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by  Eric Lascelles Jun 8, 2021

While the spread of variants may risk a new viral wave, Canada and other countries prepare to reopen their economies. How will things change as the pandemic eases? Chief Economist Eric Lascelles looks at the data on online shopping, inflation and the global corporate tax plans recently proposed by the G7.

Watch time: 12 minutes 59 seconds  |   Hover your cursor over the video to see chapter options

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Hello and welcome to our latest video MacroMemo. We have much to cover off in this episode.

We’ll talk, as always, about the declining COVID case count. We’ll acknowledge that Indian variant, now called the Delta variant. We’ll talk about the rapid rate of vaccinations; some enthusiastic economic reopening; some contrast between the U.S. economic data which has been quite strong, and Canadian economic data which has been somewhat weaker, though we think we know why, and we’re not overly concerned. But we’ll also dig into a few special topics.

So we’ll look at the outlook for online shopping. We’ll dig a little further into inflation. It remains a hot-button topic. And we’ll also talk about some recent global taxation plans that were announced at the G7.

Let’s start with the latest virus numbers. And on that front, the latest COVID-19 wave, the third wave for most countries, is in active retreat still, so that’s very happy news.

We have India down quite nicely in an emerging market context. It had been the worst country of all in the developed world. European numbers are mostly declining. The U.S. still improving despite very few social distancing restrictions. Canada is now down well below its trough between the second and third wave back in March.

And even the infection rate in Vietnam is falling. And I mention Vietnam simply because they’ve said they may have a new, more contagious variant. We don’t know the details on that or just how contagious it might be, but it’s good news that they’re getting a handle on things. Perhaps it’s not as contagious as they feared.

I should warn, though, not all countries are getting better. And so, particularly in the emerging market space, there are a number of countries that are deteriorating, including several South American ones such as Columbia, Chile, and Brazil. Also, South Africa. We’re seeing Russian numbers start to go up as well. So let’s not pretend the pandemic is completely over.

In fact, on the subject of pandemic not completely over, that Indian variant which we now call the Delta variant, it is still spreading quite rapidly. It appears to be significantly more contagious than any of the other variants. And we’ve been tracking the UK in particular just because it has good scientific data on this variant. And unfortunately, more than half of UK cases are now this Delta variant. So it is very much spread, and actually, the number of overall UK cases per day is now significantly rising again. So there may be an extra wave that emerges from this in a UK capacity.

I have to say, in Canada, the Delta variant is also clearly increasing. It’s actually up 48% over just the last two weeks, and so, conceivably becomes the dominant strain almost everywhere and conceivably with extra waves emerging from that. So that’s really our main pandemic concern right now. One of the problems is that a single dose of vaccination appears to only be 33% effective against this Delta variant, meaning that most people would still get sick if exposed to it even after one dose. And so this is a concern.

I will say, though, that looking more deeply into the UK data shows that the hospitalization figures are almost all people who have not been vaccinated. And so what might be happening here is that people can be infected by the Delta variant if they’ve even had a single dose of vaccine, but they’re not getting that sick or sick enough to go to the hospital. And so on that front, it could be that we see more cases in many places, but maybe not more serious cases and more hospitalizations or more deaths. And so that would be quite good news, if true. Still quite speculative, I should warn.

And that presents a tricky debate for policymakers because there could be a fourth wave that happens over the next several months, but without a surge of hospitalizations or deaths. And so the question for governments is, do they lockdown? Do they try and limit the spread of this variant? Or do they not do that?

And you might think no, and that might be the right answer. But do keep in mind, governments just locked down the third wave and yet, ultimately, the level of fatalities was much, much lower than prior waves. And so that wasn’t enough from their perspective to allow the virus just to run. So it’s not clear how this gets handled. Let’s keep watching that Delta variant quite closely.

On the vaccination front, the rate of vaccination remains quite rapid. The UK is now up to 100 doses per 100 people. Though let the record show that doesn’t mean everyone is fully inoculated. You need two doses per person to get there. Nor does it mean that every person in the UK has received one dose because some have gotten two, some are still unvaccinated. But nevertheless, an important milestone.

The U.S. is at 90 doses per 100. Canada is at 69 and moving rapidly. Europe is in the realm of 55 to 65 doses per 100.

I think on the vaccination front, China probably merits some mention as well. China’s at 54 doses per 100 people, which is lagging everyone else I mentioned, but they’re moving very, very quickly. And keep in mind, they have this unbelievably large population that makes it logistically challenging as well. They’ve actually inoculated nearly 1 in five 5 in their population, and this is a 1.4 billion population, just in the last two weeks. So they are moving very quickly indeed and so dealing with this pandemic quite nicely.

In terms of reopening, while countries are enthusiastically reopening their economies for the most part, actually, Canada is now the most locked down of the 11 countries that we’re closely watching. And so we’re still seeing reopenings. We are seeing Canadian provinces partake in that as well. So Canada not completely alone.

But we do highlight the risk that the rate of reopening slows as this Delta variant spreads. And indeed, when you look at the UK, they’re now talking about delaying the next step of the reopening, given the Delta variant. So there could be a deceleration in those reopening efforts.

And then pivoting to classic economic data. Well, the U.S. economic data remains quite strong. The twin ISM numbers, the manufacturing, nonmanufacturing were both above 60 and rising. So consistent with very fast growth. So all is well in the world there.

U.S. payrolls for May were a little less than the consensus but still very good, with 559,000 new jobs. And the U.S. unemployment rate’s now below 6% for the first time during the pandemic. It’s down to 5.8%.

Intriguingly, the market, stock markets seemed pleased by the economic miss. And so, I think you view that as, the market likes it when the economy’s recovering, but the market is a little anxious about the economy overheating and requiring central banks to raise rates and inflation to get too hot and that kind of thing. And so maybe we’re now in a world where bad economic data is bad. That’s always the case. But maybe good economic data is bad. Maybe it’s okay economic data talk that’s the sweet spot or the ideal position right now. That thesis requires further validation, but it was an interesting market response.

On the Canadian economic front, we can say Canada’s economic data was considerably weaker. And so Canadian job numbers were outright down in May for a second straight month. Canadian GDP is estimated, on a flash basis, to have gone down in April; the first decline since the spring of last year. And so some economic weakness in Canada.

But we do know why. It was the third wave lockdown. That was April and May, largely. We fully expect it to be better in June, and we do see room for catch-up because Canada has been the most locked down of major countries recently.

And I suppose, from a silver-lining perspective as well, and with reference to the Bank of Canada which meets later this week, at least as I record this, takes a little bit of pressure off the Bank of Canada to tighten policy just because the economy has taken a breather over a couple of months. But again, we do think it snaps back.

Let’s talk now about online shopping. And so naturally, online shopping has increased massively during the pandemic. We look at the Bank of America’s real-time credit and debit card transaction data to get a sense for this. And before the pandemic and for the U.S., 13% of retail spending was online. At its peak during the pandemic, 28% of spending was online. And that’s retreated back from 28% now to 19%. So still well above the 13% from before, but equally well below the prior peak.

We think—and this is not precise—but we think online spending will retreat a little bit further as economies continue to reopen and as businesses just became available for customers to physically visit. And so we think that 19% goes down to something like 17%, but not all the way back to the 13% pre-pandemic norms. We do think some of this online spending sticks around, but not all of it, and certainly a significant retreat from the peak during the worst of the pandemic.

And I should say, we do think there’s a structural tendency for online shopping to rise going forward over the coming years and decades, much as it was before the pandemic rising. In fact, there’s not really an obvious upper limit on how far online spending can go. I mentioned it’s currently at 19% in the U.S. It might fall down to something like 17%.

China’s at 34% right now. They are well beyond, and some forecasters think they could go over 50% over the next five years. And so I think over time, we’ll see online rise again, but there’s a period of retrenchment right now just as physical stores get to claim some share of shoppers along the way. We’ve been thinking a lot about inflation. And so we’ve written and spoken in the past about how, in the very short term, inflation should be very high. It is, in fact. Over the next few years, it should be a little high. Over the long run, probably not. And so we still think those things.

But let’s identify a few items. One is that we will get the next U.S. inflation print later this week. It will probably be higher again than the prior month. And so we may well see an inflation print of 4.5% or even approaching 5%. So be braced for that.

However, we do think that probably is the peak. And in fact, we do track some web-based, real-time inflation measures, and they did start to peak over the last month and have started to come back down. So we think we’re in the realm of the hottest moment for inflation. Not to say inflation heat disappears altogether, but some of it does start to fade, we expect.

And I should say as well, on the wage side, which has been one source of concern, we’ve all read articles about big signing bonuses for workers at fast-food restaurants and that kind of thing. It’s important to recognize, wage pressures are highly varied. And so, for instance, fast-food wages in the U.S. are up 7% over the last year. There is genuine heat in that particular sector. They’re struggling to get new workers. However, hourly earnings overall across the economy are only up by about 2% year over year. And so we’re not actually seeing wage pressure everywhere. It is a select few sectors. In turn, I think that limits the inflation pressures that might build off of that. It’s not a universal wage phenomenon.

And so, on inflation, far from resolved. Probably, though, near its peak. We do again acknowledge that it likely stays higher than normal over the next few years. There are some special forces at work here that don’t go away overnight. We don’t think it’s a forever story. We don’t think inflation is just off to the races going forward either.

Let me finish with some thoughts on global corporate taxes. And so, the G7 recently agreed to a minimum 15% corporate income tax rate. That seems confusing because, actually, all of the G7 countries already have a corporate tax rate of more than 15%. But the idea is, any company domiciled in one of those countries, their global corporate effective rate would have to be at least 15%. And so, if they claimed a lot of earnings in a tax haven, they would then have to top up their tax payments in their home country. And so there is some relevance to this despite seeming signs to the contrary.

There’s also a clause that would tax big profit margins. So if you’re a big business and you have a profit margin of more than 10%, which some businesses do, you’d pay a 20% tax on the surplus. And so some extra taxes here proposed.

I would flag, these aren’t yet implemented. So the G7 countries would all need to pass this through their legislatures. They haven’t done that yet. There’s even a bit of a game theory debate. In the U.S., it’s hard to do. You would need Republican support alongside Democrats to get this done, which is far from certain for the U.S.

It’s not clear other countries will implement this unless the U.S. does it first. So it may just fizzle altogether. We don’t quite know. But it’s, again, far from certain of going through. Eventually, you’d want to bring this to the G20 and then to a full 135 set of countries, and so it’s not clear they’ll all sign on either.

It’s still fairly ambiguous what is a largest company, to what extent does this get embraced globally. And in terms of estimates, in terms of how much money this might bring in for governments, one we’ve seen is $100 billion to $200 billion of extra corporate tax revenue globally, which is quite significant.

However, from a corporate profit perspective, it might cut earnings after tax by maybe 1.5% to 3%. And so palpable but not a massive hit. But in the end, much remains to be determined. This may or may not be implemented. The details are frankly unclear right now, and so we’ll keep watching this. But not a massive blow to companies, I don’t think.

Okay. I’ll stop it there. Thanks so much for your time. I hope you found some of those items interesting. And please consider tuning in again next time. Thank you.

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


Publication date: June 8, 2021

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