Hello and welcome to our latest video #MacroMemo. There’s much to cover off in this latest edition.

We’ll talk, as we always do, about the latest COVID infection figures and just where those trends are going and how they relate to the economy. We’ll talk a little bit about vaccine boosters, which are increasingly in the limelight and possibly quite consequential on a number of fronts. We’ll also talk about vaccine mandates and vaccine passports, which are rising in popularity as a policy tool for limiting the spread of the pandemic.

And from there, we’ll shift into more classic economic terrain, and we will discuss some softer economic data that’s been coming out recently, the latest messages from the U.S. Federal Reserve and how that’s relevant to investors. A look at strong household finances, and indeed, they are quite strong, particularly in the U.S. And then also, a quick inflation checkup; inflation very much on the mind, given that it remains fairly high.

Let’s begin with the COVID data. And so, COVID numbers globally are still very high but stable, having been on an upward trend previously. I can say, when one digs into the details, still seeing some increase in developed countries, but seeing, actually, quite a happy if unexpected improvement in many emerging market countries. And so we can now celebrate that African cases are seemingly falling; most of Latin America is managing lower numbers as well; fair swath of Asia getting better, including India and Indonesia. Though I shouldn’t say everyone is. For instance, Malaysia, Thailand, and Asia still struggling; Mexico seeing a high number, perhaps unsurprisingly given U.S. problems just to their north. But overall, emerging market countries, more are getting better than getting worse at this point in time.

It’s a little more nuanced and tricky in the developed world space. Europe, quite mixed. Some going up, some going down, many going sideways. Unfortunately, the UK numbers are getting worse again. And that’s a disappointment because we had seen for a few weeks the UK figures improving, and they had opted to fully open up. And there was some hope that maybe the magic of vaccinations and so on would actually create a sustainable situation.

I can’t yet say the UK numbers have peaked, so the jury is out as to whether this is a good strategy for the UK to be fully open or not. I can say, though, that their hospitalizations and fatalities are still fairly low. So this strategy still has a fighting chance of working, but I would still say the jury is out until we see the infection numbers levelling off at some point in time.

Let me also say, Israel is a disappointment right now. You may know that they’re among the most vaccinated countries in the world. Unfortunately, despite that, they also are seeing nearly a record number of infections per day. Hasn’t translated fully into fatalities or hospitalizations, and maybe that’s the secret of vaccination success, and perhaps it’s a tolerable thing. But Israel has found itself locking down somewhat more and actually pivoting, as we’ll talk about later, toward a third dose of vaccines as well. In North America, the cases are rising fairly steadily in Canada. It looks like that will continue for some time, particularly as colder weather and schools reopen in the next few months.

U.S. numbers already high, as is well known. I think still rising, but interestingly, a little bit less uniformly than in the past. It’s no longer every state getting worse, and maybe actually Florida is starting to peak, though I think, again, the jury is out on that. And wouldn’t be a surprise to see those numbers get worse for some time longer.

Nevertheless, worth watching. And one of the things we’ve learned across this pandemic is we can’t always figure out with precision when these waves are going to turn. And so the idea that maybe we’re seeing some peaking in parts of the U.S. merits watching, even if I don’t have a good explanation for exactly why. Let’s talk about boosters now. And so, most vaccines involve getting two shots. However, there are a number of reasons that a third or fourth booster shot is now coming into focus.

And so, one would simply be that vaccines appear to be less effective against the Delta variant. For instance, the Pfizer vaccine was something like 95% effective against the original virus; it’s something like 84% effective against symptomatic cases of the Delta variant. So less effective on that front. It’s actually in the 60% range, 60-some-percent range if we’re talking about all cases, including asymptomatic.

And then simultaneously, it seems as though the efficacy does decline fairly rapidly over time. And so for instance, a recent study finds that for those aged 35 to 64, protection is about half as effective 100 days after vaccination relative to 2 weeks after. So just in a few months, losing a considerable level of protection. That seems to continue to fall, and so, protection ultimately becomes more and more feeble as time passes.

And so, understandably now, developed countries very much wanting boosters. Israel has already vaccinated 14% of its population a third time. Other countries, including the U.S. and Canada, have plans to deliver a third dose, either to vulnerable groups or perhaps to all groups.

And so that’s now happening, but of course, it just means more effort is needed. And simultaneously, it’s not good for developing countries, which were only starting to get their share of vaccines recently. Now they’re back, maybe not to the back of the line, but nevertheless, vying with developed countries for vaccines again.

One interesting trend in terms of how countries are grappling with the pandemic and trying to limit it is that we are not seeing as much lockdown happen with the Delta variant. Countries aren’t shutting entirely back down. Instead, they’re trying something different. They’re trying to use more vaccine mandates, more vaccine passports. By vaccine mandate, essentially requiring certain sets of workers, for instance, to be vaccinated. Very often, government employees, health care workers, education workers as well.

The U.S. has just announced the military will have to be vaccinated also. In the U.S., the top 25 universities all now require their students and staff to be vaccinated. And so we’re seeing very much a push on that front.

Simultaneously, seeing a push with vaccine passports. And so, Israel has famously done that; France is doing that. Now parts of Canada, including British Columbia, and Quebec, and Manitoba, and a few others are pursuing vaccine passports as well. And even some companies are requiring their customers to be vaccinated, such as those for cruises and visiting sports stadiums. And some companies are also requesting vaccination status, requiring vaccination in job ads. And that fraction is rising quite quickly.

And so, the takeaway from all of this is that this is a more targeted way of controlling the pandemic. It likely does less damage than simply shutting down restaurants or something with a broader brush might have done. And so there should be less economic damage as these sorts of things are introduced. I can’t say no damage, though.

And then shifting into the classic economic terrain, let’s say that the main conclusion recently is that economic data has been getting a bit softer. It’s not bad; it’s just a little bit less good. We’ve recently seen economic surprises turn outright negative for the first time in a couple of years, and so signalling that it’s no longer an easy prediction to say that the data will beat the market’s forecast for it. It’s a big reason why we have some below-consensus forecasts for our own growth numbers.

Recent purchasing manager indices have been a bit weaker for August. Recent retail sales data has been a little weaker in the U.S. The U.S. Michigan confidence indicator collapsed in August. I must say, I’m dubious that it’s as bad as the latest readings suggest. And we’ll get another measure that gives us a flavour in the next few days. And I don’t think it’s going to be as weak, but nevertheless, some evidence of weaker consumer confidence as well. And also, China having locked down parts of its economy, including some ports, and so with economic consequences stemming from that.

And so, as I said, we are below consensus in our growth forecast. We think growth will be perfectly fine, but not as fast over the next year as it was over the last year. Not quite as fast as the market is assuming either. And really, the logic behind it is that there is a Delta variant. We think the consensus is very optimistic to begin with. There’s a little less buoyancy in economies over the next year, just because they’ve already recovered so much. And we expect to see a little bit less monetary and fiscal support over the next year as well.

And so, we still have perfectly good forecasts. More than adequate. Nearly 4% growth for the likes of the U.S., Canada, and Europe; 5% growth for the UK for 2022. These are awesome numbers in any kind of absolute sense, but a little bit less than we’d been thinking a while ago; a little bit less than the market is thinking as well. And so, I guess that makes us a bit conservative on that front.

Let me acknowledge central banks for a moment. And so, of course, they’ve done a lot of stimulus delivery. The thinking is, over the next few years, they might start to gradually remove some of that stimulus. The U.S. Federal Reserve is the global bellwether and benchmark for this sort of thing, and it does appear that they’re inching toward tapering now.

And so, I should define tapering. Tapering doesn’t mean rate hikes. Tapering doesn’t even mean selling bonds. Tapering just means buying fewer bonds than before. It’s still delivering stimulus, just a little bit less. And so let’s not overreact to that, as much as financial markets did get jittery for a moment over the last few weeks at that prospect. Really, what the Fed is saying is the economy has recovered nicely. The justification for extreme stimulus is a little bit less, and they think they might start tapering those bond purchases towards the end of this year or early into next year.

I personally think it’s completely appropriate. There’s no reason markets need to be upset by this. It’s actually a good thing for the economy. You don’t want to overheat economies, just as you don’t want to crush recoveries. It’s a fine line to walk between the two, and it seems to me central banks are doing a pretty good job of that.

For those worried that suddenly you lose this big buyer of bonds in 2022 and maybe yields have to go a lot higher, well, actually, the bond supply is set to fall quite sharply in 2022 such that, even with tapering, there’s probably going to be less bond availability next year than there was this year when you ex out the central bank. So I don’t think that’s a huge concern.

Let me spend a moment on households. And so, really, the point here is to say that as much as we’ve seen economic growth slow, and that makes sense, et cetera, boy, our household finances in quite good shape. And it’s particularly true for the U.S., and that’s where I’ll focus my attention, but to some extent true for a lot of countries.

And so, again, using the U.S., the U.S. household Financial Obligations Ratio, essentially the fraction of one’s income that’s spent more or less servicing debt, is the lowest it’s been in many decades. And so yes, people have bought homes, and people have in some cases borrowed money, but low interest rates heal all wounds, it would appear.

And so, actually, a couple extra percentage points of income available to be spent, if households so choose, as opposed to servicing the debt versus just two years ago. So there’s more money sloshing around as opposed to less on household balance sheets. Household wealth is still high despite the pandemic, as you’d guess, based on what home prices and stock markets have done. We have high savings rates, which means that households have accumulated a lot of excess savings.

And as much as I’m dubious that that excess saving is necessarily going to be spent over the next few years—I think people are going to mostly keep that invested—I will say this. Even just assuming that household savings rates go back down to normal, let alone dissaving, just back down to normal, could unleash an extra 3 or 4 percentage points of income into spending.

And so, I think the takeaway is, households are in very good financial shape right now. They can be a driver of growth. They are a reason we think growth could be close to 4% as opposed to maybe a norm of something like 2%. So let’s be aware of that, and let’s appreciate that strength, that tailwind, even as we see headwinds over the next year from fading fiscal support, fading monetary support, and other factors like that.

And let me conclude just with a quick inflation checkup. Inflation is quite high, and so we need to keep a very close eye on it. And I’m happy to say the latest U.S. inflation report was a bit softer. It wasn’t soft, but it was a bit softer. We saw 0.5% increase in prices in the month of July; it was 0.9% the month before. That 0.5, by the way, it’s a big number but it’s still the smallest we’ve seen since February. So some sense, perhaps, of an easing of the pace of inflation coming from that.

We think we see a few other indicators that are similar to that. And so, for instance, ISM indices—the prices index, the suppliers index—both finally fell a little bit after surging. And really what that means is that manufacturers in the U.S. are finding that their input costs aren’t rising quite as badly as before. Their supply chains, in terms of inputs, aren’t quite as problematically limited as well. So that’s a good thing for inflation.

Shipping costs. We have two different measures. One’s flattening out; one seems to be falling. So maybe we’re in the vicinity of the worst for shipping costs, and we could lose a little bit of pressure there as well. And for people who’ve been paying close attention to inflation, you might know that used car prices have been actually the biggest single inflation component, the thing rising by the most. And at the wholesale level at least, we can say we just saw U.S. used car prices, we just saw those actually begin to fall.

And so, no guarantees that any of these trends necessarily persist, but all of these are promising things, suggesting inflation is in the realm of its peak, if not a little bit beyond. That’s good news from a purchasing-power perspective. Your dollar goes further. It’s good news from a business-cycle perspective. It suggests we’re not actually overheating. And it’s good news from a financial-market perspective. Bonds certainly don’t like high inflation. Stock market maybe is middling towards it at times but doesn’t ultimately like very high inflation. And so I think that’s a positive takeaway.

All right. I’ll stop there. Thanks very much for tuning in. I hope you found this useful and interesting, and please consider following along next time as well. Thank you.