Hello and welcome to our latest video MacroMemo. Much to cover off this week.

We’ll certainly begin, as we always do, with a touch of COVID and what’s happening at the global level on that front. But we will quickly move in to other subjects.

And so one is that the EU, quite surprisingly, is embracing normality as defined by business travel, as defined by going to the office, than many other parts of the world. So we’ll talk a little bit about that. We’ll then proceed into just the data run for the U.S. and Canada. We see some interesting but somewhat divergent trends between those two countries.

We will, of course, acknowledge some of the big, thematic topics out there. And so China’s economic slowdown is one; supply chain issues is another. In fact, those are easing slightly, to our happiness. And inflation notes of course as well. It’s a high-inflation environment.

We will then circle around, a bit of a broader business travel discussion. And we’ll finish just labour versus capital. Maybe there’s a shifting balance of power there relative to what has dominated for the last few decades.

So, lots to cover off. As such, why don’t we dive right in? On the COVID front, well, COVID numbers—so infections per day globally—still mostly falling. And so this is still a fairly positive situation despite the high level of contagiousness of the Delta variant. Cases are falling as opposed to rising in most places, including in most of the U.S. and most of Canada.

I should admit, there are some parts of the world that are tentatively getting worse. That does include a number of EU countries now. We’ve noted that Germany, France, Netherlands may be hooking a little higher, which isn’t ideal.

UK cases still fairly high as well, though hospitalizations not so much. And of course, the UK has pursued quite a different strategy. They’ve just completely normalized such that masks have practically disappeared and so on.

It should also be acknowledged that there are some increases in cases in countries that previously pursued zero tolerance policies. So places like Australia, like Singapore, had had very low cases. They were unable to completely eliminate it. Now they are seeing something of an increase.

And so, COVID numbers worse in a few places, but the big message is still broadly getting better globally, still broadly getting better in a North American context as well.

Let’s talk about the EU for a moment. And so, the European economy has not been especially impressive in terms of its economic revival. That is to say, its activity is still well short of pre-pandemic norms and, at times, it has struggled. And so that theme remains the same.

What’s interesting and even a bit curious in the context of that is that we can see that some things about Europe have normalized more than almost everywhere else. And so for instance, traffic congestion in major European cities is now completely normal.

And so let’s acknowledge, of course, maybe some people not getting on the subway, driving instead. It doesn’t mean necessarily the same number of people are going to the office. But nevertheless, EU traffic congestion completely normal. North American and Asian traffic congestion has absolutely revived and looking more and more normal, but still well short, particularly at rush hours. And so that’s interesting.

Similarly, when we look at business travel, we see that business travel has revived the most in Europe as well. In fact, it’s almost 50% of pre-pandemic levels, which is quite surprising. And so, what to make of that. It could be that we’re missing something, and maybe Europe is normalizing more than the most in a way good for the economy.

I’d be inclined to think there might be a different interpretation, though, which is, it may just be the European economy is more rigid in the sense that they can’t get things done as well without visiting the client in person or physically going into the office. They may not have absorbed or embraced as much virtual working and teleconferencing and these sorts of things. And so, a little unclear what conclusions to draw, but it’s interesting to see Europe lead the way in a sense that it hasn’t generally through the pandemic so far.

Okay. Let’s pivot into just traditional economic data for a moment. We’ll start with the U.S. And so, U.S. economic data, I would still describe as mixed. And so, news sentiment, for instance, continuing to sour, which has been a pretty good proxy for economic growth. Not a sign of acceleration there.

U.S. payrolls, generated jobs, almost 200,000, but not the 500,000 that had been hoped for, and so some disappointment there as well. I will say, though, that we do wonder whether U.S. data is perhaps beginning to trough. We can see some of the surprises becoming a bit less negative. We had the ISM Manufacturing and Services measures out recently, and those actually impressed.

And just theoretically, as the Delta variant fades, as it seems to be in the U.S., it would make sense if we saw a bit of a mini acceleration in the U.S. So not seeing it overwhelmingly in the data, but we do budget for perhaps no longer a deceleration in the U.S. over the next few months.

And then in Canada, it is to some extent the opposite situation. So Canada has had very strong economic data over the last few months, including a big 157,000 job gain in September, which easily bested expectations. And the Bank of Canada’s Business Outlook Survey was incredibly strong in terms of what businesses are up to, and their hiring, and their investment plans. And so all of that is quite lovely.

I do wonder whether the Canadian economy might slow a little bit from here, though, just in the sense that we’ve now seen two regions of Canada lock down a bit more than before. And so Atlantic Canada and the Prairies have both tightened their rules somewhat; they had seen an increase in COVID cases. And so that might weigh a little bit on Canadian growth. So we expect a bit of a slowdown. Still, recovery’s still fine, though.

All of that said, there is a fascinating divide between Canada and the U.S. right now. And so, I don’t know if you know this or not, but Canada’s employment is now back to its pre-pandemic peak. So more jobs than there were before the pandemic. The U.S. isn’t yet.

Conversely, the U.S. economy is back to its pre-pandemic peak and the Canadian economy isn’t. And this is a curious state of affairs. Usually, those two things rhyme with each other within a country. And so really, what it says is that U.S. productivity growth has accelerated, and so they’ve managed to make more things with fewer workers. In Canada’s case, that hasn’t happened.

And so, which is good, which is bad; it really depends on your perspective. I think for investors, the U.S. situation looks better because, of course, bigger productivity means more profits, and so it’s nice for investors.

Canada’s situation, though, isn’t all bad, in the sense that, of course, after a recession, there’s a great desire to get unemployment down, to get workers back into the workforce. That’s often a main policy goal. And so, in that sense, the policy goal, the societal goal, has been achieved but maybe not quite as purely good for investors to the extent that it means that there hasn’t been as much productivity growth.

Okay. Let’s talk about China for a moment. We’ve done that over the past several MacroMemos. And so I’ll just cut right into the main issue here, which is, we did get some extreme weakness in the Chinese GDP numbers recently. The economy grew by just 0.2% in the third quarter, and this is a country normally growing at 6 and 7% per year, so that certainly isn’t the normal rate of growth.

Seems to us you have four simultaneous headwinds that have really slowed China down. Not enough electricity for its factories, and that’s because natural gas and coal prices are very expensive, and also perhaps some green initiatives. A Chinese tech crackdown, which is hurting that sector. We can say housing market woes, of course, as government rules tighten and as builders have started to buckle, like Evergrande, as we’ve discussed in the past. And then, lastly, I suppose, just a more general demographic challenge.

And as we look to the future, really, the housing to us is the most acute issue here. Chinese housing is 15 to 25% of the economy. We’ve already seen apartment sales fall by 20 to 30% over the last year, so there’s already some weakness there. And builders clearly are struggling. There are now four Chinese builders that have not been able to repay some of their debt, and the government doesn’t seem all that keen to bail out these players.

We don’t think it’s a Lehman Brothers moment. That is to say, we don’t think this is a giant financial crisis that encircles the world. There are maybe some parallels to Bear Stearns, which is to say, a U.S. investment bank that failed before Lehman Brothers and didn’t take the global system down proved to be manageable but was a warning that there were some problems in that area and those warnings need to be heeded, and they weren’t all that well in the U.S. And I think they likely will be in the Chinese context.

I think there are also parallels to Japan—is it a Japanese moment? Because Japan, in the early 1990s, had similar demographic challenges, a similar housing boom that began to bust, and high debt levels. And so there are very much parallels there.

I would push back a little bit, though, just in the sense that Japan made some big policy errors over the 1990s that I don’t think China will repeat. Similarly, China still has quite a bit of room to converge on developed-world living standards. And so I think even if China’s growth is permanently slower from this, it will still be pretty darn good by any standard other than itself.

And so, we assume at this point that the Chinese economy does get dinged to the tune of about 1.5% of GDP over the next year. So we think Chinese growth will be slower, mainly because of housing. We are now forecasting sub-5% Chinese GDP growth for the year ahead. That is below the consensus, slower than China is used to, but it’s also quite good by any standard other than China’s. So I guess it’s all relative in the end.

Okay. Let’s talk supply chains. And so, supply chain issues have been quite intense, and it’s been hard to get products for companies, and cost has been very high and so on. We do see some improvements now. Not a complete improvement. I’ll give you lots of caveats in a moment, but we do see some improvements. And so, one would be, there are now fewer container ships waiting at anchor to unload in Southern California. That’s where 25% of U.S. imports come from, the two ports there. And so, some slight easing of that.

We can say that shipping costs appear to be now coming down, and so our index of global cost is edging lower. There are some anecdotal reports that the cost of shipping from China to the U.S. has just fallen by more than half, though it remains several times higher than normal for context.

And when we look at ISM supply indices, those have improved a bit as well. So businesses are complaining a little bit less about supply chains, though certainly, hasn’t fully normalized.

And fourth, I guess I could say that the holiday rush is now. To get something to market in time for the holiday season, it needs to be on a boat by the middle of October. That’s roughly now, as we record this. And so the next month or so is critical in terms of moving through a particular bulge in the supply chain. And after that, conceivably, some of the issues start to abate a little bit. And so, we are seeing some improvement. I guess that’s the big point.

I would still warn, we think some supply issues persist. There are still big backlogs in ships waiting at port and the cost of shipping is still very high. There’s still lots of inventory items waiting in ports to be put onto trucks. There are still lots of inventory items in factories waiting to be put onto ships in China. So by no means has this been cleared out at this point in time.

The cost of shipping, as much as it’s coming down and is welcome, wasn’t a huge driver of inflation; less than you might think. It was more just the inability to get certain things like computer chips. And as it happens, those computer chips are still hard to get, and it takes a few years to build a new chip fabrication plant. And so, some of these things are going to persist. We don’t think there’s a neat and tidy resolution but it’s getting a little bit less bad, it would appear.

Quick couple thoughts on inflation from me, which is a hot topic, and inflation itself has been quite hot as well. The first is, when we look at real-time measures of inflation, they’re not going up. In other words, they’re not accelerating but neither are they coming down. They are suggesting we are in a steady but nevertheless high-inflation environment for the moment. So let’s not assume that inflation cools off drastically in the near term.

The second thought is, energy costs are very much contributing to inflation right now. So oil has gone up a lot; it’s more than $80 a barrel. Natural gas has risen several-fold. Coal prices are now up three times from 2019 as well. And so, we’re seeing it really on all fronts right now. And of course, that is significantly inflationary and it’s also not great for growth, at least in countries that don’t make a lot of those products.

There’s also housing market prices to consider when we think about inflation. And so, on the housing front, home prices have gone up a lot. Those actually don’t bleed into inflation all that quickly or all that immediately, but they are starting to now. And so, even as maybe the energy cost push slides away a bit over the next six months, we will see this other factor that keeps inflation somewhat higher.

And so, the conclusion for us is not that inflation stays extremely high forever. We do think inflation will eventually normalize. We think it will be a bit less hot over the next year. But I don’t think we’ll see a complete normalization in 2022. It’s going to take a bit longer than that, and housing might give a bit of extra pressure as well.

Quick word on business travel. And so, personal travel we think will eventually fully revive after the pandemic. That is a conviction we have. Business travel, though, we think probably doesn’t. We think business travel will probably be permanently lower than it once would have been. Maybe two-thirds of pre-pandemic levels but not a full return.

When I say that, though, it’s a surprise that European business travel is now up to nearly 50% of pre-pandemic norms. U.S. business travel is now up to 42%. So there’s been a significant revival already.

I’m surprised by this, in part just by the speed with which it’s happened, but I think more acutely by the fact that we’ve seen a revival of business travel more significantly than we’ve seen a revival of people going into offices. When we look at U.S. offices, we can see that New York and San Francisco, as an example, are still no more than 25% of office occupancy, and yet, apparently planes, at least with business travellers, are closer to 50%. And so that’s a surprise.

No big conclusion from that. I guess it’s good for airlines. But nevertheless, that sequence is a little bit different than we’d been assuming, and I think it merits some further close examination.

And then lastly from me. Just a nod to labour versus capital. And this is not always an adversarial relationship, but nevertheless, it would be fair to say over the last few decades that capital has won. Businesses have seen profits surge and profit margins go up. Wages have not risen to the same extent.

And so the question is whether this might be starting to reverse, and I think possibly it might be. From the pandemic, we can say there is a greater focus on people over finances right now. There have been experiments with big social safety nets and some of that might stick. There’s been less immigration. There have been early retirements, so the supply of labour is artificially reduced. And all of that gives some clout to workers.

And there is, arguably, a labour shortage right now. When we look at the data, wages are rising more quickly. Anecdotally, there are more strikes. And so there’s been a bit of a shift during the pandemic. I think there were also some preexisting trends. Populism was on the rise. We’ve seen left-leaning governments installed in the U.S. and Canada and Germany recently. Anti-trust efforts go against tech firms. Minimum wages have been rising. There’s a new minimum global corporate tax. Baby boomers retiring is ultimately something that adds to a labour shortage.

And so I guess the takeaway from all of this is, at the margin—this is not the only theme we have to care about—but at the margin, it might be a little harder for profit margins to continue rising from here going forward over the next several years and decades. Might be a little easier for wages to go up. And so, maybe a bit of a challenge for workers. Certainly a good—pardon me—a bit of a challenge for investors. Maybe a bit of a good thing for workers as well.

Why don’t I stop there? Thanks so much for your time. Hope you found these varied subjects interesting, and please consider tuning in again next time.