Hello, and welcome to our latest video MacroMemo. This week we’ll discuss a number of subjects of interest.

Certainly we’ll begin with the COVID-19 figures, including the third viral wave that is now sweeping across much of the world. We’ll talk though as well about some promising developments with regard to the third wave, and so there is a bit of a balance to that discussion.

We’ll certainly acknowledge some tightening restrictions in several jurisdictions in terms of trying to limit the spread of COVID-19 going forward. And we’ll also celebrate ongoing vaccination progress and successes as well.

We’ll pivot from there into the economic data, and we’ve seen some very positive economic data, particularly for North America. However, we’ll contrast that to some economic weakness that persists and really has been the story throughout the pandemic in Europe. And lastly we’ll dig a little bit into India, which has been one of the more prominently affected emerging market countries.

Let’s jump right in. And we’ll begin with this third viral wave. And unfortunately it’s still happening. We’re now several weeks into it. We are seeing globally rising numbers of infections, rising fatalities as well, and so it’s a most unfortunate situation. The driver of it does seem to be predominantly these new virus variants that are more contagious.

And so, for instance, looking at Canada, we can say just in the last week we’ve seen a 71% increase in the number of variant cases. In the U.S. it’s not quite as fast, but it’s a 47% increase over the last week. And so these are huge growth rates that essentially say we’re still seeing a massive expansion of the variants, and they are in the process of taking over, and existing social distancing rules have not been sufficient to control these new variants. And so this is the problem and the root of the third wave.

In the Canadian context now, we are seeing infections rising quite sharply, in fact about as quickly as we’ve seen across any of the waves. British Columbia is now at a new record in terms of its daily cases. Ontario is maybe two weeks away from setting records as well. So this is a concerning wave. In the U.S., not soaring yet though. And so vaccinations going well there, and that’s been a very helpful thing. We think there’s a higher level of natural immunity in the population, so that limits the spread to some extent as well. But we’re still budgeting for a U.S. wave also, just based on the extent to which those variants are spreading in the U.S. too.

Maybe the twist in the U.S. is whereas a lot of other jurisdictions are shutting down and imposing new economic restrictions, we’re not expecting a significant policy response in the U.S. They’ll probably let this burn out on its own and get to a point where vaccines have quelled the wave. And so we’re not looking for economic damage there.

I will say as much as this third wave is pretty awful stuff, there are a few promising developments beneath the surface. And so one would be that the UK continues to do well despite having been exposed first, in fact, to the UK variant. And so it’s possible to control this. In fact, the UK infection numbers continue to fall to very low levels indeed. I should note, the UK is also doing well from a vaccination perspective, which is part of the story.

I can say that, as well, it looks tentatively as though the third wave might be already starting to peak in parts of Europe. And so we’ve seen what looks to be a fairly steady decline now for about a week in Italy in terms of cases. Possibly a bit of a turn in France and Germany, though it’s also possible that’s just a Easter underreporting lull and could yet revert, and so we’ll see if that sticks. But some European countries seem to be getting a little bit better. And that does make sense. They have imposed fairly aggressive lockdowns over the last few weeks.

And so I suppose the story is one in which we’re continuing to assume that the third wave, while very serious, is ultimately less long-lasting than some of the earlier waves, and hopefully also—even if the infection numbers do set records—hopefully also less consequential from a fatality or a hospitalization perspective, given the targeted vaccinations that have been taking place.

In terms of lockdowns, and so this is governments imposing stricter rules, actually globally we’re still seeing more easing of rules than tightening. That’s still the global trend. However, it seems to us at the national level that we have seen a pretty significant pivot, particularly in the last week or two. It’s most obvious in Europe, and perhaps starting to pay dividends in Europe as mentioned a moment ago. Canada now tightening quite a lot as well. And so we are seeing a shift there.

There is going to be some economic damage when you impose additional restrictions on certain sectors and on behaviour more generally. But I’ll say this, we’re assuming that the third wave economic damage is a little bit less than the second wave. And recall the second wave damage was in turn much less than the first wave, and indeed even less than we’d assumed. And we were feeling pretty optimistic when we were making our assumptions.

. And the reason we feel fairly good about the third wave economic damage, the idea that it’s not going to be that great, not so much because we’re expecting fewer restrictions. In fact, we think the restrictions will be roughly comparable to the second wave. Maybe a little different and a bit better targeted as policy makers learn lessons from one wave to the next, but ultimately, pretty similar in terms of the aggregate.

But instead, just because businesses and workers and consumers and so on are just getting better at working their way around these things and adjusting to them, and so in the end we think the economic damage probably pretty limited. Probably not to the point of countries shrinking, just to the point of countries growing a little bit less than you would have otherwise expected. So a tolerable thing.

And I should say, when we were last updating our forecasting really at the end of 2020, we had already budgeted for a third wave. It seemed to us that the variants were going to create a third wave. And so that’s already pretty well embedded in our fairly optimistic forecasts for 2021.

On the subject of vaccinations, well still going well; not a lot of new, new news to report here. We’re saying an active acceleration of vaccinations as well. Israel still leading. The UK and U.S. doing very well by big country, wealthy country standards. The UK is now up to 54 doses per 100 people. The U.S. is at 48. Recall you need two doses per person for most of the vaccines, though.

The eurozone lagging somewhat. It’s around 18 doses per 100 people. Canada is around 17. And from a Canadian perspective, I can say, when you look at the pace at which the inoculations are now happening as opposed to the total number of inoculations that have occurred, Canada has accelerated very significantly, more than most countries, and actually is now inoculating a larger fraction of its population each day than Europe. And so actually we think that Canada will catch up to and then surpass Europe over the next few weeks in terms of the inoculation figures per capita.

Turning now to the economic data. Really seeing very strong data, particularly in North America. There was an absolutely bonkers ISM manufacturing report for the month of March. It reached 64.7, which is about as good as we’d ever seen it. It was a 60 reading the prior month and that was extraordinarily good. And so we’re seeing enormous optimism and growth out of that U.S. manufacturing sector, and to an extent, out of the global manufacturing sector as well.

Maybe one point of caution is just that historically, as much as a high number is consistent with fast growth and optimism and so on, historically, when you’ve had a high number, there’s been less room for stocks and risk assets to advance significantly from there, just because the good stuff has already been happening and that’s often already priced in. And so historically, a high ISM number can actually signal a time to be a bit more cautious from an investing perspective. So do be aware of that. I still feel pretty good about the investing outlook, but that’s one point of slight caution, despite the strength that it’s issuing right now.

I will say this, though, that normally, the reason for that is because it’s hard to sustain such high levels. And maybe those levels can be sustained a bit longer this time just because there’s so much room to catch up from a growth perspective. You can afford to be overheating for a period of time without really running into trouble, at least that’s our thinking on the subject.

The other big U.S. economic number was the payrolls report also for March. And so almost a million new jobs added to the U.S. economy in March. The unemployment rate is now down to just 6%. And so, let the record show, sub 4% would be considered ideal, but that’s still a huge amount of progress from the mid-teens kind of level that prevailed in the spring of last year. The gains, a little bit artificial in part just because we know there were some weather problems the prior month and so there was some catch-up hiring. But nevertheless, we think, consistent with organically quite a lot of demand for workers, and to an extent, that should persist into the next few months.

It’s been very similar, by the way, in Canada. The Canadian GDP number for January was officially released. It was great for February. Has been tentatively released; was very good for March. We don’t have a formal number yet, but it looks to us as though it was probably pretty good as well. And so the Canadian economy moving nicely also.

A word on inflation, and certainly inflation fear is out there, and some inflation upside risk. We’ve come to think of it as, in the very, very short run, the next few months, we are going to see high inflation. Over the next few years, we might see a little bit higher than the target number, maybe 2 to 2.5%, but not big trouble. And over the long run, frankly, the risk is still less inflation as opposed to more. And so that’s more or less how we feel about inflation.

But the one source of concern is that when you look at wage growth data, it looks like it’s fairly hot. And might that generate inflation pressures of its own, actually, it’s not as hot as it looks. And so first of all, a lot of the people who lost their jobs were lower-waged workers, and that means that the average wage has gone up just because those people aren’t in the equation. No one got a wage hike, and yet you would have seen a higher average wage. And so that’s a distortion that will go away with time.

The other one is when you dig into the sector-level wages and you look at median wages to get an even more realistic sense of things. And what you find is that even in sectors that have done fairly well through the pandemic, including manufacturing, including finance, actually the wage growth has been slowing a little bit over the last year as opposed to picking up. So we don’t think wage pressures are boiling over and about to create significant inflation through that channel at least.

Let’s talk about Europe for a moment in the context of the economy. And so the European economy has significantly underperformed. And Europe really hasn’t fully partaken in the sort of recovery that North America has been enjoying, in particular since the turn of the year. And the one figure, in particular, can really drive that home and so you look at U.S. retail sales versus pre-pandemic levels now 15% higher than before the pandemic. You look at European Union retail sales since before the pandemic, they’re down 5%. That’s a 20 percentage point divergence. Certainly you can explain some of that via fiscal stimulus in the U.S. and these other things, but the bottom line here is one in which the European economy has not done as well.

It’s done significantly worse because of tighter lockdowns. It’s done worse because of less stimulus and some coordination problems getting all of those countries to agree on stimulus measures. They’ve been slower to vaccinate than the U.S. and the UK. It’s a tourism-centric economy that’s been hurt perhaps disproportionately. Maybe in general, less dynamic businesses, and more densely populated, older, public-transit reliant. All things that are tricky during a pandemic. And so it makes sense the European economy has underperformed.

Unfortunately, they’ve had to lock down again, and so we’re going to see some further underperformance over the next few months. They should, at some point, get to play catchup. I would say over the second half of this year we should start to see significantly better economic figures out of them simply because we expect the pandemic to be in serious retreat at that point in time. Eventually, they should be able to catch all the way up but it’s certainly been a worse experience so far. It’s not clear to me that they’re on the cusp of starting to outperform quite yet. That’s probably still several months away.

Let me finish just with a few thoughts on India. And so India has been a particularly prominent country through the pandemic. It’s had the third most infections on a cumulative basis and so certainly has been in the mix. It’s suffering, by the way, rising infection numbers again right now, but let’s put this into context. And so for instance, India has a huge population. So when you adjust the population or the infections per capita, it doesn’t look nearly as high. However, you can’t, unfortunately, stop there because there’s one extra adjustment which is it looks like India very seriously undercounted its infections.

Everyone did that, but India maybe more than the average. And so when you look at, for instance, blood tests that look into who has antibodies, conceivably about 20% of India was actually infected after all, which is pretty similar to the U.S. So in the end, you can say India was quite seriously hit by COVID, even adjusting for the population. It’s very hard to make any kind of coherent statement about fatalities. It looks better than the U.S. per capita but there seems to be a lot of undercounting structurally and specific to COVID-19 and so hard to gauge. But India, very much affected by the pandemic.

And then economically it has been hit quite hard. Its economy has done worse than most. In fact, it underperformed by 14 percentage points of growth last year. Would have normally grown at maybe 6%, and instead it shrank by more like 8%. And so huge underperformance. It’s unlikely to be clawed back in the near term, and so India is still some distance away from getting back to its prior economic peak.

We think India has great medium- and long-run structural prospects. It’s becoming a manufacturing powerhouse. It’s getting wealthier. Its infrastructure has gotten a lot better. It could be the next China in several regards, but it’s undeniable. It struggled through the pandemic and there’s still some hard work left to go for India on that front.

Okay. I’ll stop there and say thank you so much for tuning in. I hope you found some of that interesting and please consider tuning in again next time.