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by  Eric Lascelles Apr 27, 2021

Vaccinations have accelerated across developed countries, while infection numbers remain concerning in emerging markets. In this video, Chief Economist Eric Lascelles reviews ongoing global virus and economic developments, and comments on the recent spike in inflation. He also sheds light on the factors behind productivity growth across various sectors, including health care.

Watch time: 13 minutes 11 seconds  |   Hover your cursor over the video to see chapter options

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Hello and welcome to our latest video MacroMemo.

And this week’s edition covers a range of subjects. Certainly, begins with the latest virus numbers, including some tentative improvement from the third wave that we are seeing.

We’ll talk about the prospect or the risk of future waves as well in a few different contexts and then move to the pace of vaccinations, looking very good. We’ll talk about economic data, also looking quite good, with the UK perhaps joining the economic growth party belatedly.

We’ll acknowledge inflation’s been spiking. That’s part of our forecast and we’ll talk through that a little bit. We’ll take a look at central banks, including the Bank of Canada’s latest decision. And we’ll finish with some talk about the prospect of faster productivity growth, faster innovation over that next decade, which could have cascading consequences.

Let’s start with the virus numbers. And just to briefly review, of course, a third wave now afflicting many of the world’s countries. That third wave, though, is now seemingly starting to recede in many developed nations. And so we can say the U.S. never really had a big latest wave but its numbers are now improving fairly broadly. Across Europe, most countries there now starting to see some improvement.

Canada finally has begun to turn, it appears, just over the last week or so. And we can see quite clear turns downward in the infection rates in British Columbia and Quebec. We can see a more modest one in Ontario. A very tentative one in Alberta as well.

I should warn, in all of these cases, maybe with the U.S. as the exception, the infection numbers are still very high. This is not done yet, but the trend is becoming a little bit more favourable.

And then in contrast to that tentative success in the developed world, we can say that emerging countries in general not enjoying as much success. And so, India most famously and prominently seeing just incredible spiking infection numbers, now setting records not just for itself but in terms of any country’s daily infection rate of well over 300,000 new cases per day.

I should warn, of course, that as much as India is in a very serious position, it does have a huge population. And so when you adjust on a per capita basis, actually, Turkey getting more new cases per capita than India per day. Several Latin American countries can say the same thing. But nevertheless, in terms of sheer numbers, India certainly is a considerable concern.

In terms of why we’re now beginning to see developed countries at least begin to get better, we posit a number of things. I think the most important development is just that governments have imposed somewhat stricter rules over the last month or two, and so that’s probably doing most of the hard work.

However, I wouldn’t want to underestimate the effect of Easter fading into the rearview mirror. And so much as the Christmas holidays induced more socialization, created a spike of infections that then fell off fairly sharply, we do think that perhaps there was something similar, if on a lesser scale, around Easter. And so getting away from that is also perhaps helping.

Warmer weather is also useful. It’s notable that there were very few infections last summer, for instance. It’s much easier for this virus to transmit in drier and colder weather. And so likely that is beginning to help and should continue to help through the next several months.

And then incrementally rising vaccinations obviously important as well. We’re seeing more and more people vaccinated. That’s ultimately the most important thing over the medium run.

I would hesitate to ascribe the recent improvement uniquely to that, though, just because we haven’t seen enough vaccinations over the last week or two to explain what had been a rapidly increasing infection rate and to explain how that suddenly turns into a notably declining one. So those other factors are also quite important in the short run.

As we think about future waves or the risk of future waves, I guess I would say this. I would begin with the observation, there is a distinct risk that some countries right now are easing the restrictions too quickly or too much.

I’m thinking in particular of Europe. I see Italy’s stringency, as an example, easing quite notably. Their numbers are down but they’re not down all that much. In fact, they’re still very high in any kind of absolute sense. And so I’m a little bit nervous that some countries might be, again, removing those rules prematurely and so might suffer a flareup again.

More generally, though, those that do manage to avoid reopening prematurely, and I think most countries will, this could be their final major wave. The inoculation rate is certainly moving quickly and the fraction of the population that’s protected is rising.

To the extent the virus doesn’t naturally transmit as easily over the summer, really what we’re debating is whether by, say, September, there’ll be enough people inoculated to make it so that there won’t be significant further waves. And I think there’s a fair chance of that.

That’s not to say there won’t have to be any limitations in the fall, but I think those could be quite limited. And so perhaps this is the last major wave for countries that behave fairly well, and certainly, that’s a promising thought. In terms of vaccinations specifically, still moving very, very quickly. In fact, there have now been more than a billion people in the world who have been inoculated. Israel still leading. A number of other smaller countries doing very well. The U.S. and UK among the big rich countries doing quite well also, now up to 68 doses per 100 people, and remembering you need two doses per person. So they still have work to do as well, but they’re moving very quickly and have made significant progress.

Canada is now playing very significant catch-up. So Canada is now up to 32 doses per 100 people. That’s less than half the U.S. and UK, so hardly done. But I can say, for instance, that fully a third of Canada’s inoculations have happened in the last two weeks. And so there’s been a real acceleration that’s taken place.

Canada is now inoculating, not just faster than Europe. That’s been the story now for the last week or two. Canada’s inoculating now faster than the UK on a per capita basis, and really not that much more slowly than the U.S. And so Canada is, again, one of the big stories in terms of an acceleration from a vaccination perspective.

But in general, going fairly well. Pfizer vaccines are the ones that have been coming in with a greater supply than anticipated. Across the world, we can say the AstraZeneca, the Moderna, the Johnson & Johnson have generally underwhelmed in terms of the rate at which they’ve been produced, but Pfizer has really saved our bacon.

In terms of economic data, well, economic data remaining quite strong. The latest round of April purchasing manager indices really does show a further economic rebound in a number of sectors and quite a number of countries. In general, we can say this. We can say we continue to get very strong indicators for manufacturing sectors. There’s a global manufacturing boom right now. That sector has been growing very quickly and nearly universally around the world.

The service sector and the service sectors, I should say, have, of course, been more adversely affected by the pandemic. But we are now seeing those leading indicators also really beginning to surge and consistent with quite rapid growth, not just in the U.S., but increasingly in quite a number of countries.

And in fact, the UK we now think is joining that economic party in the sense that the UK was hit very, very hard by the pandemic both last year and then again with recent waves. Its economy has underperformed. But the UK now has vaccinated a lot of people. It is in a good position from that perspective. It’s beginning to reopen and is likely doing so sustainably, and so it has a huge amount of economic runway to recover here. And indeed, we can see that, for instance, in the UK Service sector PMI, Purchasing Manager Index. And just three months ago, it was below 40, which is consistent with a deep recession. It’s now above 60, which is consistent with just raging growth. And so it looks to me as though the UK economy is now starting to move. And it has so much runway, I think it could be one of the really good-news stories for the rest of 2021 at a minimum.

The EU recovery, a little more cautious on that front. But we’re also seeing signs of growth in the EU service sectors as well, which we had not seen since August of last year.

Let’s talk just for a quick moment about inflation. And so we’ve talked about this in the past, and our general view is as follows.

In the short term, we should see actually quite high inflation. And one of the reasons I’m mentioning that again is that we just got the final March inflation prints, and we did see a big jump. Suddenly, Canadian and U.S. inflation is above 2% year over year for the first time since the pandemic came along, and likely they will be touching 3s as the April data comes out. And so we are seeing a surge in the short run. And really, it’s a function of a number of things. It’s base effects. It’s a commodity rebound. It’s a container shortage. It’s a chip shortage. It’s a housing boom. There are all sorts of special idiosyncratic factors at work.

But as we’ve said before, we think many of those do prove temporary. Many start to fade over time. And so we should see slightly high but not outright high inflation over the next couple of years. And then over the long run, we really don’t have reasons to think inflation will stay high. If anything, I think the risk is it could be a little bit lower than the normal level.

And so we walk away from this saying, don’t panic about the latest inflation spike. It’s very likely a temporary phenomenon. And actually, when we look at sophisticated measures like Google searches for the word inflation globally, we had seen a spike over the last month that was making us nervous there could be a self-fulfilling prophecy of inflation there. That’s now retreated right back down. The average person isn’t as concerned, it would appear. And in the end, again, we do think this is a risk that’s largely in hand.

Briefly on the central bank front. Certainly, lots of stimulus out there. Fiscal stimulus galore. Low interest rates. Lots of quantitative easing. But as we’ve talked about in recent weeks, we’re seeing tentative pivots here.

And so, for instance, China now shifting a little bit more toward tightening as opposed to easing. Bank of Canada, still very much easy monetary policy. But its latest decision included a big forecast upgrade, scaling back the rate of quantitative easing of bond buying in Canada, and simultaneously signalling that rate hikes may well be coming over the second half of next year. And that’s still quite far away, however, it’s sooner than had previously been imagined and it sets the Bank of Canada up as one of a very small number of central banks that are thinking of tightening in 2022.

And it’s likely a very reasonable thing. We think the economy can more than handle that. But sometimes markets don’t like that and so we need to watch quite closely as central banks try to navigate these difficult waters.

Let me finish with some thoughts on productivity growth. And so when we talk about the rate at which economies expand, really it’s a function of two things. It’s whether productivity is rising and whether the workforce is getting bigger. And so productivity matters quite a lot.

Our thesis is that we may be in for faster productivity growth over the next decade versus the last decade. And some of that is specific to the pandemic. We think there have been some pandemic-driven productivity gains—working virtually, buying virtually, companies operating virtually. There are some sustained improvements and productivity gains that come from that.

Digital technology is more generally really entering the prime time at this point in time. Even the education and delivery of health care sectors which have historically been very productivity resistant, are being forced into the digital age. And so there can be big benefits that eventually emerge from that.

Even before the pandemic, we were seeing capital expenditures pivoting away from classic buildings and things like that and more toward computers and software, research and development, and that can be very productivity enhancing. And we now see companies sitting on stockpiles of cash that they’re looking to spend on capital expenditures over the next few years. And maybe the third reason for faster productivity growth is just there’s plenty of scientific advances on their way right now and some ready for commercialization. And so on the medical front, of course, we’ve just seen mRNA vaccines and antibody treatments and things that were previously science fiction becoming reality. The same with gene editing. The same with protein folding. All of these are key to big gains in the pharmaceutical and the medical sector.

We’re seeing big changes in the artificial intelligence space in terms of chip technologies and natural language processing and for self-driving cars, famously. And also in the environmental space in terms of battery technologies and renewable energy and even the cost of renewable energy becoming more viable.

And maybe the last argument for faster productivity growth is China now sitting essentially at the technology frontier. China now helping to push the level of global knowledge forward. Previously it was a knowledge absorber. It was copying other countries. Now it’s sufficiently advanced that it can help to push productivity globally forward as well.

And so the bottom line is we do think productivity growth can probably run a little faster over the next decade relative to the last decade. It’s not exactly a bold claim in the sense that the last decade was unusually slow. So to some extent, this is a call for a reversion to the mean, but nevertheless, it would be an important gain if it happened. It would certainly improve the standard of living. It would improve GDP growth, though I think that still stays slow given demographic challenges. It would improve the rate of earnings growth for companies and for the stock market. It might even mean the neutral interest rate is a little bit higher than otherwise, though I still think it’s likely to remain quite low.

Okay. I’ll stop there. Hopefully, some of that was interesting. I thank you so much for tuning in and please consider tuning in again in the future.

Thank you.

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


Publication date: April 27, 2021

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