Monthly webcast

Our monthly economic webcast for July is now available here.

Overview

This week’s note addresses the latest COVID-19 developments, including rising infections in emerging markets, more information on the delta variant and the latest reopening and vaccination trends. From an economic standpoint, we examine recent strong economic figures. We also review evidence of an overheating U.S. labour market and new business growth. Finally, the report investigates the extent to which people will continue to work from home after the pandemic.

Recent developments remain largely mixed, in keeping with the pattern of the past few months. Negatives include:

• Emerging market (EM) COVID-19 infections are rising again, signaling the advance of the delta variant.
• Most developing countries are only minimally vaccinated, meaning the next wave could be the worst yet for them, in terms of both infections and fatalities. This could dim their economic outlook and affect global growth.
• Inflation pressures remain significant, as discussed in several recent notes.

However, these are roughly balanced by important positives:

• The U.K. infection rate may be starting to peak after having surged over the past six weeks. If genuine, it would mean that the country’s vaccination campaign is gaining the upper hand over the delta variant. This is promising news for other developed countries.
• Despite a tenfold increase in U.K. cases from trough to (tentative) peak, fatalities have only roughly doubled. This signals that vaccines are not just minimizing infections, but short-circuiting the connection between infection and death.
• Economic activity continues to revive nicely across much of the world.

Global infections rising again

Global COVID-19 infections are no longer declining, with both developed and emerging markets (EM) now suffering rising daily cases (see next chart).

COVID-19 emerging market and developed market infections

As of 07/04/2021. Calculated as the 7-day moving average of daily infections. Source: World Health Organization (WHO), Macrobond, RBC GAM

Sliced differently, nearly half of the countries we track are now reporting rising infections per day (see next chart). This is up from around 30% in May.

Countries reporting rising daily new COVID-19 cases

As of 07/04/2021. Change in cases measured as the 7-day change of 7-day moving average of daily new infections. Source: WHO, Macrobond, RBC GAM

EM countries are suffering to a greater extent as the new wave forms. This makes sense since they are far less vaccinated on average. New cases in Africa rose by 38% over a recent seven-day period. South Africa’s deterioration is particularly pronounced (see next chart).

COVID-19 cases and deaths in South Africa

As of 07/04/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

Among other EM countries, Indonesia, Mexico and Russia are also recording rapidly increasing infection numbers (see next chart).

COVID-19 cases and deaths in Russia

As of 07/04/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

In the developed world, continental European COVID-19 infections remain quite low, although they are no longer declining to the extent they once did (see next chart).

COVID-19 cases and deaths in Germany

As of 07/04/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

In Canada, the number of new cases continues to shrink, albeit at a slower rate than before (see next chart).

COVID-19 cases and deaths in Canada

As of 07/04/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

Delta variant

The more contagious delta variant continues to play a central role in pushing infections higher across much of the world. This variant has a natural transmission rate of between 5 and 8 (meaning that the average sick person can expect to infect five to eight other people under normal, non-quarantine circumstances). Thus, the delta variant seems likely to eventually infect just about everyone on the planet who hasn’t been inoculated.

After spreading from India, the U.K. was among the first countries to be inundated by the delta variant (see next chart). Accordingly, the trend rate of infection in the U.K. continues to rise (see subsequent chart). However, we note that – when one examines the unsmoothed data – the U.K. infection rate has actually declined in each of the last three days. This could be purely noise, or maybe U.K. vaccination efforts (conceivably alongside seasonal factors) are finally beginning to put the delta variant on the defensive.

COVID-19 variant share of cases in U.K.

As of 07/04/2021. Share of cases by variant. Source: GISAID, RBC GAM

COVID-19 cases and deaths in U.K.

As of 07/04/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

Meanwhile, in the U.S., researchers project that the delta variant will make up 50% of all new COVID-19 infections by mid-July. The U.S. is theoretically more vulnerable than most developed countries to the delta variant due to the country’s faltering vaccination campaign and absence of social distancing restrictions.

This vulnerability may now be starting to manifest in the U.S. infection data. More than half of states (30) are now recording rising infection numbers, up from barely any a month ago (see next chart). These states are disproportionately located in the U.S. South, Southwest and Midwest (see subsequent chart), broadly aligning with which parts of the country have managed the fewest inoculations and have the least restrictive rules.

Number of U.S. states with transmission rate above key threshold of one

As of 07/04/2021. Transmission rate calculated as 7-day change of underlying 5-day moving average of new daily cases, smoothed with 7-day moving average. Transmission rate above 1 suggests increasing new daily cases. Includes Washington, D.C.  Source: Haver Analytics, Macrobond, RBC GAM

Transmission rate, U.S. states

As of 07/04/2021. Transmission rate calculated as 7-day change of underlying 5-day moving average of new daily cases, smoothed with 7-day moving average. States above dotted line at 1 have increasing new daily cases. Including Washington, D.C.  Source: Haver Analytics, Macrobond, RBC GAM

The good news is that when people are fully vaccinated, they are mostly protected. When the delta variant manages to infect vaccinated people, such cases are usually mild. More than 99% of recent COVID-19 deaths in the U.S. have been in unvaccinated people, despite more than half of the population having at least partial vaccination.

Even in situations in which the delta variant has taken hold in a developed country, such as the U.K., the fatality rate has remained quite low (see earlier U.K. chart). This also appears to be true in Israel, which has recently recorded a rising number of infections but not a significant increase in deaths (see next chart).

COVID-19 cases and deaths in Israel

As of 07/04/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

This presents a dilemma for policymakers. The natural instinct is to lock economies back down when infections rise. But the U.K. didn’t do this – it simply delayed further reopening – and it now intends to further open the economy later in July. If the connection between infections and deaths can be significantly broken by successful vaccination campaigns, it suggests that most developed countries can avoid any serious tightening of rules even if another wave develops. The Economist magazine recently speculated that the delta variant might actually be slightly less dangerous than the alpha variant, though other, earlier, studies argued the opposite.  In turn, the economic consequences should be limited.

Of course, the situation is much more dangerous in most developing countries, which must also grapple with the delta variant but without the same access to vaccines. The next virus wave could be worse for them than prior waves, not just from an infection perspective, but also in terms of fatalities. That would have economic consequences for those countries, and conceivably land an indirect economic blow on the rest of the world.

On the subject of other variants, there is good and bad news.

The good news is that the World Health Organization has ruled that the variant first identified in Vietnam is actually just a form of the delta variant. This means there isn’t another, even more contagious variant coming from Vietnam.

However, the bad news is that other, new variants are springing up regularly, beyond the big four from the U.K., South Africa, Brazil and India. New variants “of interest” (though not yet “of concern”) include the zeta variant (another variant from Brazil), the eta variant (found in the U.K. and Nigeria), the theta variant (from the Philippines) and the lambda variant (from Peru). There is a risk that the variant story isn’t done yet.

Reopening slows

Our lockdown severity metric argues that the rate of re-opening has slowed in many developed countries (see next chart). This arguably makes sense in that some countries – including many European ones – are now closing their borders to travelers from certain other countries, including the U.K., Russia and Portugal.

Severity of lockdown varies by country

Based on latest data available as of 06/30/2021. Deviation from baseline, normalised to U.S. and smoothed with a 7-day moving average. Source: Google, University of Oxford, Macrobond, RBC GAM

Nevertheless, a significant amount of reopening has already occurred and we believe there will continue to be lagged tailwinds over the coming months. Furthermore, even if policymakers do have to pause or even slightly tighten rules for a period of time, we expect them to revert to re-opening fairly shortly thereafter. Consistent with this, the U.K. continues to insist that it will lift its remaining restrictions on July 19, even with the delta variant actively circulating.

Vaccinations push forward

Nearly 3.2 billion vaccine doses have now been administered globally, at a current clip of 39 million new doses per day. The United Arab Emirates, Bahrain and Israel remain at the top of the standings in terms of doses administered per capita (see next table). The U.K. is right behind them, though beginning to evince a slower rate of progress as its population becomes increasingly saturated.

COVID-19 global vaccination ranking

As of 07/04/2021. Cumulative total doses administered by country per 100 people. Source: Our World in Data, Macrobond, RBC GAM

As we predicted in our last note, Canada has now passed the U.S. in doses administered on a per capita basis. Further, Canada is now set to extend its lead given that it is now vaccinating more than four times faster than the U.S. on a population-adjusted basis (see next chart). Several European nations should pass the U.S. over the coming two weeks.

Coronavirus vaccine daily doses administered

As of 07/04/2021. 7-day moving average number of new daily coronavirus vaccine doses administered per million. Source: Our World in Data, Macrobond, RBC GAM

Among major nations, Canada has now administered at least one dose to a larger fraction of its population than any other country, at 68.6% (see next table). While this is partially because Canada has now procured a large number of doses and its population demonstrates little vaccine hesitancy, it is also because Canada consciously pursued a first-dose strategy. This was successful in that it kept down fatalities during the country’s third wave. However, the pressure is now on to deliver second doses given that the delta variant is adept at infecting partially vaccinated people. Only 35.0% of Canada’s population has been fully vaccinated, versus 49.5% in the U.K. and 47.0% in the U.S.

COVID-19 global vaccination ranking

Based on latest data available as of 07/04/2021. Source: Our World in Data, Macrobond, RBC GAM

Positive economic developments

Real-time data

Real-time economic data remains mostly constructive. Our overall U.S. economic activity index continues to revive, recently touching pre-pandemic activity levels (see next chart).

U.S. economic activity accelerates as states reopen

As of 06/26/2021. Economic Activity Index is the average of 9 high-frequency economic data series measuring the percentage change versus the same period in 2019. Source: Bank of America, Goldman Sachs, OpenTable, Macrobond, RBC GAM

People seem particularly keen to taste the (previously) forbidden fruit, flocking back to hotels (see next chart) and restaurants (subsequent chart). As restrictions ease, activity in such sectors seems likely to exceed rather than merely match pre-pandemic norms.

U.S. hotel occupancy almost back to normal

For the week ending 06/26/2021. Source: STR, Wall Street Journal, RBC GAM

Restaurants reopen for dine-in service as countries lift restrictions

As of 06/30/2021. 7-day moving average of year-over-year % change. Seated diners from online and phone reservations and walk-ins, based on a sample of restaurants on OpenTable. Source: OpenTable, RBC GAM

U.S. steel production – a proxy for demand across a wide range of industries – has continued to rise and is on the cusp of returning to its pre-pandemic level (see next chart).

U.S. raw steel production (net tons)

As of 06/26/2021. Source: American Iron and Steel Institute, Haver Analytics, RBC GAM

Good traditional data

In the traditional data space, the economic news has also been good. Prominently, the U.S. created a gargantuan 850,000 net new jobs in June. That number was above expectations for 720,000 new positions, and well beyond the 100,000 or so needed each month to absorb a growing population. The biggest winners were workers in the leisure and hospitality sector.

The details of the report were curiously conflicting. On the “hot” side, average hourly earnings growth jumped from +1.9% to +3.6% year-over-year, signaling the existence of inflation pressures. In fairness, a chunk of that comes from newly reviving sectors that were much cooler last year. Conversely and unexpectedly, the unemployment rate actually edged 0.1ppt higher, from 5.8% to 5.9%. Recall that the unemployment rate is calculated using a different survey than the headline job figure. The two don’t usually diverge for long, suggesting an improved unemployment rate in the future.

Elsewhere in the U.S., the Institute for Supply Management (ISM) manufacturing index for June slipped slightly to a still-strong 60.6 reading, consistent with a rapidly expanding manufacturing sector. The equivalent service sector measure will be released imminently. In the meantime, we can lean on the Markit U.S. Services Purchasing Managers’ Index (PMI), which fell from a heroic 70.4 to a very-good 64.8. It would certainly make sense if the U.S. economy began to grow slightly less quickly in the coming months given that we believe it has already recovered the lion’s share of the output loss suffered during the pandemic.

Internationally, the Eurozone and U.K. continue to enjoy an economic revival. The Markit Manufacturing PMI for both regions held roughly steady in the 63—64 range, suggesting muscular growth.

The Services PMIs weren’t quite as high, but have been actively rising from month to month. In the Eurozone, the Services PMI recorded a fifth straight increase, having increased from just 45 in February (sub-50 is consistent with contraction) to 58 today. In the U.K., the Services PMI recorded a good reading of 62, up massively from the country’s abysmal low of 39 in January.

Canadian data

In Canada, April GDP was reported to have declined by 0.3%. This was significantly less than the initial -0.8% flash estimate, though still the first outright drop since the initial stages of the pandemic. Statistics Canada estimates that May GDP may have declined similarly by around 0.3%. These are the result of government lockdowns in response to the third viral wave.

Despite recording declines in the first two months of the quarter, Q2 GDP still appears to be on track for moderate growth. This is due to the anticipation of a big bounce in June plus supportive base-effects from the prior quarter. Indeed, one measure of Canadian small- and medium-sized businesses shows an enthusiastic jump in June as restrictions began to be lifted (see next chart).

Canadian businesses reopen as restrictions eased

As of 06/22/2021. Source: Canadian Federation of Independent Business, RBC GAM

Labour shortages

The labour market remains contradictory, with a still-elevated unemployment rate paired with record high job openings (see next chart).

U.S. job openings rate at record high

As of Apr 2021. Estimates for all private non-farm establishments. Shaded area represents recession. Source: Bureau of Labor Statistics (BLS), Macrobond, RBC GAM

What can possibly explain the unusual juxtaposition of these two readings? The answer up until recently was that the labour supply was being artificially restricted by enhanced government unemployment cheques, fear of being infected by the virus in the workplace, and inadequate childcare options.

But some of those constraints have already significantly faded: fear has presumably declined in line with falling infections, and summer camps and daycares are now mostly operating. The remaining restraint is now falling away: supplementary unemployment benefits expired for half of U.S. states in June. That should nudge additional people into the labour force in July and beyond.

As such, one would expect job openings to recede in the future, even as the unemployment rate falls.

That said, a new issue has arisen that could keep job openings elevated for a little longer. As social distancing restrictions have faded, previously obstructed sectors such as leisure and hospitality are now snapping back with unprecedented speed. Suddenly, every such employer needs dozens of new employees, all at once. Understandably, considerable frictions have arisen. Even with many unemployed people simultaneously looking for employment, it takes time to make successful matches and to onboard new employees. As one would expect, the biggest leap in job openings are in sectors that have only recently been unshackled (see next chart).

Job openings of leisure and hospitality sector spike as economy reopens

As of Apr 2021. Estimates for all private non-farm establishments. Shaded area represents recession. Source: BLS, Macrobond, RBC GAM

Furthermore, workers are finding that their best job opportunity isn’t always the first one they come across, especially with wages rising quickly in certain sectors. This significantly explains the high “quit” rate (see next chart).

Voluntary separations in U.S. rebounded and then surged

As of Apr 2021. Estimates for all private non-farm establishments. Shaded area represents recession. Source: BLS, Macrobond, RBC GAM

But even this should prove temporary. Beleaguered sectors should revive over the next few months, after which the relationship between unemployment, job openings and the quit rate should mostly revert to normal.

New businesses being formed

It has been widely acknowledged and celebrated that many new businesses are now being formed (see next chart).

U.S. business applications boomed during the pandemic

As of May 2021. High-propensity business applications are more likely to turn into businesses with payroll. Source: Census Bureau, Macrobond, RBC GAM

Classically, recessions and the subsequent recovery period are regarded as a good time to begin a business because many incumbent businesses have failed, leaving a gap for new entrepreneurs and new ideas. Recessions also frequently result in cheaper commercial real estate, discounted machinery and equipment and lower borrowing costs – all helpful when starting a new business.

It is exciting that this is happening again as the pandemic eases its grip, and we have argued that this may help to drive faster productivity growth in the future. It is customary to see rapid employment growth and productivity growth in the one to two years immediately after a surge of business formation. However, some caveats are necessary.

1. Most new businesses being formed are ones that are not deemed likely to add staff beyond the founder (refer back to the prior chart and note the smaller increase in “High-propensity applications”). These are not likely to turn into the innovation hubs or job creators of the next decade. Pessimistically, one might even think that some of these may be unemployed people creating “consultancies” and the like as a means of earning some modest income or even just filling a hole in their resume between jobs.
2. Nevertheless, the High-propensity applications have also gone up significantly, if to a lesser extent, so there is still some genuine increase in entrepreneurship.

2. These new firms are just filling the hole created by a sharp drop in companies last year (see next chart). This is entirely normal, and one might argue that the new firms could be more dynamic than the old, hobbled ones. But the fact remains that it is not the case that an unprecedented number of people have caught the entrepreneurship bug. Alas, we lack sufficiently fresh data to have a 2021 net figure.

Significantly fewer businesses in 2020

As of Q3 2020. Year-to-date number for 2020. Net change is the difference between the number of opening establishments and the number of closing establishments. Source: Census Bureau, Haver Analytics, RBC GAM

3. Over half of the acceleration in new business formation in 2020 came from the retail sector. There is nothing wrong with this and an unusual fraction may well have e-commerce platforms. But few small retailers become large businesses, and many are fairly homogeneous with a value-added that is simply their geographic proximity to customers.
4. The concentration of new firms shouldn’t be overstated, however, as new business applications did accelerate in 16 out of 19 sectors – it wasn’t solely a retail story.

The bottom line is that there is indeed a surge of new businesses and this is a good thing, even if there were unfortunately many other firms being destroyed at the same time.

Working from home

Many employees have spent the past 16 months working from home. We have long argued that, once pandemic restrictions are fully lifted, there will be fewer people working from home than today, but more than before the pandemic. In fairness, this is a pretty obvious conclusion.

A better question would be whether the post-pandemic working world will more closely resemble today or the pre-pandemic norm. Believe it or not, the best answer is probably smack-dab in the middle.

Of course, the answer will be very different for a white collar worker versus a blue collar one, and for someone in sales versus someone in operations. At the extremes, some companies have already announced that they are going all virtual. Others are insisting that all workers return to the office, full-time.

Surveys generally find that employees want to work from home more than their employers want them to. A Statistics Canada survey of employees found that the most popular option for workers is a 50-50 split between in-office and virtual work. Working entirely at home or entirely in the office were considerably less popular, though respondents were more receptive to logging over half of their time at home than in the office.

While broadly willing to pivot (fewer than 20% of executives plan a full return to pre-pandemic office routines), businesses are generally more conservative than their employees. For example:

• 87% of executives think offices are still important.
• 68% expect three-plus days to be spent in the office (another survey puts the fraction of respondents providing this answer at 85%). Offices help facilitate collaboration, maintain the corporate culture, aid in training new employees and are critical for interacting with clients.

Data in both the U.S. and Canada argue that around 5% of work was conducted remotely before the pandemic, versus perhaps 40% during the most locked-down part of the pandemic – a remarkable eight-fold increase.

Keep in mind that nearly half of jobs – including most in retail, manufacturing, health care and beyond – do not lend themselves to remote working. Thus, the great majority of people who could work from home were working from home.

In Canada, the 40% work-from-home figure had retreated to 32% by the start of 2021. It has likely fallen further in the relatively more open U.S.

A variety of studies argue that around 20% of work can be expected to be conducted virtually after the pandemic. That is half the rate at the peak of the pandemic, but four times the rate before the pandemic began. That seems like a reasonable guess, and is, incidentally, almost exactly the midpoint between pre-pandemic and pandemic practices.

Stylistically, one might imagine that half of all workers will continue to be unable to work from home. The other half will work from home an average of two days per week, with considerable individual variation.

These changes may have major implications.

If the average office worker spends 40% less time at work, downtowns will probably be diminished to a greater extent and more enduringly than we had previously budgeted for. One study concludes that downtowns will experience a 5% to 10% decline in spending. That said, given that downtowns are centrally located and have good transit connections, one might expect other sectors including residential, entertainment and retail to fill any slack over time.

With regard to the outlook for commercial real estate, various surveys contradict one another. Remarkably, one survey finds that 56% of executives actually plan to increase their office space over the next three years. Big tech companies have broadly continued to spend on commercial real estate during the pandemic. However, another survey finds that 69% of CEOs plan to reduce their office space over the same timeframe. It can’t be both.

To the extent that most workers will likely be coming into the office for several days each week, it won’t be as simple as eliminating the offices of remote workers. Companies will either need to keep the vast majority of their cubicles, or shift to a hot-seating program in which offices are shared. That could backfire, making workers less keen to come into the office.

Offices will have to get better if they are to attract workers from home – more pleasant, more functional, and above all else, more useful for collaboration.

A complication is that newly disease-sensitive workers may desire more space per person. The average office space per person shrank by 40% between 1990 and 2020. Were that trend to reverse, any space saved due to fewer workers in the office would be completely offset.

Residential real estate may remain in high demand to the extent that many remote workers will now need more space for a home office, and may care more about the amenities around their home. And while suburbs and exurbs will presumably be relatively more popular than downtown dwellings, the great majority of workers will still be expected to spend several days per week in the office, limiting a mass exodus to the countryside.

It is possible, though not certain, that allowing for more flexible working arrangements could extract additional productivity as well. One study argues productivity could be boosted by a cumulative 5% over time by allowing people to work in the optimal environment for each task.

A permanent increase in virtual work has cascading consequences into other spaces as well, affecting the pattern of clothing purchases, restaurant demand, traffic, public transit, and beyond.

It is unlikely that companies will get the future of work exactly right the first time. There will likely be many iterations, spanning years. It is anyone’s guess whether the key revelation will be that ever-more work can be conducted from home, or instead that productive workers require human contact and in-person collaboration for companies to prosper.

-With contributions from Vivien Lee and Lucas Hervato