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by  Eric Lascelles Jun 22, 2021

Vaccination efforts continue to progress while the Delta variant persists, especially across emerging market countries. In the developed world, where many economies have reopened, Chief Economist Eric Lascelles looks at consumer behaviours and other post-pandemic trends. Finally, he shares updated inflation forecasts from the Fed, and explores expectations around upcoming rate hikes and inflation.

Watch time: 14 minutes 12 seconds  |   Hover your cursor over the video to see chapter options

View transcript

Hello. And welcome to our latest weekly video MacroMemo. We have much to share in this edition.

We will talk, as always, about the latest COVID numbers, the Delta variant, and our worries on that front. And of course, reopening trends and vaccination trends as well.

We’ll then pivot into the economic space and talk about some important economic developments, including perhaps a turn lower in newspaper article sentiment, which has been a guide to some of our decision-making. We’ll talk about the extent to which people are embracing previously limited activities, pent-up demand revealing itself. We’ll look into the latest federal reserve decision, and we see a fairly hawkish Fed, at least compared to its prior stance.

And we’ll also, as has been a recurring theme, take a peek at inflation. It’s very high right now and merits some attention. And lastly, we’ll just touch on a few post-pandemic trends based on some interesting new research.

On the COVID front. Well, COVID infections globally are continuing to improve. So we are seeing an improvement on that front. Fewer global cases per day. However, the rate of improvement is now decelerating. So it’s slowing.

Emerging markets in particular are not enjoying as much of an improvement as before and, actually, some are regressing as they have for several weeks. And so the emerging market space is getting a little bit trickier, a bit less friendly. And of course, they tend to be less vaccinated, and these new variants seem to be more contagious, and that likely is a big part of why they are beginning to struggle again. Despite that, most developed countries are still improving. The U.S. is now recording its lowest daily infection since the onset of the pandemic. Canada is now under 1,000 new cases per day, which is an enormous improvement relative to just a few months ago. Europe is also significantly improved.

However, the concern beneath the surface on all of these fronts, and I suppose above the surface when it comes to emerging markets, are these more contagious virus variants. And so the Delta variant, this formerly called the Indian variant, does seem to be extremely contagious. It’s 50% to 60% more contagious than the next most contagious variant. It’s thought to be possibly more damaging. It seems to be better at getting through and around vaccines, particularly partially vaccinated people. And at least in the developed world, the UK is the first to be tarred with that brush. And so we have UK cases now rising quite significantly again. Up to 10,000 infections per day once again.

And we can see beneath the surface that the Delta variant is also spreading elsewhere. For instance, in Canada, it’s thought that the Delta variant cases increased by 66% over just the last week alone. So quite a lot of spread there.It’s a little surprising on the surface that the UK was the first country to run into trouble. It’s highly vaccinated. It had strict rules through the spring. Maybe it was just a little bit unlucky to be first. But I think there’s some hope that perhaps the UK situation is a little bit special in the sense that they have used the AstraZeneca vaccine more. It’s a bit less effective.

They didn’t begin vaccinating their under-30s until very recently, actually just really two weeks ago. And so, conceivably, you had this big pool of highly social people spreading it, and that doesn’t exist to the same extent in other developed countries. They have been pursuing a one-dose strategy, and the Delta variant seems to be able to get past just a single dose, and so that’s been a relevant consideration. And you can see as well that many of the cases have been in certain regional pockets where the rate of vaccination was lower, and that’s not unique to the UK but nevertheless does suggest that vaccines are helping where they’ve been administered more substantially.

In the end, it is a race for many countries between the double vaccination effort, getting a second shot into arms versus the spread of this Delta variant. It’s not entirely clear which one will win over the next few months. We’re assuming for the moment that there will be some increase in cases elsewhere in the world over the next couple of months, but probably not to the extent of prior waves. And maybe most critically, probably not a big leap in hospitalizations or fatalities, which has often led public policy decisions in the past just because even though this Delta variant can seemingly infect people who are partially vaccinated, it doesn’t seem to infect them with a particularly severe case. And so if governments are willing to hold their nose and tolerate some level of infection so long as it doesn’t lead to hospitalization or death, it seems as though there may not need to be a significant policy adjustment.

Nevertheless, something to watch. Something, unfortunately, to be a little concerned about. We have economic forecasts that do assume a mild lockdown later in the summer. Hopefully, we’re wrong on that front. In the meantime, the reopening trend is actually quite mixed. I can say emerging market countries on average are actually locking down a little bit again as some of them see higher infection counts. But developed countries are still very enthusiastically reopening.

Among those, Canada is the most closed, and so in theory with the most room to reopen over the next several months, pending how the Delta variant plays out. And within Canada, I can say, using Bank of Canada data, Ontario has been the most-locked-down province. It has subsequently reopened the least. And so, in theory, considerable economic upside from places that have been more locked down, and so some promise for the future.

On the vaccination front. Well, we can say a few things. One would be that developed countries are now very much pivoting away from first doses to second doses, and that is true in quite a number of countries. Canada, quite remarkably, is now number two in the world in terms of the share of the population that has received one dose. So Canada went all in on that single-dose strategy, and has had vaccines just flooding in over the past few months. And so very successful on that front. However, has done fairly few second-dose inoculations, which is an issue for this Delta variant at this point in time.

At the current rate, actually, Canada may pass the U.S. within the next few weeks in terms of total doses administered per capita, and that is largely because the U.S. does seem to have a fairly serious vaccine hesitancy problem. A lot of people just don’t want to get it. And so, overall, the U.S. is just a little bit past 50% of the population with one or more doses. It really seems to be stalling out around there. And as much as some states are doing, of course, better than that, some states like Mississippi only have 35% of the population even with a single dose. For context, Canada is approaching 70%. And so some parts of the U.S. not very well inoculated at all.

And so I guess the way to think about that is, for the moment, actually, the virus numbers look just fine. We’re not seeing increases even in places like Mississippi. However, I think it needs to be acknowledged the U.S. does have a vulnerability to something like the Delta variant because it is stalling out and there are big pockets where the level of vaccination is quite low.

Okay. Let’s move along to the economic space finally now. And, as highlighted earlier, let me say that the U.S. Daily News Sentiment Index from the San Francisco Fed, it’s something we watch fairly closely, for the last year or so, it’s basically been rising. Newspaper articles have become ever more optimistic as the pandemic has become a little bit less intense and as the economy has revived. However, I can say it’s now slipped somewhat over the last month or two. It’s still at a good level, but it’s slipping somewhat. And we don’t know if it’s noise or if the trend persists or not, but I’ll just say it’s notable in the data.

And when I think about it, maybe it makes sense in that the rate of vaccination in the U.S. has slowed, we’re not seeing quite as many upside economic surprises. The economy’s still just fine and moving nicely, but it’s no longer doing better than people expected it to. There are of course concerns about the delta variant. There are concerns about inflation. The U.S. Federal Reserve is now talking about tightening rates. It makes sense to me that we’re not seeing news sentiment rising as enthusiastically as before.

Unclear whether this is a marker of some significance for financial markets or anything quite like that, but I’ll just flag that and say that we think we’re now into a period in which the economy ultimately meets expectations instead of exceeds it. And it probably is an environment in which financial market gains aren’t going to be quite as easy to come by as they were over much of the last year.

Another economic theme or issue to talk about is that there was quite a debate up until recently in terms of what would be the dominant theme as restrictions on activity went away. Would it be scarring? In other words businesses hobbled by the pandemic, workers unable to find new employment, and so on. Or would it be pent-up demand as the key theme? And people so eager to do the things they weren’t able to do before that the economy actually runs faster than it normally would. And of course it’s a mix of the two, but I can say it does seem to be more the pent-up demand story. And so more of the optimistic story there.

And so just as an example of that, U.S. hotel occupancy rates are now higher than they were before the pandemic. That may not be a perfect comparison. We’re comparing to February of 2020. February not being exactly peak hotel season. But nevertheless, significant increases. Technically the highest since the pandemic and higher than immediately before. And I would very much guess that those numbers will continue to rise over the span of the summer. So people are very keen to start travelling again when possible. We even see some revival of travel spending in Canada as well, though at a much more modest overall footing.

Let’s turn now to the U.S. Federal Reserve, so the world’s bellwether central bank. And it had been in a very dovish footing. It had suggested no rate hikes until 2024, and people were a little bit skeptical of that, particularly in a world of accelerating economic growth and higher inflation. And so the Fed has now finally pivoted to some extent. It was a more hawkish Fed this time. It has increased its growth forecast, it’s increased its inflation forecast, it’s acknowledging the extra inflation, though it does believe most of it is still transitory or temporary. And it now does look for somewhat sooner rate hikes. Hardly, soon. They’re talking now about 2 rate hikes in 2023, which is a couple of years away, but nevertheless it was 2024 before. There’s also a slight minority—meaning just below half of Fed participants think there could be a rate hike next year. And so not necessarily all that much out of line with for instance the Bank of Canada.

And in the end, as much as markets don’t love higher rates, I think it’s a good development. You don’t want a policy error here. We don’t want inflation becoming a structural problem. And so you sort of take your medicine when needed. And so I think this is a helpful change for the most part. Markets have taken it fairly well. And it’s arguably good that the Fed has awoken to some of these issues of strong economy and higher inflation.

By the way on the subject of inflation, let’s acknowledge still very high in many parts of the world. Very high for emerging market countries. Fairly high for the developed world. The U.S., it’s CPI right now, 5% year-over-year, which is the biggest number we’ve seen since 2008, which was the tail end of an earlier commodity super cycle. I can’t say we’re seeing shipping costs backing off yet. They’re five times higher than they were a year ago, and actually actively rose further over the last two months. So that pinch point very much remains, though we’re watching it extremely closely.

We can see as mentioned a moment ago, emerging market inflation is quite high. And so this makes sense, they’re more reliant on things like food and energy, and so inflation shows up more quickly and more aggressively when your basket of spending is skewed toward commodities. And so they’re seeing it in particular, and indeed some of their central banks have already had to raise rates. It’s notable though that the bond market remains unconcerned. Actually bond yields are lower than they were a few months ago even though inflation has gone up. That’s the bond market betting this is not going to be a persistent problem.

Similarly within the bond market, break-evens, which is an inflation expectation proxy, break-evens over the next 5 years are actually notably lower than they were a month ago, even as inflation sets a 12 or 13 year high. So I would say the bond market thinks it’s temporary. I mostly agree. We can see some commodity prices are now down. So lumber and copper prices in particular, but we’re seeing a little bit less heat on the commodity front. And I can say as well as we look at measures of web based inflation, computers that are picking prices off of e-commerce websites and the like, looks as though inflation peaked maybe over the last month by those measures as well. As much as they don’t precisely match what the official inflation numbers will claim.

And then let me finish just with a quick word on post-pandemic trends. And of course you could go off in any number of directions here. I’m just going to focus fairly narrowly on some research actually the Economist magazine did. And they summarized it nicely. And so a few takeaways are that the feeling of euphoria after a crisis, or a pandemic, or a war, actually doesn’t tend to last that long. And so for instance, beer sales after World War II actually fell, not rose, for what it’s worth. And so don’t expect that to be a long-standing trend. People I guess go back to their happiness set point fairly quickly.

Nevertheless, economies do usually bounce nicely after pandemics, and this is what we’ve been seeing and what we’ve been forecasting for some time. Not all savings get spent. So people save money usually during recessions and pandemics. Usually it doesn’t all get spent afterwards. Just about 20% of the savings during World War II got spent over the subsequent 4 or so years. You do sometimes see a higher level of risk-taking after a pandemic. More new businesses formed, more automation, and these sorts of things. And so we’ve been talking in the past about possibly faster productivity growth. I think those two ideas fit together fairly well.

And maybe I’ll finish by saying sometimes you see a more pro-worker attitude or a more pro-person attitude emerge. And so maybe we’re seeing that right now, there’s just a tolerance to run up public debt seemingly indefinitely. There’s been more of a tolerance for more inflation, even though that could create problems later, but they’ve been focusing on making sure people are okay. And so there are things to like of course about that, but also things to worry about to the extent that public debt, and inflation, and other variables like that, need to be heated as well.

Okay. I’m going to stop there and say thank you so much for tuning in. I hope you found some of this interesting. And please consider watching again next time. Thank you.



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

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Publication date: June 22, 2021



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