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This episode, Chief Economist Eric Lascelles covers the latest macroeconomic trends around the world. Starting with some promising employment data out of Canada and the U.S., Eric also talks about the cooling inflation expectations, and questions whether the delta variant could halt further economic growth. [11 minutes, 33 seconds] (Recorded July 9, 2021)


Hello and welcome to The Download. I'm your host, Dave Richardson, and I am joined once again by Canada's hardest working economist. Chief Economist at RBC Global Asset Management, Eric Lascelles. Eric, welcome back.

Thank you. We also have your dogs with us, just so everyone knows.

Yes, I think I mentioned on a previous podcast, my wife does rescue dogs and we've got twenty-two dogs in the house right now; seventeen puppies. When they get hungry, they'll appear in the background. So, I apologize for that. Hopefully it doesn't interrupt some of the incredibly important information that Eric is going to share with us this morning. Speaking about hard working, a couple of good job reports, one coming out of the U.S. a week ago, one out of Canada today. Eric, what are your thoughts on some pretty strong numbers, I guess, particularly Canada?

Yes, well, in Canada, it’s just out, as we're talking. And so, 230, 000 net-new jobs for the month of June. A big number, obviously. Keep in mind, this is Canada where 20, 000 thousand jobs would be a normal number, pre-pandemic. But it's really important though, because keep in mind, this is June data. April and May were bad. Canada's had a rough couple of months. The country was broadly locked down and there were a lot of jobs lost in April. There were some additional jobs lost in May. People weren't sure that would happen, and it did. So, we didn't quite fully get all of those lost jobs back in June, but we came pretty close, within a couple of tens of thousands of jobs, in terms of recovering those losses. So it's certainly a welcome thing. If you wanted to poke holes in it, you could say it's mostly part time, but there's a reason for that, which is that it's the mostly part-time sectors that are the ones that are coming back now as the economy reopens. I think that's tolerable and understandable, certainly. It's nice to see a seven handle on that unemployment rate again. We'd like to get into the sixes. Maybe we'll be lucky enough to get into the high fives, which is where we did flirt with before the pandemic. But nevertheless, some progress there as well. I would say from that perspective, just a relief, the Canadian economy is indeed growing enthusiastically again in June after having stumbled. We were pretty sure that was going to happen based on the reopenings we can see around us and based on some real time data we've seen that have small businesses saying that they're much more open in June relative to May. But I'll also take a good data report when I get one. You mentioned the U.S. numbers; they were out a week ago, so not brand new, but still very important and also big numbers: 850 000 new jobs. That also exceeded the consensus, as it did for Canada. So just consistent with that country also. It's already pretty close to back on its feet, I think. They never locked down that much in April and May. But I’m still happy to see some good numbers there. There’s work to be done. Still four or five million jobs that need to be absorbed to get back to a normal place in the U.S. But they're working pretty fast on that. It's notable that in the month of June, a lot of the enhanced unemployment benefits in the U.S. started to erode and go away on a state-by-state basis. So when we get the July numbers, I would think we could also see a pretty happy looking figure as people get nudged back into the labor market.

So, some good news on that front. Then if I think about the different podcasts that we've been taping with yourself, Stu Kedwell and others from around the world: a lot of the noise that we've heard in financial media and even more broadly in the general media conversation has been around inflation and rapid economic growth. We're seeing it in the jobs numbers. You go outside. I live in the Toronto area. I'm in traffic jams again when I go out driving because people are out and about. Yet I look at Treasury yields. The U.S. Treasury peaked out about around 1.75% earlier this year and dropped down almost to 1.25% yesterday. Is that saying anything to us?

I think it’s reflecting a few changes of thinking in the market. The market is becoming maybe a little more concerned on the growth front. Not at all disputing the recent happy job numbers, but just thinking that there's probably some deceleration of growth over the second half of the year, which I agree with, by the way. Inevitably there's going to be a bit less growth, particularly for the U.S., given how much it's grown and how close it is to normal already. Central banks will perhaps be tightening, which takes a little off the punchbowl there. Then inflation fears, I think, have faded a little bit, which to me is a wonderful thing because we've all been a bit nervous about that and it would be problematic if inflation stayed quite high. So I'm quite content that the market is becoming a little less nervous. We've seen commodity prices maybe balance out. A little of other sources of pressure also eased slightly with a big print, by the way, next week, so we'll see what that reveals, but probably in a peaking process as well for U.S. CPI. People have also said there's a lot of cash sloshing around. And so, some of that is finding or found its way into bond yields. I don't think it's an overly sinister set of reasons for why yields are down. I will say it seemed to us that yields were probably too high before. So we felt they were really high before. As I look at them now, maybe they're a little too low again. I still feel fine about the growth outlook. The funny thing is, we're pretty much in line with the consensus growth outlook. So, I don't have a great dispute with what the market is thinking. When you price in what the market is thinking, it's still quite good growth for the rest of the year. The idea that growth is slowing, I agree, and yet, in a perfectly reasonable way and not one that's problematic and maybe even in a way that's desirable to the extent we don't want inflation to overheat and all sorts of unhappy central bank tightening surprises. I guess I feel OK about the situation right now. Maybe yields have fallen a little bit too much would be my takeaway, but we still think this is a structurally low-interest-rate environment and probably will be for the rest of our careers, Dave. So I'm not expecting that basic central feature to change.

I think you just called me old, which is fair. But the pandemic… We're hearing about the Delta. Now, the Lambda variant. Do you think that's playing at all into this rethinking of growth and what's going on with yields?

I think maybe, to an extent. Let me say, we fully expected this Delta variant to bloom in an unfortunate way for quite some time. So, it's not a surprise to us. I don't think it's a huge surprise to many market trackers, but it is now in focus. We can say, for instance, the U.S. infection numbers do now seem to be going up. More than half of U.S. states are seeing a deterioration and so on. Not ideal. By the way, a fighting chance that Canada avoids that, just because it's vaccinating at this point more quickly. It's hard to get a perfect read on that. But I would say this: I'm not convinced the Delta variant can have a big effect on developed world economic growth and ultimately sustainably on markets. I would say, maybe on emerging markets. They're the ones that aren't vaccinated and encountering this more contagious variant. It wouldn't surprise me if there were some knock-on economic effects there. But from a developed world perspective, I'm not really expecting the U.S. to lock down in any significant way. I think you're going to see infections go up. I don't know that you're going to see fatalities go up a lot in the sense that we are seeing some decoupling of the infections and fatalities, just because there has been a pretty decent level of inoculation, particularly for the most vulnerable people. And so, I think policymakers probably mostly hold their nose and don't lock down in a big way. The UK has been a guide for us as an example. They've seen, unfortunately, quite a jump in infections. So that's the bad-news side of the Delta variant. What they did, though, is they just essentially delayed reopening for a month. They never really locked down further. They're insisting they're going to open further in the next few weeks. Actually, some of the projections say they may see more infections, double or quadruple infections as a result, but arguably a tolerable level of fatalities, whatever that is. Again, from an economic standpoint, I don't know that we're going to see a big hit. We budgeted for just a little dip based on people behaving a bit more cautiously later in the summer. But I'm not expecting a big lockdown. I guess the pandemic discussion and the economic discussion are starting to separate a little bit.

To keep you on a little bit longer than usual, just out of interest; as you look around the world, at the progress that we're making with respect to vaccinations— and you already referenced the developed world and the difference in the emerging markets—, are you comfortable with the progress of how things are going with vaccination from an economic perspective? Is there a potential risk there from big population sets that are falling behind on the vaccination?

Right. Yeah, I mean, gee, I'm mixed up. That's a great question. Therefore, not a simple answer, I guess. Vaccine hesitancy is quite a problem in the U.S. in particular. It seems like almost half the population doesn't want to get inoculated. That is not herd immunity. Therefore, we are very likely to see that Delta variant, or whatever comes after it, to rise with consequences for those who made that choice, who have been unable, for whatever reason, to be vaccinated. The Delta variant is so contagious that you arguably need like 90% plus of the population to be inoculated, to have a completely normal life. If you've earned 80 to 85% number, that's actually probably the percentage of the population that has to be immune. Of course, not every dose is 100% effective, and so you need even more. That's not even possible right now since children under twelve aren't eligible, and they represent 10% plus of the population. But there's no mathematical way to get to perfect herd immunity without some natural infections or herd immunity being achieved naturally on the side, and so I would say right now, we're going to probably have to see some restrictions, but I think it’s going to be very limited, though. If it's as simple as you wear a mask when you're on a subway, maybe we don't shake hands quite as much as we used to or subtle things like that might just be enough if you can get to that 75% mark, which a country like Canada seems to be more or less on its way to. But the key is to get the second doses in, because that Delta is pretty sneaky around the first dose, and then simultaneously trying to get overall acceptance up, because 60% isn't good enough and the U.S. is seemingly stalling out on that kind of trajectory. The 75% number in Canada is pretty darn good globally, but also arguably not good enough. It would be nice to get even higher. So that does have me somewhat concerned. But again, I think the economic consequences this time will be pretty limited just because we're getting so good at doing things in the economy without those restrictions or getting around restrictions, essentially. I'm not expecting big economic damage, but I can't say the pandemic is completely done at the same time.

Well, I guess economically, that's OK. Let's hope, from a health standpoint, that things continue to move forward, because I think everyone is done with this pandemic. And it would be nice to get a little bit back to normal. So, Eric, as always, great stuff. Always great to catch up with you. Thanks for your time today.

Thanks so much. Goodbye everybody.


Recorded: July 9, 2021

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