probably makes sense to let those fade first and see where everything lands. And as it stands right now on the policy-maker front, policy makers are so focused on keeping the economy going it would be a surprise if they tried to undermine the housing market in a major way in the near term at least. .

And let me finish with some thoughts on emerging markets, quite briefly. And so we haven’t spent really enough time on emerging markets over the last year. Certainly, they’ve been affected by the pandemic. But have they been more or less affected than developed countries? Obviously, huge overlap. This has been a global event. .

And so I guess the question—or the answer we would pose is as follows: It seems to us that emerging-market countries have done about the same in terms of infections and deaths, though with extreme variation. It looks superficially like they’ve done better with infections, but we think they’re just picking up fewer infections than they’ve actually had. .

In actual fact, if you look at data like excess deaths beyond the normal rate in a country, it looks like some EM countries have been among the worst. Others, though, have done very well, including many East Asian and Southeast Asian countries. .

And then, from an economic impact, it does look pretty clearly that emerging market countries have done a bit better or at least a bit less badly. They suffered a slightly smaller economic decline last year. Given different growth rates, you could say developed countries lost three years of growth; emerging market countries lost fewer than two years of growth. .

So again, EM countries being less badly hit. And indeed, the forecast ahead is they perform a bit better going forward, even controlling for the fact that they normally grow more quickly. And really, I think the fact that they’re such dynamic economies, young populations, they had more limited lockdowns; all of that’s proven fairly helpful to EM countries, though they certainly have been affected despite all of that. .

Okay. I’ll stop there and say thank you so much for your time. I hope you found this interesting, and please consider tuning in again next time.

For more information, read this week's #MacroMemo.


Publication date: March 30, 2021

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