Monthly webcast

Our latest monthly economic webcast is now available, entitled “Third wave arrives, but economic optimism persists.”

Overview

This week’s note begins, as always, with the latest COVID-19 infection, restriction and vaccination numbers. It then turns toward economic data, including a celebration of further U.S. and Canadian economic strength, and a peek into sector-level wage growth. The report then investigates European economic weakness, evaluates India’s performance during the pandemic, and concludes with some surprising fatality statistics.

Overall, we remain happy with our above-consensus economic forecasts. These are motivated by the combination of massive stimulus, natural economic buoyancy, a lack of economic scarring and outperforming vaccination campaigns. The latest wave of infections is certainly concerning – and a risk to this view. But it should ultimately be vanquished by a combination of vaccinations, stricter restrictions and warmer weather.

Third wave

The latest virus wave continues to build, as evidenced by rising COVID-19 infections and deaths at the global level (see next chart).

Global COVID-19 cases and deaths

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

Many countries now report transmission rates greater than one, in large part due to the additional virulence of several new vaccine variants (see next chart). It is some solace that this phenomenon is not quite universal.

Transmission rate below one means COVID-19 decelerating

As of 04/04/2021. Transmission rate calculated as a 7-day change of underlying 7-day moving average smoothened by a 14-day moving average of new daily cases. Source: WHO, Macrobond, RBC GAM

The daily case count continues to surge in Canada. It is now rising more quickly than it ever did during the first two waves. This means that social distancing rules have been grossly insufficient to control the spread of the virus (see next chart). Of course, the rules are now tightening, possibly changing the equation.

COVID-19 cases and deaths in Canada

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

British Columbia is now recording its most daily cases ever (see next chart). Ontario is on track to set new records if the current trajectory is maintained for just a few more weeks.

Spread of COVID-19 in British Columbia

As of 04/03/2021. Calculated as 7-day moving average of daily cases and total cases. Source: Government of Canada, Macrobond, RBC GAM

The spread of more virulent variants remain key to understanding the third wave. Our calculations argue that these variants are expanding at an eye-watering 71% week-over-week growth rate in Canada and by a concerning 47% in the U.S. (see next chart).

Week-over-week growth in total variant cases

As of 04/02/2021. Source: CDC, Government of Canada, RBC GAM

Within these numbers, the U.K. strain remains the most common, but the Brazilian variant is accelerating the most.

Despite these challenges, the daily infection rate in the U.S. has not yet soared. It makes sense that the U.S. is doing better than most given its superior vaccination campaign and higher level of natural immunity. However, we detect a slight upward trend (see next chart). Given the pace at which the variant is accelerating on U.S. shores, plus the fact that most U.S. states are recording a rising number of cases, it seems likely that a wave of some description will also form in the U.S. But we remain dubious that the U.S. will significantly lock down since fatalities and hospitalizations should be kept in check by the aforementioned vaccination campaign.

COVID-19 cases and deaths in the U.S.

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

Promising developments

There are three promising developments amid third wave worries.

1. The U.K. has managed not only to reduce its case count despite the presence of the variant, but continues to pare it (see next chart). This is an achievable outcome for any country with the discipline to enact sufficient social distancing.

COVID-19 cases and deaths in the U.K.

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

2. Continental European COVID-19 infections may now be peaking. That is our highly tentative reading of France, Germany and Poland. Italy’s improvement is somewhat more convincing (see next chart). Many of the countries have imposed significant new lockdowns. However, particularly for those that have only barely rolled over, there remains the worry that several recent holidays, including Easter, could have reduced testing in the short run. These same holidays may also increase cases over the medium run given additional socializing.

COVID-19 cases and deaths in Italy

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

3. The Brazilian variant is proving particularly worrisome on several fronts. Yet, it would appear that Brazil is finally starting to tame the variant despite woeful public policy (see next chart).

COVID-19 cases and deaths in Brazil

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

As such, while the third wave remains concerning and variants are by no means under control in most countries, it is at least possible to get past the third wave. As vaccinations continue and the weather grows warmer, we continue to believe the third wave will be briefer than its predecessor.

Tightening restrictions

Government restrictions are still in flux. Some countries such as the U.S. are still actively opening. Indeed, the global trend still leans in this direction (see next chart). But an increasing number of countries, including many European nations and Canada, have now pivoted back toward lockdown. We expect this to become more visible in the data in the coming weeks.

Global Stringency Index

As of 04/04/2021. Global Stringency Index measuring the strictness of lockdown policies that restrict mobility, calculated as stringency index of 50 largest economies. Sources: University of Oxford, International Monetary Fund, Macrobond, RBC GAM

The economic damage from such lockdowns is real, though likely insufficient to halt the economic recovery altogether.

A broader perspective

It is interesting to step back from the latest flurry of policy activity and to reflect upon what kind of countries have generally fared best throughout the pandemic. Perhaps unsurprisingly, small countries have, on average, done better than large ones at limiting the spread of the virus.

No less surprisingly – though a bit dishearteningly – authoritarian governments have done better than democratic governments at controlling COVID-19. This makes sense given that authoritarian governments have more experience delivering and implementing top-down edicts, and their populations are generally more compliant. China and the U.S. have each fared as their respective government system would suggest.

Vaccinations roll on

Over 658 million vaccine shots have now been delivered globally, spanning 151 countries. Israel continues to lead, and has consequently slashed its infections and fatalities (see next chart). That said, it remains peculiar that the country’s infections have fallen by more than its fatalities.

COVID-19 cases and deaths in Israel

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

The hierarchy of top-vaccinating countries remains largely unchanged (see next table). Among large nations, the U.K. and U.S. are doing very well. Europe lags somewhat, followed by Canada.

COVID-19 global vaccine ranking

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

Notably, while Canada lags in the vaccination standings, its pace of inoculation is now materially faster than Europe, arguing that it should soon surpass the region in cumulative doses per capita (see next chart). It will be interesting to see whether the European Union (E.U.) then begins to restrict vaccine exports to Canada, much as it has limited Australia.

Coronavirus vaccine daily doses administered

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

Vaccine supply

Vaccine supplies are still constrained. Nevertheless, most of the vaccine production news over the past several months has been positive. For example, the original manufacturers are producing more than initially expected, while more recently new partnerships are further expanding the supply.

Alas, there is a new tick in the opposite column: Johnson and Johnson reported that a factory error had compromised 15 million doses of its one-shot vaccine – a significant setback, albeit for a vaccine not yet in widespread distribution.

Bloomberg now estimates that – at the current pace – the entire world is roughly 21 months from being vaccinated. We would argue that most of the world will be vaccinated well before this, but the logistical challenge of reaching the most remote areas and most elusive people could well make their prognosis correct.

Vaccine demand

As expected, Pfizer tests have concluded that the company’s vaccine is safe for children aged 12-15, expanding the set of people eligible for inoculation. Remarkably, the vaccine was found to be 100% effective against symptomatic disease.

Now, tests have begun on those aged six months to 11 years in an effort to close the last age-based eligibility gap. There is every reason to think this will be successful: the vaccine appears to work better and better as recipients get younger, and non-COVID-19 vaccines are primarily administered to young children.

Until recently, the expectation was that children might start to be inoculated in the fall. But it now appears that this could happen sooner. Further, it would be highly logical to make a significant push before the start of the next school year.

Vaccine efficacy

New studies on vaccine efficacy are spilling forth from the U.K. – a leader in the vaccine rollout. The studies find that the beleaguered AstraZeneca vaccine (with its lower clinical efficacy rate and concerns about a blood disorder primarily affecting younger women) is actually proving as effective as the much-heralded Pfizer vaccine in real-world conditions. One study finds that a single dose of the AstraZeneca vaccine is as effective at protecting those aged 70-plus against symptomatic infection as one dose of Pfizer. Another study finds that two doses of either vaccine provide the same amount of protection against hospitalization for all age groups.

Separately, Pfizer reports that its vaccine works at an effectiveness rate of 91% six months after inoculation – slightly shy of the rate achieved in clinical trials, but still excellent. It also claims that its vaccine was 100% effective at eliminating serious illness among trial participants in South Africa (though this is distinct from preventing any illness altogether).

Vaccine diplomacy

As vaccine supply becomes slightly less pinched, vaccine diplomacy is building. China and Russia have already been busy currying favour by promising doses to developing nations. Now, the U.S., Japan, India and Australia have a plan to provide one billion doses of the Johnson & Johnson vaccine to Southeast Asian nations in an effort to counter China’s influence.

Positive economic developments

U.S. data impresses

The upside economic surprises continue to roll along in the U.S, with the latest Institute for Supply Management (ISM) and employment numbers both exceeding expectations.

Incredibly, the ISM Manufacturing index for March surged to its strongest level since 1983. The reading of 64.7 was well ahead of market expectations for 61.3 and the prior (very robust) reading of 60.8. Of 18 manufacturing industries, 17 reported growth. Manufacturing remains a source of particular strength, helping to offset COVID-related restrictions in some service sectors.

Supporting factors include:

• the natural buoyancy of the U.S. economy as it recovers from the worst of the pandemic
• significant easing of social distancing restrictions
• the enormous Biden stimulus package
• a rebound after weather-related disruptions in February.

Some of these supports will persist into April and beyond. Others, such as the weather-related factor, will fade somewhat, arguing that growth may not be quite so superlative in future months.

U.S. payrolls for March landed at a remarkable 916,000 net new jobs, with a further 156,000 in upward revisions for earlier months. The U.S. unemployment rate is now just 6.0%.

The U.S. labour force participation rate is still nearly two percentage points below normal – signaling that the true unemployment rate is higher than the official measure captures. However, a more holistic approach nevertheless argues that the simple headline numbers cited above do a fairly good job of capturing the overall state of the labour market. The Kansas City Fed Labor Market Conditions Indicator combines a wide range of labour market factors, including:

• a broader measure of the unemployment rate
• job availability
• the labour force participation rate
• job cuts and 20 other indicators.

Unexpectedly, it actually finds that the simple unemployment rate comes fairly close to reflecting the state of labour market progress back toward normal (see next chart).

U.S. labour market conditions have improved but still below normal

For Kansas City Fed indicator (Feb 2021), a positive (negative) value indicates that labour market conditions are above (below) long-run average. U.S. unemployment rate (Feb 2021) normalized using historical data since 1992. Source: Haver Analytics, RBC GAM

Canadian economy keeps chugging along

The Canadian economy officially grew by 0.7% in January, even better than the original flash estimate. The January performance is remarkable in that the country was actively locked down at the time, and indeed retail sales retreated in January. But big gains from industrial sectors provided a more than full offset.

The advance estimate for February argues for a further brisk 0.5% gain, with leading indicators for March arguing that the economy probably grew in that month, too. In turn, first quarter Canadian GDP probably grew by nearly 6% annualized, well ahead of initial forecasts.

Of course, the new set of restrictions being imposed across much of the country in late March and April should temper growth for a period of time thereafter. Nevertheless, that should prove temporary. Perhaps the key point is that the Canadian economy through the end of the first quarter is probably now just 2% smaller than it was before the onset of the pandemic.

Wage pressures

While the North American economy is certainly normalizing quickly, wage pressure is less apparent than popularly imagined. Aggregate wage growth has been artificially inflated for compositional reasons: lower wage workers disproportionately lost their jobs, increasing the average worker wage without actually raising any one worker’s individual salary. This distortion will unwind as the pandemic fades.

Meanwhile, sector-level decomposition finds that – even in red-hot sectors like manufacturing and minimally affected sectors like finance -- the rate of wage growth has actually decelerated across the pandemic (see next chart). While it is undeniable that some sectors are already operating at their usual production capacity and that this can theoretically generate inflation pressures, in practice the extremely flat Phillips Curve that prevailed over the past decade still appears to be in effect.

Wage growth has declined during pandemic when controlled for sector

As of Feb 2021. 12-month moving average of median wage growth. Source: Federal Reserve Bank of Atlanta, Haver Analytics, RBC GAM

Europe’s economic underperformance

Europe has suffered a particularly challenging pandemic from an economic standpoint. This can be seen in any number of metrics. For example, consider the region’s service sector Purchasing Managers’ Index (PMI) – a good proxy for sectors most affected by pandemic restrictions. Europe has significantly underperformed, remaining well short of the U.S. equivalent (see next chart). Technically, the U.S. readings are consistent with growth in recent months, while the European readings are associated with a slight retreat.

E.U. has performed worse than U.S. across pandemic

As of Mar 2021. Source: Macrobond, RBC GAM

This differential is visible in other important data series. For instance, Eurozone retail sales are significantly underperforming the U.S. In fact, the numbers are now actively diverging in opposite directions (see next chart).

Divergence in recent E.U. and U.S. retail sales

As of Mar 2021. Source: Macrobond, RBC GAM

Perhaps the one key exception is industrial production, which has exhibited a very similar trend between the two regions (see next chart).

U.S. vs. E.U. industrial production

As of Mar 2021. Source: Macrobond, RBC GAM

Unfortunately, it isn’t possible to compare the labour markets of the two regions. The U.S. has leaned more heavily on its unemployment insurance system to tide over surplus labour, while the Eurozone has tended to subsidize companies to keep idled workers on payroll.

Several things appear to have conspired to induce the Eurozone’s economic underperformance:

1. Most obviously, Eurozone social distancing rules have been stricter than in the U.S. In exchange, the Eurozone has recorded fewer infections or fatalities per capita (though arguably the number is not as low as one would have hoped).
2. The Eurozone has delivered less fiscal stimulus, hamstrung by already high public debt loads in some cases, strict budgetary rules and coordination problems (and legal challenges!) while attempting to implement the planned E.U. recovery fund.
3. The Eurozone’s vaccine rollout has been slow, permitting a significant third wave that has necessitated further economic restrictions.
4. The European economy is heavily dependent on tourism. This sector has been especially limited during the pandemic, and the third wave has arrived at an inopportune moment as holiday season approaches.
5. The European economy may be fundamentally less dynamic – less capable of nimbly responding to new shocks, including the pandemic.
6. Europe is more densely populated, older and relies to a greater extent on public transit than the U.S.

None of these factors appears set to change radically over the coming several months. As such, we budget for the Eurozone economy to continue underperforming the U.S. It should begin to match the U.S. growth rate toward the end of the year as the pandemic fades, but the earlier underperformance will still leave it well behind in terms of its recovery back to pre-pandemic levels of output.

Untangling India

India has been prominently affected by the pandemic. The country has officially recorded the third highest number of COVID-19 infections since the beginning of the pandemic, trailing only the U.S. and Brazil. India’s dense population had made it particularly vulnerable to transmission. India is now suffering a significant new wave of infections (see next chart).

COVID-19 cases and deaths in India

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

However, India has not done as badly as it first appears. The country has the second largest population in the world, and on a population-adjusted basis, it has done quite well compared to many other nations. It has recorded only a tenth as many cumulative recorded cases per capita as the U.S. and significantly less than European nations or Canada (see next chart).

Cumulative COVID-19 cases per capita

As of 03/30/2021. Cumulative cases per million residents. Source: WHO, Macrobond, RBC GAM

Obvious advantages include India’s young population, low rate of obesity, warm climate, and perhaps also its government’s unusually vigorous response by emerging-market (EM) standards. Last spring India imposed among the most aggressive lockdowns for EM countries (see next chart).

Severity of lockdown by emerging market

Based on latest data available as of 03/27/2021. Deviation from baseline, normalised to U.S. and smoothed with a 7-day moving average. Source: Google, University of Oxford, Macrobond, RBC GAM

But India’s seeming success is subject to some debate. The country may have undercounted its true caseload more significantly than many others. Whereas India has officially recorded 12 million COVID-19 infections, seroprevalence studies argue that more like 268 million people may actually have been infected (nearly 20% of the population). This is far less positive. It puts India in rough alignment with the true U.S. infection experience (based on American seroprevalence studies).

Despite this, Indian fatalities are running significantly lower than in the U.S. These peaked at around 1,100 COVID-19 deaths per day, versus a peak of more than 3,000 in the U.S. – even though the U.S. population is less than a quarter of the size of India’s. In addition to India’s young population, a further explanation is that its citizens may enjoy some cross-immunity from other coronaviruses.

But India may have undercounted its COVID-19 related deaths to a greater extent than the U.S. as well. This is hard to nail down. India does not formally publish its death statistics until several years after the year has been completed – and these numbers are needed to calculate “excess deaths”. Patchier data is available at the state and municipal level, but is contradictory. The state of Kerala reported fewer deaths than usual in 2020, while the city of Mumbai reported 22% more deaths than normal. These may still underestimate the true fatality rate as only 86% of the country’s deaths normally go registered, and that proportion is thought to have declined during the pandemic. One focused study argues that fatalities may have doubled during the first wave – an enormous jump.

As such, it is hard to say much that is coherent about India. It has arguably experienced a large number of infections on a per capita basis, though an uncertain number of deaths. It is certainly now experiencing another major wave of infections, arguing that it has not yet reached herd immunity (though some argue certain of its cities may already be there).

Because India locked down more than did the bulk of EM nations, it suffered a sharper economic contraction than most in 2020 of -8%. This is a 14 percentage point undershoot relative to the country’s normal growth rate. While this year should manage extraordinary growth of more than 10%, that still leaves the country well short of its full potential going into 2022 and likely beyond. That constitutes an economic underperformance relative to its peers.

At the same time, India is playing an outsized role in global vaccination efforts. It is a major hub for vaccine production, primarily producing for other EM countries. This has given it some preferential access to vaccines for its own population, putting it in better shape than nearly every other EM country on a vaccine per capita basis, despite its enormous population.

Non-COVID deaths

A proper understanding of the human consequences of the pandemic requires not just the number of officially recorded COVID-19 deaths, but a sense for how mortality has differed from normal. Ideally, this would pick up deaths due to COVID-19 that were misattributed. It would also reflect the extent to which other causes of death rose or fell during the pandemic. We discussed these “excess deaths” for the U.S. in our January 12 edition (see the bottom of the “Virus Trends” section). After factoring in deaths that are officially unrelated to COVID-19 but clearly ebb and flow with each wave (probably mostly unreported cases), it appears that non-COVID deaths have been approximately in line with normal.

Certainly there have been and will be additional deaths due to missed diagnoses and forgone treatment of other ailments. One might expect more deaths from depression, and possibly even from additional obesity as well. Some of these may arrive with a lag.

Conversely, theory would suggest fewer auto deaths due to less commuting, and far fewer flu deaths due to better social distancing.

Indeed, several of these expectations are now being confirmed:

• The Quebec government estimates that 4,119 people with cancer went undiagnosed due to fewer screening programs. One cancer centre reported a 22% decline in new patients and an 11% decline in cancer surgeries.
• Overdose deaths are also substantially higher. More than 85,000 Americans died of drug overdose in the year through August 2020. That’s up from 68,000 over the prior 12 months. The interpretation is complicated by the fact that overdose deaths were already rising significantly, but the leap is well beyond the prior trend. These extra 17,000 deaths are small relative to the 553,000 deaths formally attributed to COVID-19 in the U.S. (and what might have been several times that death rate had restrictions not been imposed). But the numbers are still staggering.
• At the happy end of the spectrum, flu deaths are almost nil, versus 12,000 to 61,000 American deaths during a normal flu season. In Canada, there have been just 55 flu cases captured this season, versus over 20,000 in a normal year.

What has been surprising – albeit with the caveat that the results are still only tentative – is that some predictions of altered mortality patterns due to COVID-19 are not actually happening:

• Despite emptier roads and 13% fewer miles driven, U.S. road deaths rose by 8% in 2020 relative to the year before. Experts believe vehicles have been travelling more rapidly than normal, and possibly more recklessly.
• While feelings of isolation, depression and anxiety are elevated, and although calls to mental health hotlines are sharply higher than normal, the actual number of suicides in 2020 fell by a significant 5.6% in the U.S. It should be noted that the trend has been slightly negative for several years, but not to this extent. The pattern appears to be similar in Canada, although not all provinces have reported their 2020 figures yet. British Columbia announced a remarkable 37% decline in suicides.

-With contributions from Vivien Lee and Sean Swift