Hello and welcome to our latest video Macro Memo. We'll cover a number of things this go round and we'll spend a fair bit of time on China actually in two contexts. The first is China seemingly starts to ease some of its COVID restrictions, which is a big deal since it's been the most locked down country for the better part of three years.

The other being the Chinese economy's position right now, at least as that starts. And so it's actually quite a challenging economic situation in China, though policymakers are starting to do something about it. We'll also just talk a little bit about the general flow of economic data, which is mixed, but with some pretty resilient labour market data. I will talk about how any theoretical recession might feel as opposed to what it might strictly be.

And I'll explain that in a moment. We'll talk about Black Friday briefly, what we can glean from that in the context both of spending behavior and inflation behavior. And we'll take a look at some interesting recent trends that suggest inflation probably does get to continue falling as well. And we'll also just take a glance in the direction of recent changes to global oil rules with relevance to Russia.

So as usual, plenty to cover off. Let's start with China. And so China, COVID, really. And so China is suffering by its standards, at least a big COVID outbreak. You've got in the realm of 30,000 new infections a day on a seven day moving average basis. That's actually pretty low if you adjust for population relative to what a lot of other countries have experienced.

But it's a lot for China and it might well be the most China has had period, or at least since its initial wave, which wasn't all that well measured. Subway activity is cratered, so we can see some of the real time economic activity really being hurt by the lockdowns that have resulted. In fact, two thirds of China's cities have some measure of lockdown currently in place, and that's actually boiled over recently in a way that is unusual for China.

And so we've seen the most intense protests in China against restrictions since really the late 1980s at this point in time. And so that is quite intense. And the government is trying to decide what to do and they really can't remain this locked down indefinitely. The protests suggest that discontent is growing among the population. The economic impact as well isn't great.

It's quite damaging to the Chinese economy, but you can't completely open up like the rest of the world either because China has very little natural immunity. It has not had good vaccines. So it would be a disaster. In fact, we have seen estimates from The Economist magazine estimating that at its peak, if China just eliminated all restrictions, which I don't think it will, but if it did, you'd have 45 million cases per day.

You need seven times more intensive care beds than China possesses. You'd have 680,000 people die as a result of that wave. So that's obviously not an attractive outcome either. China is trying to find a middle ground, I guess you could say. And so at this point in time, they are trying to get rid of the least effective rules, the ones that bother people and limit the economy, but don't actually all that successfully help to constrain the virus.

And most of the changes are kind of experiments in different cities so far. And I suspect the ones that work will then be used more broadly. Examples of that are China seems to be reducing its reliance on centralized quarantine facilities. So as it stands now, if you even were a close contact of someone with COVID, you're off to the quarantine facility and need to spend something like ten days there.

They are now letting more and more people at quarantine at home. And so it still hurts the economy, still people not circulating and doing regular things, but nevertheless a much less unpleasant experience. They are lifting some movement restrictions in some cities. And so instead of locking down the whole city, they'll just lock down people who are infected and close contacts.

And so that allows a lot more normalization of activity. They are reducing testing. They've been PCR testing people practically every day and it looks like they will back away a little bit from that. And indeed, some cities are allowing people to get on to the public transit now without proof of a recent PCR test. And so some easing of measures, also a vaccination campaign ongoing.

These aren't radical changes. China is still very restricted relative to the rest of the world. They will have to see how this plays out, whether they can control COVID. Even with these easier rules, there will still be plenty of people quarantining. So I don't want to overstate the boost the Chinese economy will get. And of course, some people will be just reluctant to circulate, given the ongoing risk of being flagged to close contact or the risk of being infected, which is now higher than it's been in a while in China.

But it is incrementally good for the economy and stock market in particular has been very keen and quite enthusiastic on that front and as has rallied in response and indeed the Chinese economy might be able to move a little bit more quickly as a result. So that's the story there. I suspect it is still very much a work in progress.

We'll hear a lot more in the coming weeks and months. Let's pivot a little bit, though. Not completely. Let's talk about the Chinese economy. And so the Chinese economy can certainly use that help that was just mentioned. So easing some of those restrictions because we suspect Chinese GDP is on track for only something like about 3% growth this year.

And indeed, the fourth quarter now looks unlikely to see much growth at all to the extent that those lockdowns have struck. If you actually dig into the regional numbers of the Chinese economy, Shanghai's economy is actually 1.4% smaller than it was last year, and Beijing's is only 0.8% larger. And so these are very anemic numbers, particularly for a country that historically is growing at six, eight or even 10% a year.

These are outright recessions. And Shanghai did have its own big lockdown in the spring, but that was many months ago. And the economy is still smaller than it was a year ago. So there is some real economic suffering regionally, more than you would think based on the headline numbers. The youth unemployment rate in China is 18% right now, which isn't great is frankly surprising since they do not have many youth, you would think they would be easily absorbed into the labour market.

Consumer confidence is the weakest we have ever seen right now. Now, that should improve somewhat as restrictions ease, but it's still not likely to be a time of enthusiastic consumer spending. Retail sales are now down over the past year, which just doesn't happen in China. But it has happened as consumers have become more cautious and have focused on saving and exports, in fact have been down recently and in fact U.S. dollar terms are also down over the last year or so.

This is a very weak Chinese economy of the sort. We have not seen much of the credit impulses turn negative. The housing market is weakening as well. That might be one of the bigger sources of softness. So it's quite a challenging economic situation. Let the record show the Chinese government is now starting to do things, though they've been cutting rates.

Unlike everyone else who is raising rates. And so that's quite an emergence. They have begun to shift away from that zero tolerance policy as just discussed, and they've also made some tweaks to housing rules. And in the classic Chinese style, it's not quite that they spent X dollars on X outcomes; it's more recommendations of banks doing certain things and keeping builders liquid and so on.

But nevertheless, they've issued quite a list of close to two dozen initiatives that they are hoping will stabilize housing after a period of weakness, though they don't want it to significantly revive because it was too hot. And so I guess the way we're thinking about it is that Chinese growth in 2023 should actually be a little better than 2022, which is the opposite of most countries in the world, but still fairly anemic by the standards of pre-pandemic China.

And we're not sure that China gets all of that loss growth back. We think they are probably in a structurally slower mode, but policymakers at least are now seeking to stabilize the situation. All right. On from there, let's just talk for a moment just about the data run in really North America mostly. And so the biggest figure was U.S. payrolls were out, the latest job numbers for the U.S. and there was a 263,000 job gain in November and that was more than expected and quite good in any kind of absolute sense.

It is absolutely fair to say the labour market has been resilient. Canada, by the way, added 10,000 jobs of its own. So I guess a similar narrative there, if not quite as strong. But I will say I think there's a little underbelly of weakness in the U.S. labour market that isn't being fully picked up. And so for instance, there's a lesser known survey also coming from the same statistical agency called the Household Survey, and it's actually seen less job growth in seven of the last eight months.

And the number of people tend to focus on settling down in four of the last eight months, including in November, it says, or outright job losses. I don't think that's the real story, but I do think the real story is a bit more muted, perhaps in the numbers people are tending to focus on. And it's fair to say we've seen a big jump in layoffs recently and we have seen a notable decline in job openings as well.

So there's something of a turn happening. But I wouldn't say on the net that we're necessarily seeing job losses. In terms of recessions, well we've been saying for a while, we think a recession is more likely than not. Unfortunately, the risk is maybe shrunk a little bit recently, just as those job numbers have hold up. But still, well, more likely than not, we've argued it should be of a middling depth.

So in the middle of it, relative to the historical experience. But it does seem to me that even if this is a middling recession, it could feel rather milder than that. And so for a few reasons. One is just that the last few recessions were unusually deep.

So comparatively this could feel mild, even though it's technically more medium sized relative to the longer term historical record, we expect fewer job losses than usual as a result of the recession. The reason being companies have struggled to find workers. They may hoard those workers. And so there's less acute suffering when you could avoid the job losses that lead to bankruptcies and delinquencies and big hits to spending. And so sharing the pain more equally could limit the damage.

And then the other reason is that as much as real GDP is set to shrink, and that's really almost the definition of a recession, nominal GDP may not. And so earnings price nominally may not have to fall as much. Government revenue may hold together or even continue to rise across any recession. Nominal personal incomes may not get hit to the same extent.

You could argue that the effect is mostly psychological in the sense that on a real basis earnings would still be down and revenue would still be down and so on. But nevertheless, the psychological effect might mute the negative behavioral response from a recession. It might just feel milder. And so a middling recession, but one that may not feel quite as bad.

Black Friday came and went not long ago. That's the start of the shopping season in some ways may be the pinnacle of the shopping season in the U.S. in particular. And we saw fairly good numbers. Black Friday sales were up relative to the year before. They slightly exceeded the consensus expectation and so that was all quite nice.

I have to say, I suspect a chunk of that enthusiasm was simply front loading as opposed to people actually planning on spending more over the entire season. In other words, people have become quite price sensitive, given how expensive everything is, and they did a whole lot of the shopping all at once. They may have pulled forward spending that might otherwise have occurred later.

So I think we might see a bit of a spending hit later. Nevertheless, it did look okay. I'll just say that as we look at other measures of spending, for instance, retail sales, retail sales look okay on a nominal basis, then you adjust for inflation and you realize people are actually getting no more things than a year ago.

They're just paying more for the same number of things that they're getting. And so we're actually not really seeing genuine growth there. Similarly, you look at a personal savings rate in the U.S. and it was the highest on record at points across the pandemic, extremely elevated. It has now plummeted not just to normal, but to within a 10th or two of the lowest personal savings rate on record.

And you can say, well, listen, they're able to do that because they save so much earlier. That would be fair. Nevertheless, I think what we're seeing here is that spending has been outpacing income, essentially, and we are going to need spending to cool off to some extent. Just takes a while for people to change their behaviors. Okay. Inflation.

So inflation is the central issue of our time. And it's much too high, though. It's coming down and we think it can continue to come down. And we actually think it comes down a little faster than the market does. That's the main good news story in our narrative, at least. I will say we see three things recently that support that view.

And the first one is just that China producer price indices are now falling on a year -over- year basis. And that says something about China, to be sure. But also keep in mind, China is the manufacturer to the world. And so to the extent that that manufacturers prices are falling, that really bodes nicely for consumer prices right around the world.

So that's a promising development. Eurozone inflation tentatively turned lower in November. We've been waiting for that. We had North American inflation start turning lower in July, but it was taking longer in Europe, in the U.K. because of the gas shock in Russia and a weaker currency, it has started to turn and so that's quite a happy thing and we think there's some room for that to move lower as well.

And lastly, and it's circling back to Black Friday, we can see people spent money, but they spent money on heavily discounted goods. Retailers are back to the discounting game and that's relevant for inflation, in part because it means prices were lower, but in significant part because a big chunk of the initial inflation pop a number of years ago was because companies stopped offering sales.

It wasn't that they're raising their prices. They just weren't offering sales. And so the idea that we're back to a world that has sales is the suggestion that we're going back to a more normal looking inflation environment. And then lastly, on the subject of oil, December 5th brought several important changes to the global oil market. One is that Europe has banned all importing of ship based oil to its own shores.

And so that chops about 300,000 barrels of oil a day out of the supply from Russia to Europe. And so there's a bit of a scramble on both sides to find new sources and new markets. The other one, though, is that the European Union and the G7 and Australia have combined to set a price cap for Russian oil.

And so essentially they're trying to prevent Russia from getting more than $60 a barrel for oil. The market prices is higher than that, not a whole lot more in terms of what Russia was getting, but it is higher than that. And so Russia and actually not a fan of this, the way the West plans to implement this is the West controls most of the insurance companies that insure these big oil tankers.

And so you can't ship without insurance. And so it simply won't be provided unless the oil price from Russia is 60 or less. Russia is trying to get around this. They have 100 go ships. They're making all sorts of adjustments. I think they will significantly get around it. But I think the point would be, to the extent that China and India and others are buying Russian oil, they have a little more bargaining power now.

They can probably drive Russian prices down a little bit. But in the meantime, it's an extra volatility in the oil space as everybody essentially tries to find a new dance partner to get to that 100 million barrels of oil a day that the world does consume. And that's it for me. And so thank you very much for your time.