Forecasting Growth Amid Covid’s Fourth Wave

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Avery Shenfeld

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Avery Shenfeld, chief economist at CIBC.

We’ve clearly seen the bond market take its own judgment on the Delta issue, and in effect downgrade the economic outlook. We saw that over the course of particularly in July and early August when bond yields came down as a result of that threat. And there’s no doubt that the threat of Delta is going to cause a little bit of a disruption to the path of economic recovery. We’ve seen airline stocks, for example, give up some ground. We’ve seen some airlines, in fact, report that bookings have slowed a bit as of mid-August, a sign that perhaps there’s a little more caution among Americans, and in fact in Europe as well, in terms of people deciding how much they’re willing to get out there in the economy.

But I think it’s too early to get too pessimistic on how big an economic impact Delta will have. For one, in countries that have seen huge spikes in cases but also have high take-up of vaccines — and I’m thinking in particular of the Netherlands and the U.K. — what we’ve seen is indeed that those vaccines have not prevented the upswing in cases. What they have done is prevented a material upswing in deaths. And so, ultimately, we think that consumers will be a little less worried about taking some chances with being infected, given that the severity of those infections seems to be much more contained given the vaccinations. And that’s particularly going to be a benefit to Canada where the vaccination rate is quite high.

The second point I’d make is that I think businesses, governments and even individuals are going to school on the lessons learned both in prior waves and in this most recent wave, in terms of doing things that can try to mitigate both the climb of Delta and the severity without imposing huge costs on the economy. So, businesses, for example, in the U.S. and as well as educational institutions are starting to require proof of vaccination for certain indoor activities. We’ve seen New York City adopt the same approach. In Canada, Quebec has taken that step. Other jurisdictions are certainly looking at it. But even if that doesn’t happen, should it be it’s deemed essential, we’ll see institutions taking steps on their own. And most recently we saw the Winnipeg Jets say, “We’re happy to have a crowded arena, but please show your proof of vaccination.”

And what that can do is it can leave open the economy for the vast majority of Canadians who are already vaccinated and indeed the majority of Americans who are vaccinated, and impose some restrictions on others but also encourage a higher vaccination rate, which will have a payoff down the road.

And one of the side benefits of this latest wave, if you can call them benefits, is that we are seeing some of the people who have been most recalcitrant about getting that vaccine step up and go get one, both because they’re seeing what’s happening to the unvaccinated population, but they’re also seeing some restrictions being imposed on their activities that they’d like to get around by showing their own proof of vaccination.

So, all told, while we do think that in Canada, for example, the third quarter growth rate will be quite strong, the fourth quarter perhaps not quite as strong because of this latest wave, we still see the economy over the next six quarters performing quite well. And therefore, we think that capital markets will not end up being that threatened by Delta. That could mean some further upside for equities over time, but also should mean that bond yields drift back up again as the market realizes that the dawn of Delta isn’t necessarily the end of the recovery path for the global economy.