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by  Eric Lascelles Apr 20, 2021

This week, Eric Lascelles reviews strong economic data in North America and global vaccine developments. He also looks at China for clues to the global market outlook, and shares some thoughts on Canada's first federal budget in two years.

Watch time: 12 minutes 47 seconds  |   Hover your cursor over the video to see chapter options

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Hello and welcome to our latest video MacroMemo.

This week’s video covers a variety of subjects: the latest COVID-19 infection figures; the latest lockdown developments; and, of course, vaccine developments as well. It then pivots toward more classically economic news, including really the continuation of broadly strong economic data, particularly in the North American context.

We’ll also dig into a few special subjects. And so one will be looking at China more closely for clues about the market outlook; and we’ll also talk briefly about Canada’s first Federal budget in two years.

Let’s jump in and begin with this third viral wave. And so, unfortunately, the global trend in COVID cases remains challenging; record infections being set per day and, of course, driven by these more contagious variants. The biggest spike, in fact, is among emerging market nations, and so looking into those emerging market countries, we see India in particular doing much, much worse than before, really seeing just an incredible surge in new cases. It will soon be setting record for the most new cases per day for any country. It’s about to exceed the U.S. on that front.

Obviously, the one point of context for India is that the country has such an enormous population. It’s still not doing that badly when you adjust on a per capita basis, but certainly it is struggling more than it has for some time. Brazil, another emerging market country that was doing very badly, I guess you could say it still technically is, but it’s no longer seeing a surge in cases. Maybe those numbers are starting to come back down.

And then pivoting to the developed world, we can say Canada, unfortunately, now recording record daily cases of its own, exceeding the second wave at this point in time. Not obviously done rising in a sense that when we track the variants specifically, we can see the number of variants in Canada doubling roughly every week. And so that is not a stabilizing or improving trajectory whatsoever and, indeed, those variants are now the dominant strains. So we assume things get a little worse, at least in Canada, though recent lockdown efforts will perhaps help to cap that over the next several weeks.

One point though of silver lining in all of these numbers is that in most countries, we are seeing fatalities still well below prior records, and we think that is a function in part just of lags unfortunately, the fatalities peak a month after the infections, but perhaps more crucially, we can say we think targeted vaccinations are probably doing their work and should keep fatalities lower than they would otherwise have been at all points in time.

Canada’s now, by the way, in a position in which its number of new cases per capita each day now exceed the U.S. and so that’s a first in the context of the pandemic. Though, of course, it’s worth recognizing U.S. numbers were far worse than this earlier in the pandemic. The U.S. has just had more luck with vaccinations so far. Even with all of that success, its numbers are also getting a little bit worse, but it’s a much more gradual trajectory and seems plausibly that ongoing inoculations will ultimately control this; doesn’t look like the U.S. has any reasonable plans to lock down in the near term.

Now when we look at this third wave, we can say tentatively there is some evidence of peaking elsewhere. And so, for instance, Europe has been hit quite hard. We are now, though, seeing France and Italy and Poland begin to record slightly reduced numbers of infections per day. And in terms of how they’ve pulled that off, well, certainly, vaccination efforts are part of the story and conceivably warmer weather is also part of the story, but it’s mostly been a lockdown story, one in which we’ve seen pretty aggressive restrictions imposed in those countries and those are starting to pay dividends.

I shouldn’t say the problem is resolved fully in Europe in a sense the number of infections are still quite high, it’s just they’re no longer rising and indeed, perhaps coming down a little bit, but hardly good at this point in time and so there’s still some work to be done. And in the end, my suspicion is it’s vaccinations that will be the ultimate solution for all of these things, but it’s going to take quite some time to get to the necessary critical threshold in most countries.

Global lockdowns have certainly continued. So we’re seeing countries locking down more than we’re seeing them open up. We’ve seen a jump, in fact, in terms of stringency on that front recently. Not to the level of stringency that we saw peaking out around the turn of the year with regard to the second wave, but nevertheless, a jump relative to the restrictions that existed as of just a month or two ago.

I would say it’s unclear that policy makers have done enough just yet and so you see quite significant restrictions, for instance, in Europe and perhaps starting to work there. We haven’t seen that level of restriction imposed in Canada, for instance. We certainly haven’t seen it imposed in the U.S. And, in fact, one of the key themes here is quite a divergence. In fact, the U.S. is opening; Europe has locked down; Canada, somewhere in the middle, and so we’re no longer seeing all policy makers sing from the same hymnbook at this point in time.

Vaccine progress remains significant, and so Israel’s still leading the way, though, very much slowing its rate of inoculation now, presumably, as it runs out of people to inoculate. The UK’s still doing very well also, though it’s also slowed its rate of inoculation. Conversely, most other countries, still in acceleration mode. So U.S. inoculations, still accelerating, more new doses delivered per day than the day before in the U.S., now up to 63 doses per 100 people.

Canada has really accelerated now and so as we predicted a few weeks ago, it’s now jumped past Europe both with regard to the rate of inoculation, but also with regard to the total number of doses per capita and so Canada moving much more quickly now. In fact, Canada’s rate of inoculation is now among the fastest in the world. And we can say the vaccines are working in the sense that when we look at the countries that have inoculated the most, and so I’m thinking of Israel and the UK in particular, we see a very sharp decline in infections and in deaths and, indeed, it’s come down more there than just about anywhere else. And so this is, indeed, working when you push past all of the ambiguity over exactly what the efficacy rate is for different variants and so on.

Let’s pivot now toward economic developments, and I can start just with some IMF news. And so the International Monetary Fund has upgraded its global growth outlook and so that’s certainly welcome news. I should say we look to the IMF not because it’s the first or the fastest to generate a new forecast. In fact, it’s arguably among the last to do that. We look to it instead though because it has among the most sophisticated forecasting models and the biggest, largest number of economists and so on. And when you combine all of that, it’s a very credible forecast, and so it’s still good news that we see the IMF upgrading its growth outlook even though others have broadly already done that.

The IMF also releasing a variety of thematic reports and so, for instance, one of its findings is that the economic contraction last year would have been up to 3 times worse had it not been for all of the fiscal and monetary stimulus delivered. So, as much as some of that stimulus was perhaps imperfectly directed, in some cases was too big, in some cases, too small, we can say in the end it did do quite a lot of good in the grand scheme.

Maybe the other big conclusion from the IMF is they’re still not worried about inflation. They acknowledge there’s a bit of a spike coming in the next few months, but they don’t, over the medium run or longer, think there’s any sort of persistent problem out there. In fact, they think if anything, the underlying core trend is probably easing and they really highlight that the Phillips curve is very flat. Unemployment rates, even when they get low, don’t necessarily have to create a lot of inflation.

Elsewhere on the economic data, the real-time data remains very strong. In fact, it looks as though the U.S. is accelerating quite significantly when we look at things like credit card spending and small business revenue and travel statistics as well. The traditional data is also quite strong. We’re seeing jumps in retail sales and housing starts and this kind of thing, and greater optimism about tourism, and even rising demand for things like leisure and hospitality that had previously been quite beleaguered.

And it’s a fairly similar story in Canada. Canada has seen some very strong job creation for March. Canada’s Business Outlook Survey just came out with a high level of business optimism. And so we’ll warn Canada probably underperforms the U.S. economically a little bit over the next month or two just because Canada’s done some more lockdowns and the U.S. hasn’t, but we even feel okay about that in the sense that the second wave didn’t do much economic damage. This one probably does even a little bit less.

Let’s spend a moment on China. And so just to flag, China’s an important country. It’s been a pandemic bellwether over the last year-plus. It’s also just a big country. It was generating a third of global growth even before the pandemic and it’s even more important now. So we care a lot about China. China’s mostly sent optimistic messages. It’s shown us that the virus can be controlled. It’s shown us that people will get back onto airplanes once the pandemic has faded; that consumers will return to malls; that economic scarring should be fairly limited. And so lots of useful and welcome lessons. I would say, however, we’re getting maybe a bit more mixed data recently. It looks as though the Chinese economy has now slowed somewhat. It grew quite a bit more slowly, in fact, in the first quarter of 2021 than previously. Some of that’s probably seasonal distortions, but nevertheless, it’s no longer in recovery mode. It’s now back to a more steady rate of growth, we think. And related to that, and simultaneously, we can say policy makers in China are no longer, therefore, in stimulus mode. In fact, if anything, they’re thinking about tightening as opposed to easing. And so there’s talk of some rate hikes later in the year. There has already been some tightening of housing market rules. And so I mention all of that not because there’s trouble; in fact, I suspect it will all be just fine, but when the U.S. does something like that, when the U.S. starts to tighten policy after a long period of stimulus, you sometimes get a taper tantrum in markets. Seems to me China certainly is important enough to receive the same kind of treatment. And so let’s just pay close attention to China. There’s a risk that markets could be displeased if China continues down this tightening path. China’s been a really important source of growth over the pandemic.

And let me finish with a few quick thoughts on Canada’s latest budget. In fact, it’s Canada’s first budget in two years. It was certainly a spend-happy budget in the sense that there was 101 billion new dollars being spent over the coming three years, and even more over the next five years, and that’s on top of all of the spending promises previously made.

Pandemic-specific initiatives include really extending existing emergency programs, so extending the more generous unemployment payments, extending wage and rent subsidies for businesses as well. There’s a new program also that will encourage businesses to hire or increase people’s wages, or increase people’s hours, and then just more generally, more money for beleaguered sectors like tourism and hospitality and small businesses as well.

In terms of non-pandemic spending, there was plenty of that, but maybe the biggest thematic item is this major new childcare plan, a vision of $10-a-day childcare for the entire country. That’s going to take some time to deliver. It’s actually a provincial responsibility. The government wants the provinces to contribute half the money. And so there’s plenty of work left on that front, but it seems like a credible aspiration in several years’ time. And then on the revenue side, there had been fears. Particularly relevant for investors, there had been fears perhaps of a higher capital gains inclusion rate; fears about higher top marginal tax rate; fears of higher corporate taxes; fears even that perhaps the exemption on capital gains on primary residences might go away. None of that happened. We didn’t see any of those things happen.

Instead, there were some smaller tax increases that are being put through: one is a tax on foreign-held homes, and so a foreign buyer’s tax essentially; a tax on stock option deductions that’s been signaled for some years I should say, but now it looks like it’s going forward; a tax on luxury vehicles, $100,000-plus cars for instance; and a new digital services tax. So there were new taxes but maybe not directly focused on investors of relevance to our clientele.

We’ve already factored in this sort of thing into our economic forecast. We knew this approximate spending program was coming, and so our forecasts are already pretty strong for Canada this year. They don’t need to change. Certainly, the federal debt has gone up quite a lot over the last few years and will go up a little further over the next year. This budget proposes or expects that that debt ratio will then start to ebb a little lower in coming years, not because the deficit goes away, but because the economy grows fast enough to outpace the size of the deficit.

And then maybe to conclude, just to say that this certainly does feel like an election budget. And so, as much as it’s likely to be passed and make its way through this minority government, it does seem as though there’s a high probability of an election in the coming months.

Okay. I’ll stop there. And so, hopefully, you found some of that interesting. I wish you very well in your own investing and please consider tuning in again next time.

Thank you.



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

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Publication date: April 20, 2021

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