Hello, and welcome to our latest video #MacroMemo. We have much to share with you this week. We’ll talk, of course, about the latest COVID trend. The Omicron variant remains the central question, I think, both from a health and from an economic perspective. We will work our way into central banks as well, who have remained quite hawkish in recent days. And, indeed, we’ll talk about the yield curve as well, which has been flattening, perhaps in partial response to that hawkishness. We’ll then dig into economic trends, and actually they’ve been fairly good, though the real-time data is beginning to roll over, we think, which makes sense in an Omicron context. And then we’ll revisit some of the key themes and risks that we’ve been flagging for the year ahead, and that includes China, it includes inflation—high inflation—and it includes supply chains, which remain quite altered but maybe beginning to improve a little bit.

So that’s our plan. Let’s jump into item number one and, that is to say, we’ll take a quick look at where the global infection figures are taking us. And interestingly, global cases right now are merely flat to slightly rising. So we’re not seeing a global spike right now, though I must say, the numbers are spiking in countries that seemingly were among the first to be hit by the Omicron variant. And so, for instance, South African cases remain extremely high, though not actively rising over the last few days, so that merits some watching. But they are still very high. The UK is now setting outright records, which isn’t great, since they had experienced some pretty significant prior waves. And so they’re up to record numbers per day, a doubling relative to November levels. In Denmark, running 10,000 a day. That’s twice their prior record. And Norway, also running twice their prior record. Those happen to have been countries that were hit early by the Omicron, so certainly the suggestion here is that the Omicron is highly contagious and a similar fate likely awaits most developed countries at a minimum.

I should say, for the moment, the U.S. figures are not obviously seeing an overwhelming effect yet. We know the Omicron is there. We know that the infection rate is rising somewhat but it’s been pretty slight at this juncture. In Canada’s case, similar story, though maybe the rate of increase is a little bit brisker in Canada right now, but not especially high levels just yet. And then interestingly, continental Europe has been something we’ve watched for a while, and they were experiencing a big wave of infections even before the Omicron. For the moment, we’re seeing some improvement there. So for instance, German cases have been declining recently, though I think what we’re getting is that Germany and other countries had locked down somewhat over the last month or so. I think they’re beginning to reap that benefit versus the Delta variant. I’m not sure they’ve quite hit that critical number of Omicron infections just yet. And so my suspicion is we will see a higher number of cases across the developed world, but that isn’t actually the trend we’re seeing just yet in a number of countries.

And then I should acknowledge, I’ve neglected, other than South Africa, emerging markets so far. And so for the moment, we’re not seeing any kind of increase outside of Southern Africa in terms of COVID cases per day. I think it’s reasonable to think we might see some increase going forward, but those countries have marched to a different drummer on occasion. They do have a much higher level of natural immunity, we think, than developed countries. And so it’s worth acknowledging they’re not quite the same as the developed world. Their fate may not be quite as intertwined with Omicron, but I don’t say that with a high level of confidence.

Let’s talk Omicron in more detail now. And so I would say it’s playing out largely as we’ve expected over the last few weeks, since we last had an opportunity to talk. And so that is to say, really, it is proving to be highly contagious, much more so, we think, than the Delta variant. It is proving to be significantly vaccine resistant and it is proving to be at least, we think, strong evidence at this point that it’s significantly less deadly. And so two bads and one good. Overall, though, I guess an interesting mix, if nothing else.

Let’s talk about each of those three observations though. And so, to begin with, on the highly contagious front. Well, I mean, we can see Omicron cases doubling every 2.5 days in the UK. That’s a much faster rate of growth than was ever witnessed by the Delta variant, which is the previously most contagious variant. The estimates really vary quite wildly in terms of just how much more contagious the Omicron is. I’ve seen studies that argue between 30% more contagious and 400% more contagious, and so it’s probably not at the extreme high end of that. But nevertheless, it is significantly more contagious and it’s now the dominant strain in quite a number of countries and will likely become the dominant strain just about everywhere over time. Realistically, we are probably about to see our biggest wave yet in most developed countries at a minimum. So let’s be braced for that.

In terms of vaccine resistance, well, it does seem to be more resistant to vaccines as well. And so two Pfizer shots are now thought to offer around 33% effective protective versus 80 or even 95% protection earlier. I should say that for people who get a booster shot, that protection then jumps from around 33% to something like 70 or 75, which brings it back to what scientists would describe as a good level of efficacy. So booster shots certainly seem worth getting in this context. Still, part of contagiousness is getting past vaccines and so, of course, that is to say, one of the reasons this thing is so contagious is precisely because it’s dodging those vaccines.

We do think it’s less deadly. It’s hard to say precisely how much less. A little bit like the contagiousness estimates, you can find almost any number to support almost any opinion. I’m seeing somewhere between 0.3 times to 5 times less deadly. The more credible estimates tend to be the less optimistic, so the ones that suggest it’s a little bit less deadly as opposed to much less deadly. But I have to say, equally, when we look at the hospitalization data in South Africa, it does look quite promising to me. South Africa, right now, reports the same number of people in the intensive care unit as a month ago, before the Omicron had taken over. Fewer people on ventilators than a month ago, which would be the most serious subset. And actually, significantly fewer people in ICUs and being ventilated than two months ago. And so, as much as we could say, well, maybe we haven’t fully seen the worst yet for South African hospitalization, that’s probably true. But the first case in South Africa was identified on November 8th. That’s now quite a while ago. That’s about five weeks ago, as I’m recording this, if not six weeks. They’ve had significant numbers of cases for the last two to three weeks, and so you would have though then that you would be starting to hit quite a high level. And you hear anecdotal reports from South African doctors and South African insurance companies and otherwise, and they’re suggesting it’s more of an upper respiratory-like cold phenomenon, as opposed to one that directly targets the lungs. They’re finding that people are in the hospital about half as long as earlier variants required. It’s still possible this fills up hospitals. It’s still entirely possible it proves to be quite a burden on the health care system, but I wouldn’t say it’s quite certain, even with this high level of infectiveness, just given what we’re seeing from South Africa and some of these initial figures.

Now, I should say, I’m not a public health expert, so maybe take all of that with a grain of salt. I do like to think I know a fair bit about the economy, though. And so I am still expecting notable economic damage from this Omicron wave. We can see—even if it’s milder—we can see governments aren’t about to tolerate just a high level of infection. And so we’re seeing some locking down. Restrictions are being imposed, which does economic damage. Even if governments were to stand pat, we’re seeing companies and individuals cancelling activities and holiday plans and these sorts of things. I should say, government support is less generous now than it was during prior waves. A lot of programs have essentially expired over time. And so, we should recognize, even if it was a similar wave to earlier variants, you might see more economic damage emerge from that because some businesses might fail that survived earlier waves.

And then keep in mind, as well, if a lot of people are getting sick, even with a mild variant, if a lot of people are getting sick, we can say that, essentially, they will nevertheless miss some work. Other people will be forced to isolate. There is economic damage that comes from that. So, long story short, our forecasts do reflect a base-case scenario of these things happening. We’ve priced in a dimmer first half of 2022 as a result. And as you likely know, we are still a bit below consensus in terms of our 2022 growth forecast. We think it’s still a year of recovery, but it’s not as optimistic as the market, and the Omicron can do some damage here, we think.

Okay. Let’s get off that topic to central banks. And so central banks remain quite hawkish, which has been a theme that’s extended right back to last summer, as essentially they’ve woken up and recognized that inflation is higher than they budgeted for. And so I can say that the U.S. Federal Reserve was, indeed, quite hawkish recently. It has doubled the pace at which it’s tapering its bond buying, so it’s scaling back bond buying more quickly than before. And it’s now explicitly said it’s planning three rate hikes for 2022, which is a significant number, more than previously envisioned. And again, in response to inflation, but also in response to quite an impressive improvement of the U.S. unemployment rate.

Interestingly, the stock market’s been pretty calm about all of this. You might have thought there could be trouble on that front, but I would argue, it broadly makes sense. Rate hikes aren’t bad if they prevent a worse economic outcome, like inflation spiralling out of control. And so I think that’s what central banks are trying to avoid, and markets are taking it reasonably well at this point.

I can say the Bank of Canada has also met recently as well. No rate change there. Pretty status quo, actually, but the Bank of Canada had already been signalling fairly notable tightening, in all likelihood, for 2022. They did acknowledge economic indicators had accelerated. But floods in British Columbia, the Omicron variant, lower gas prices do a combination of slowing the economy and reducing inflation such that they don’t feel a greater level of urgency than they did a few months ago. They’re still talking about economic slack being gone in the second or third quarter of next year and, in turn, that’s when they think rate hiking is broadly appropriate.

The other Bank of Canada item, by the way, is the Bank of Canada has finally renewed its mandate with the government. They do this every five years. They are still an inflation-targeting central bank, still looking for 2% inflation, but with an extra twist, which is that they’re now being asked to pay a bit more attention to the labour market. And so that doesn’t quite make them a dual-mandate central bank. It really isn’t—and they acknowledge this really isn’t that different than how they’ve been operating in recent years already. They’ve put a heavy weight on the labour market, simply in achieving their inflation target, but it maybe puts a little bit more emphasis there. I guess, at the margin, it’s a little bit more dovish, to the extent that the labour market hasn’t quite normalized, and yet, inflation already has, which is that other target. So maybe a little less urgency but I think, practically speaking, it’s pretty close to the same target.

And then in terms of other central banks, well, the Bank of England has delivered on its threats and it’s raised rates. So it’s the first G7 economy to raise rates. The Bank of Japan is tapering; it’s reducing its bond buying a bit. So the common theme is less monetary policy support over the coming year. I think that’s still very much the theme to think about. And it’s a reason why we do look for decelerating economic growth over the next year as well.

I want to flag in all of this, the yield curve has been flattening. Central banks have been more hawkish, which is taking up short-term yields. Flattening, by the way, essentially means that there’s less of a difference between a short-term interest rate and a long-term interest rate. Normally, long-term rates are significantly higher, and that gap is shrinking. And again, part of it is because central banks are raising, or talking about raising, the short-term rates, so that’s pulling up the short-term yields. But simultaneously, we’ve seen the longer-term yields go down. And some people have said this is because the market expects a policy mistake and thinks there’s trouble down the road from this tightening. I don’t think it’s that. In fact, we can say it’s not, because the expectation for policy rates has come down for the long term, which would suggest some error that had to be reversed. Instead, it’s because the term premium has shrunk, and that’s a bit more of a technical factor that doesn’t really fit as precisely onto macro explanations. And so I would say, let’s keep watching the yield curve. And I should say, as yield curves flatten, tongues start to wag about recession risks. And when yield curves invert, which hasn’t happened and, arguably, would be at least a year away, people start to talk about recessions perhaps being imminent. I think that’s overdone at this point in time. We’ll watch this flattening yield curve. I think it’s a pretty reasonable and pretty normal flattening so far.

Okay. Couple of quick thoughts on some other topics. And so let me begin, just to the economic data. It’s been strong recently. So U.S. jobless claims at a 50-year low; economic surprises actually tilting a little bit positive again; Q4 GDP tracking quite nicely for the U.S. and Canada and for a number of other regions as well. So that’s lovely. However, the Omicron is now striking, and some of the real-time data has weakened to some extent. And so I can say we expect a slowdown from here. We can see restaurant reservations dipping globally. We can see a new sentiment index also dipping as well. We can start to see air-travel metrics also coming off. So I think we’re going to see less strength, but it’s been good up until quite recently.

On the China front, well, the China slowdown story is something we’ve talked about before and it’s, in last part, a housing slowdown, but also a regulatory crackdown with some demographics and a few other things in the mix. I should say, on that front, Evergrande, the big Chinese builder, has now formally defaulted. So they’ve gone past their grace period and were not able to make payment. A number of other builders are in a similar position. And we are getting some weaker economic data out of China, as expected. Some of the housing data’s been softer; retail spending data has been fairly anemic as well; CapEx intentions not that strong either. So we feel pretty good about our sub-5% Chinese growth call in that context. But I should say, it’s clear now that the government is stepping in. So, for instance, the government just delivered a rate cut. So whereas many central banks are thinking of rate hikes, they’re going the opposite way to try and restore a little bit of growth. And maybe, most important of all, though somewhat cryptic, the Communist Party recently indicated that stability is its top priority for the year ahead. And, you could argue, last year’s top priority was a regulatory crackdown, which was bad for growth. Stability suggests they don’t want growth to slow a whole lot more, and so I suspect they’ll probably, ultimately, achieve that goal.

And then let me finish. Just a few thoughts on inflation and supply chains. So inflation’s still very high, almost 7% in the U.S. It’s running at almost 5% in Canada, so quite high figures here. The Canadian number actually, it’s come to light, might be a little underestimated, to the extent that used-car prices, which have been such an inflation driver in many countries—Canada doesn’t measure used-car prices in inflation. If it did, our 4.7 might turn into a 6. So actually, Canada really not running much lower than the U.S. We do expect fewer pressures from oil prices and supply chains, going forward. We expect more pressure from wages and rents. And just the breadth of inflation and the pricing power of companies suggests we’re not going to snap back to normal inflation overnight. We think next year’s a year of declining inflation, but not a year of normal inflation.

And then lastly on supply chains, just a related subject to inflation. We’re seeing some improvement. We’re seeing slightly lower shipping costs and things like this. However, it’s come to light that improvement that everyone had thought was happening, which is there were fewer ships waiting at port in Southern California, that’s actually a false improvement. Essentially, the port has instructed ships to park elsewhere. And so, when you actually tally it correctly, we can say there are still a record number of ships waiting to unload there. But we are seeing some slight improvements. Chinese bicycle exports are falling. Some of the things people wanted a lot of during the worst of the pandemic, they’re starting to want a little bit less of. We do feel a bit better about supply chains than we did a few months ago. And we do expect a significant improvement over the coming year, if not quite a complete normalization. And so, really, if I were to summarize our thinking over the last month, we feel worse because of the Omicron, and a little bit of that is tempered because we’re feeling a bit better about supply chains. Okay. I’ll stop there, having gone too long, as always. Thanks for sticking with me. I hope you’ve found some of this interesting. And let me wish you a happy holidays.