Hello, and welcome to our latest weekly video MacroMemo.

We’ll cover off a number of subjects over the next little while, starting, of course, with this Omicron variant that does look more contagious than the existing dominant strain. We’ll talk a little bit about government restrictions and how those are beginning to mount again. We’ll look at some economic data, which has actually been quite strong, at least up until this point. And we’ll talk about our growth forecast to the extent to which those are edging a bit lower. And then some quick topics, some quick dives into the Canadian consumer, U.S. politics, a visit to inflation, which is obligatory these days; central banks as well, who have remained fairly hawkish; and a look again at BC flooding.

So, plenty to cover off. Let’s dig in, as a result. And to begin with, on the COVID file, well, Omicron is this new variant. It has many, many mutations relative to other variants. And the initial thinking is that it’s likely more infectious, likely more resistant to vaccines, and also likely less deadly. And so, two bads and one good. Let’s work our way through that.

Again, it does look likely to be more infectious than other variants. It’s spreading very rapidly, and it’s taken over South Africa more quickly than the Delta variant ever did. Hence, the thesis that it’s more contagious than other versions. It’s likely, therefore, to become the dominant global strain. It’s likely there’s going to be some sort of global wave over the next several months, we suspect. And in fact, we should acknowledge there was already something of a global wave happening, particularly in Europe, but to a lesser extent, right across the developed world as a result of the Delta variant. And so, I guess one way or the other, it may be that COVID cases go up as opposed to down over the next few months.

Now, it’s unclear how much more contagious precisely this variant might be. There are several estimates that suggest it could be multiple times more contagious than the Delta variant. That stretches the imagination a little bit. There is another study recently released which suggests it might be about 30% more contagious than the Delta variant. That seems more plausible, to me, at least. And so, this is a variant that needs to be regarded with some caution.

In terms of breaking through vaccines, well, theoretically, because so many of the mutations are on the spike protein, which is how vaccines target these viruses, theoretically, this is more capable of breaking through vaccinations, and the experts seem to be in agreement with that thesis. Early results suggest that the variant is three times more likely to break through natural immunity.

So we don’t have clear conclusions on versus vaccines. But in terms of people who had been sick before, it seems to be much more capable of breaking through that, which it’s probably a hint it’s also fairly good at breaking through vaccines. Not to say vaccines won’t work, but they might be somewhat less effective.

Vaccine makers insist that they can make new vaccines that better target, but it’s a multi-month process to do that. Then you need to get approval. Then you need to produce, distribute, inoculate people. In the end, there are a number of quarters before we’ll be back fully to a high level of vaccination, if this does indeed break through vaccines, as currently seems likely.

And then lastly, and the hopeful bit of news is that this may be less fatal or might result in fewer hospitalizations. There are initial reports at least of it being fairly mild and not having the same sort of impact of prior variants, though it should be warned that the timing is still fairly early. It takes a while for people to go to the hospital. Takes even longer for some people to tragically die. And so, we don’t have the full read on this right now, but as it stands right now, it seems likely to be, again, a little bit less fatal at least. And initially, some of the symptoms are less lung-concentrated and the symptoms may be presenting for a shorter period of time.

And so, the question then is, what to do with all of this swirling pieces of information. And from an economic standpoint, we’re thinking of three main scenarios. The base-case scenario, which we assign about a 50% chance is that, yes, this is moderately more contagious; yes, it’s moderately more vaccine-resistant; yes, it’s moderately less dangerous. And if that trio of factors prevails, then we can say, conceivably, the global economy will be about a percentage point smaller than it would have been over the first half of 2022, should then rebound. And for context, this would be a worse economic hit than with the Alpha and Delta variant; about similar to what we saw in the fall of 2020. Not nearly as bad as the hit from the spring of 2020, but nevertheless, a palpable effect. And so we are budgeting for that and that is now factored into our forecast.

A pessimistic scenario, maybe a 20% chance would have this being just much more contagious, much more vaccine-resistant, maybe not less dangerous than the Delta variant. And if those were to prevail, then you’re talking multiple percentage points chopped off activity over the next few quarters before a later resolution.

I do want to say, though, there is also an optimistic scenario, and we actually assign a 30% chance to that—it’s a bigger chance than the most pessimistic scenario—and either this Omicron doesn’t actually take over, and you can think back, for instance, to the Beta variant that took over South Africa and then never really gained traction in the rest of the world—there’s a way that could still happen here; or it does take over, but it’s so significantly less dangerous that, essentially, the world is able to race to herd immunity with a minimum of negative consequences, it crowds out the Delta variant, and we’re actually in a better position than we were before. So that’s possible too. We’ll just have to see which of those dominates. But certainly, it goes without saying, the Omicron needs to be watched very closely. To my eye, it’s the biggest unknown as it stands right now.

Let’s pivot from that into a subject that’s certainly linked—I suppose they all are—but nevertheless, restrictions, government restrictions. And so I can say that the Global Stringency Index we track has been tightening. That is to say, governments are imposing more restrictions on activity as opposed to fewer. That was even before the Omicron, by the way. That was in response, largely, to the Delta wave that was, in particular, taking over Europe. The UK has introduced mass restrictions. Many European countries are locking down, but only for the unvaccinated. So a targeted lockdown.

Now that the Omicron is here—and we need to see just how dangerous it is or isn’t—but now that it’s here, we’re getting international travel restrictions as well. And we’ll see what else proves necessary, but the risk, certainly, is more restrictions as opposed to fewer.

Until then, though, the economic data in the world has actually been quite strong recently. We’ve had healthy, real-time indicators, particularly from the U.S.; we’ve had good global purchasing manager indices from, really, right across the developed world, but also in China as well, which is a welcome development, given that China had been slowing. Thanksgiving spending, a little underwhelming for the days themselves. But if you look at Thanksgiving as a month worth of spending, which it increasingly is, actually, that November spending in the U.S. was 14% higher than the year before. So I think fairly strong consumer spending there as well.

And really, if you wanted to poke holes on the recent data, maybe you could criticize U.S. job creation. In November, it was 210,000 jobs; there had been hope of more. But I will say this: the other survey that gets less attention for the month of November argues it wasn’t 210,000, it argues the U.S. created 1.9 million jobs. Now, it’s not the better survey, but they both have some informational value. And I would say, in general, I feel pretty good about the U.S. labour market. The unemployment rate did fall from 4.6 to just 4.2%, and so I’m not particularly concerned about employment at this point.

Similar story for Canada, big job number, 154,000; falling unemployment rate; some wage acceleration as well. Now let’s recognize looking forward, this Omicron may take a little bit of wind out of the sales of economic growth. In the Canadian context, you have BC flooding. That’s also going to do a bit of damage. But nevertheless, for the data that we have, it’s actually been pleasantly strong recently.

Now in terms of our own forecasts, as I mentioned earlier, we have been downgrading them a little bit. And so again, it’s not that the recent data has been bad; the recent data has been good. It is more the Omicron variant. And so we’ve taken something out of 2022 growth in response to that.

I should say, we’ve also felt a little bit less pessimistic about supply chains. So we’ve added a bit back from that, but the net effect is a bit less growth. And so just to give you a broad sense, before we publish our Global Investment Outlook in the coming weeks, to give you a broad sense of where we’re going with this, we were looking for growth forecasts of nearly 4% across much of the developed world for 2022; we’re now looking for about 3.5%. That’s still a recovery, it’s still a good number on an absolute basis, but it’s less than we assumed before, and it’s also a little bit less than the consensus, for what it’s worth.

Okay. Let’s dig into a few smaller subjects here. The first one is just Canadian consumers. And so, broadly speaking, Canadian consumers are fine in the sense that they’ve enjoyed high job creation, and they are sitting on a lot of excess savings after the pandemic, and they’re not experiencing much financial distress. So, let’s not look for trouble where trouble doesn’t exist.

But I will say, when we compare Canada to the U.S., household debt servicing ratios aren’t nearly as friendly. Canadian households have more debt. The amount of debt servicing they’re having to do as a share of their income is, actually, unusually high, whereas in the U.S., it’s unusually low. And so I guess the message is, if there were to be a consumer spending boom over the next few years, which is quite possible, Canada might participate a bit less than other countries, including the U.S.

Now speaking of the U.S., the U.S. political situation has a number of interesting developments recently, and so let me just run through the five big ones that I can think of. The first is that U.S. Congress passed the bipartisan infrastructure bill a few weeks ago, and so that is a go. That is happening.

The second item is that the larger multi-trillion-dollar partisan spending bill still hasn’t happened been yet. And so that’s still idle. They’re still looking for enough support on the Democratic side of the room, and they haven’t gotten there just yet.

The number three one is government shutdown has been delayed. And so initially, the U.S. government would’ve been shut down in early December because of a lack of allocated funding. That’s now been stretched to February 18th. So no shutdown yet; though, February isn’t that far away, and so we’ll have to deal with that again later.

The fourth item, debt ceiling. And so there is still a debt ceiling limit that gets hit fairly soon, plausibly as early as December 16th, according to Treasury Secretary Yellen. So that still needs to be dealt with.

And then the fifth item is President Biden’s popularity, which has fallen. And so, he had a 53% level of popularity on Inauguration Day. That is now down to 43%. For context, President Trump was at 37% at the same point, so higher than Trump was at the same juncture, but nevertheless, lower than the prior 12 presidents. And so, of relevance to midterm elections, which are now less than a year away. Usually, midterms swing away from the president. As it is, perhaps even more likely to, given this shift in Biden’s popularity. And so, it seems likely that we’ll be back to a divided Congress at best in less than a year’s time, and so this helps to explain why there’s such an urgency in the White House to get spending bills through now because this might be the one opportunity of Biden’s four-year term.

A couple quick inflation thoughts here. And so to begin with, inflation’s still very high, and we’ve got a recent eurozone inflation print that was nearly 5%. We’re seeing maybe the prospect of a bit less pressure from goods as oil prices come off, as supply chains get a bit less bad. But service inflation remaining quite hot, so rent very high, cable, recreation, legal prices, et cetera, all going fairly quickly, so we’re getting other sources of inflation, so let’s not expect it to unwind overnight.

One question we’ve had in inflation is why Japan hasn’t had more inflation. Japanese inflation is 0.1%. Here, you have these global forces—supply chains and oil prices and things that are driving inflation—affecting Japan in theory; Japan isn’t encountering inflation. And the answer seems to be really two things. The first is that Japanese companies have a steady management style. They don’t like to adjust prices abruptly. Now that, by the way, means that, therefore, Japanese companies are eating costs and will suffer worse profit margins as a result.

The other item, largely explaining the first, is Japanese shoppers are very price sensitive. They’re used to paying essentially the exact same price for a product for the last several decades because they’ve had no inflation. They know what the price should be. When the price goes up, they go on strike essentially. They defer spending rather than pay extra. And so Japanese companies have been forced to eat the extra costs. And so, we just haven’t seen the inflation in Japan. I would have to think, given the amount of pressure we’ve seen, that they are going to have to face a little bit of that and we will see a bit more Japanese inflation. But just fascinating, a very different inflation model in Japan versus elsewhere.

Let me say a few words about central banks. And so, broadly, they’re remaining hawkish. And in the U.S., we had Fed Chair Powell abandon that transitory word, because inflation has just stuck around for longer than they’d expected, though they do ultimately think it is temporary. They don’t believe we’re in a new inflation regime. The Fed acknowledged inflation is spread more broadly, and the Fed acknowledged it might taper faster, might scale back that bond buying in a way that the buying is done before the middle of next year as opposed to around the middle of next year. So, hawkish there.

In Canada, we get a rate decision very soon. And a strong employment report, maybe a bit of a hawkish signal there, but I would say, the market already prices a lot of rate hiking for Canada. Five hikes for the next year. The Omicron variant adds an element of uncertainty. I think the Bank of Canada will be fairly neutral and, actually, we think maybe the market price is a bit too much.

And let me finish with British Columbia flooding as we’ve visited this subject before, but worth an update. Subsequent waves of precipitation didn’t do as much damage as feared, and so that’s good. The Trans Mountain Pipeline is now back providing the 85% of energy used in Southern British Columbia. Rail lines are back. Highways, it’s much more mixed; selectively back. Some won’t return for months, though.

There are still gas and travel restrictions, though, through mid-December. And so we’re still broadly looking for a similar economic impact—a negative November GDP print for Canada, a palpable hit to the fourth quarter, but you get that back later.