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by  Eric Lascelles Jul 6, 2021

In this video, Chief Economist Eric Lascelles reviews the latest virus and economic developments. While global infections continue to rise, he observes strong economic activity -- especially in leisure and hospitality sectors. He also provides perspective on recent labour shortages amidst new job and business creation in the United States.

Watch time: 14 minutes 42 seconds  |   Hover your cursor over the video to see chapter options

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Hello and welcome. This week’s video MacroMemo covers quite a range of subjects, starting with the latest COVID numbers, the infection figures, and, in fact, even some decoupling between infection numbers and deaths as it pertains to the UK.

We’ll take a look at reopenings and how some of the reopening plans of governments are actually slowing a little bit.

We’ll talk about vaccinations, certainly, and some changes in the scorecard there.

The economy will get a look. And the economy, in fact, is doing quite well. We see good growth just about everywhere.

And then we’ll also dig into a few special topics. We’ll talk a bit about labour shortages as they exist right now, despite high unemployment rates. We’ll discuss the high rate of new business formation. Lots of new businesses being formed and what that means or doesn’t mean. And lastly, just working from home; what that might look like after the pandemic. Some interesting research being done, and I’m very happy to share some of the key findings with you.

Let’s start, though, on the COVID file. And so, in terms of virus developments, well, global infections are now rising a little bit again, and so that’s, of course, not welcome in the least. But nevertheless, that’s where we find ourselves. And we do believe that’s a function of the Delta variant, this more contagious variant that came originally from India.

We see in our measures that roughly half of all the countries we’re tracking are now seeing rising infection numbers, whereas that was just in the realm of about 30% of countries as of a month ago. So some deterioration there as well.

And then particularly the case in emerging markets, we see those numbers getting worse more often than not. And, arguably, more consequential for them as well because most emerging market countries have not done a lot of inoculating their population and so they are more vulnerable still to the virus, particularly this highly contagious variant. And so, it’s possible the next wave will be the worst yet for some of these countries from both an infection and a fatality perspective and conceivably cascade into the economic outlook for those countries as well. So that’s one thing we’re looking at quite closely.

There is some evidence of rising infections in parts of the developed world as well, though it’s more limited. I can say in the U.S., we now see that more than half of U.S. states are seeing a rising infection count, though it’s still pretty limited so far. But there’s a vulnerability there since the U.S. has encountered a high level of vaccine resistance. A lot of people aren’t getting vaccinated there, so the U.S. is falling behind on that front.

Interestingly, Israel now seeing a slight increase in infections as well, and so demonstrating even the most inoculated countries can’t completely dodge the Delta variant. Though I should say, the fatalities are still very low there for the moment.

And I guess really the main conclusion when it comes to this Delta variant is, to the extent that each sick person in normal conditions would expect to infect five to eight other people—it’s a high number, it’s a very infectious variant—it is likely at this point in time that most people will eventually either be vaccinated or get sick. It’s not quite a binary situation but that increasingly is where we find ourselves. And so, of course, the onus then is on getting vaccinated.

For the moment, cases are still falling quite nicely in Canada and so that’s a welcome thing. And Canada’s done well on the vaccination front, and so there’s a fighting chance that trend continues even with the Delta variant. And the UK is very interesting in the sense that it has maybe struggled the most outside of India with the Delta variant. It’s seen a very sharp increase in its infections over the last six or so weeks.

It is possible, though I wouldn’t say certain, but it is possible that the UK infection numbers are starting to peak. That’s the impression we get when we look at the most recent three or four days of data. It could just be noise. I’m hoping it is something more than that. And it would be logical if the UK infection numbers were starting to peak in the sense that the UK is a leader in vaccinations. It has been moving very quickly on that front. And so, conceivably, the vaccines start to outmuscle the infection, but I can’t quite say that with certainty.

What I can say is that while the UK caseload, the number of daily infections, has increased by about 10 times over the last couple of months, fatalities in the country are only up by around 2 times. And so, the link between cases and fatalities is being broken by vaccination, even when the numbers of infections themselves are remaining quite low.

And so I think the attitude that policymakers are increasingly taking is that they can tolerate some infections if it’s not going to lead to death or serious illness. And so just as an example—and the UK remains very much the litmus test here—but the UK does plan to fully reopen in a few weeks, and so we’ll see what happens. It could be infections stay high. It could be they go higher. But probably the fatality numbers and the hospitalization numbers stay low, which, at the end of the day, really is the main goal. Just like we don’t shut economies down during a flu season since not all that many people die of the flu.

Now, moving into the economic space. I can say the rate of economic reopening, removal of restrictions, is it’s still happening but seemingly slowing. And so, of course, it depends on the country. Canada’s still very much opening happily. In Europe, seeing some borders being put up or some barriers at borders being put up, as the Delta variant swirls around there.

We still think there are plenty of reopening tailwinds. All of the opening of the last few months should still allow economies to keep growing for some time, but maybe a little bit less of a tailwind going forward from here.

On the vaccination front, well, vaccination campaigns are moving quickly still. We’re up to 3.2 billion vaccines administered globally, and it’s a rate of 40 million a day. So moving quite quickly.

In terms of the rankings, Canada has now actually passed the U.S. in doses administered, per capita, I should emphasize. Canada, of course, with a smaller population.

Canada is also at the top of the global rankings for the percentage of population with at least one dose. And, of course, some of that is just because Canada chose to give almost everyone one dose first and then circle around to a second dose. So the second dose push is now on.

But equally, it seems as though Canada has a pretty high tolerance for being vaccinated. We’re not seeing as much reluctance as exists in some countries. And so that’s a positive and puts Canada in quite a nice position going forward.

It does now look as though Europe is likely to pass the U.S. over the next few weeks in terms of total doses per capita as well. So the U.S. really stalling out here, and as mentioned earlier, now starting to see some extra infections. I wouldn’t bet on them locking down again at all, so I’m not sure there’s an economic implication. But nevertheless, we should expect to see at least a mini additional wave in the U.S. as this plays out.

On the more classically economic side, well, still a story of economic activity continuing to revive nicely across much of the world. People in particular keen to eat what was previously forbidden fruit. And so by that I mean sectors that were locked down until recently are seeing a lot of demand.

And so, for instance, U.S. hotel occupancy rates are just surging and are now in a position of starting to blow past pre-pandemic norms. And I’m not sure the rise is done yet based on the trend as it stands right now.

It’s a similar story with restaurant reservations globally. They are broadly at or above normal in countries where that sort of thing is possible. And so people are very much keen, not just to live a normal life, but to make up at least partially for lost time.

And then elsewhere in the economic space, the U.S. had a big job number in the month of June. So big job creation continues there. When we look globally at Purchasing Managers’ Indices, a pretty nice proxy for economic activity. A little off in the U.S., though still very high in June. And that makes sense. We do think the U.S. economy does need to decelerate a little after having moved so quickly over the last six months or so.

Still rising actively in other places, though. The eurozone and the UK, particularly the service PMIs. And so the sectors that were most limited and really that had given very weak readings back early in 2021 are now quite nicely improving in those countries. And, as we’ve said before, we think there’s room for quite considerable catch-up. There’s room for those countries to grow quite quickly now as they make up for lost time.

Something of that is true I think for Canada as well. And actually, we can now see in the real-time data evidence of Canada’s economic revival in June. And so, for instance, small businesses reporting being fully open surged significantly after having dipped a bit in April and May.

And actually, on the Canadian file, I can say as well that while we do now know with a pretty high level of confidence that the Canadian economy did shrink in April and May, actually, the April decline was less than half as big as initially thought by Stats Canada. And so not quite as problematic as first imagined.

In terms of special topics, one thing we’ve been looking at recently is labour shortages, and so this strange situation in which unemployment rates are high but there’s also a high level of job openings. And so businesses can’t find workers and workers can’t find businesses. And it’s sort of a strange situation.

And for a while, you could explain at least part of this by saying that enhanced unemployment insurance meant that some people were just reluctant to enter the workforce when they could make okay money being outside of the workforce. People were also scared of being infected and lacked childcare, in many cases.

Most of those arguments are now fading significantly. And so, we can say childcare is now broadly available, people are less scared of getting infected, and, at least in the U.S., the unemployment insurance benefits in half of U.S. states actually just expired in June. So people are going to be pushed back into the labour force if they were previously reluctant.

There is arguably a new friction, though. And so really, it’s just that so many businesses in a number of sectors are all trying to restart all at once. And so everyone needs to hire a dozen workers all at the same time, and it just can’t be done. Matching takes time between workers and employers, frictions exist, and so, for the moment we’re seeing high job openings and high unemployment.

Big wage gains in those particular sectors. In some cases, someone gets hired and then they quit the month later because there’s a higher wage available down the street for some other company trying to find that same type of worker. And so, we’re seeing a high quit rate as well. I think we’re going to get through this choke point over the coming months.

Another thematic topic we’re looking at is new business formation. We’ve seen a big jump in the number of new businesses being formed. In fact, that’s running about twice the normal rate. And in theory, high business formation’s a good thing. It can drive productivity growth in subsequent years.

And in fact, in general, the end of a recession is a classic time to start a business. Borrowing costs are cheap, commercial real estate, leasing rates are often cheap, as well. It’s usually cheap to get used machinery and equipment because other businesses have failed. And, for that matter, there’s a void in the market where old businesses used to operate. So it is a classic time to start a business. I think we are seeing a fair chunk of that.

However, I would say it’s probably not quite as exciting as it first looks. And so, for instance, when we look at the type of businesses being formed, most are not businesses that are likely to hire additional workers. They’re kind of solo operations. Some of them are consultancies, kind of a stopgap between traditional jobs. A way of filling a resume, but not maybe a long-term career path or a company likely to grow.

Recall or understand, I should say as well, that there was also a big net loss of businesses in 2020. Understandably, a lot of businesses failed. In the U.S., there were 250,000 fewer businesses than normal by the end of last year.

And so when we’re seeing all this growth, a lot of it is still kind of filling the hole created by last year. I’m not sure I can quite say there is outright more entrepreneurship out there today than there was a couple of years ago. But we are nevertheless still seeing those numbers rising. I do think some dynamism will emerge from that, will be unleashed from that. And I do think we could see some faster productivity growth in the coming years, in part because of this. But it’s not quite as exciting, perhaps, as it first looks.

Then my last subject is working from home. And so, during the pandemic, quite naturally, many people have been working from home. The fraction of the hours worked in Canada and the U.S. at home has gone from about 5% before the pandemic to a peak of 40% of hours worked during the pandemic and is now down maybe to about 30% of hours worked.

The consensus is that this will eventually settle after the pandemic to about 20% of hours worked outside of the office. And so that’s half of the peak level. Equally, it’s four times the pre-pandemic level.

And I should emphasize, it’s quite skewed in the sense that about half of the jobs out there just don’t lend themselves to remote working. It could be retail or food services or manufacturing or much of health care. About half of jobs just have to be done in the workplace, and so there isn’t really scope there. And so when we say about 20% of hours worked could be outside of the office, what you’re really saying is that the half of workers who can work outside of the office might work 40% of their time outside of the office or something like that. Stylistically, call it two out of five days per week, though with considerable variation by workers. So that’s the consensus thinking right now on the subject.

And major implications for that. And so downtowns conceivably enduringly diminished in the sense that you could have 40% fewer office workers down there at any particular time. Though I should emphasize, over the long run, downtowns are by definition attractively located with good transit and so on, so you would expect residential and retail and entertainment options to maybe fill that void over time. But it does take time.

You would think residential real estate could remain in high demand since people want more office space and care more about maybe the amenities around their house, if they’re going to spend more time around their house. And then commercial real estate is obviously the elephant in the room. And that’s a tricky one to answer in the sense that not all executives plan to diminish their corporate footprint. In fact, many still think they will be expanding, including a lot of the tech giants out there.

Keep in mind, as well, there may be a desire for more space per person; people worried about getting sick in the future. If you went back to 1990 size of office per person, you would actually not be able to collapse commercial real estate demand at all. You would need to essentially perfectly offset the reduction in hours worked by bigger office space.

Keep in mind, few people will actually be working from home 100%. So maybe it’s hard to get rid of any offices if everyone’s in the office some of the time, unless you pivot to a hotelling-type concept. And, for that matter, hotelling may not be that popular, sharing an office.

Offices arguably need to get better to attract workers from home, to be more pleasant, and more functional, and better for collaboration. We used to go to the office for work; we may now go to the office to work together, and that’s a different floor plan altogether. And so commercial real estate, certainly, you could persuade me there’d be less demand in general, but it might not be quite as neat and tidy as you first think.

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



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

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Publication date: July 6, 2021

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