Hello and happy New Year.

My name is Eric Lascelles. I’m the Chief Economist for RBC Global Asset Management, here to share with you our latest video #MacroMemo. And we will cover a range of subjects.

We’ll talk certainly about some flattening COVID infection numbers, which is a welcome thing. On the other hand, we’ll talk about a new virus variant which seems to be more easily spread, which is certainly a problem. We will discuss progress on the vaccinations front, including how fast life might return to normal as that vaccination process unfolds. And we’ll also talk a little bit about vaccine developments and some recent approvals.

Of course, as an economist, I’d be remiss if we didn’t cover off economic trends as well, so we’ll talk about that. Also, a U.S. fiscal deal, and Brexit, a deal at the last possible moment. And so why don’t we jump in.

And to begin with, COVID-19, still very high numbers of infections and fatalities globally, but not actively rising. In fact, if anything, maybe coming off a little bit. Possibly holiday distortions are part of that, fewer people getting tested and so on. So this might be a false positive in part, but we do think there may be some legitimacy to it. We have seen countries quite seriously lock down, which should help to control the virus.

Similarly, historically, for instance, with the Spanish flu, you saw fall and spring waves, and not necessarily a winter wave. It’s possible there is some seasonal dynamic as well helping these numbers flatten out. But the bottom line is, the numbers are not deteriorating as badly as before in places like Europe and the U.S. and Canada as well.

The big, bad news on the COVID front, however, is a new variant. And so the UK has reported a new version of COVID-19, a mutation that seems to be transmitted 56% more easily than the original version. And so this is a problem. In fact, it has now become a very significant presence in the UK and helps to explain why that country is still seeing soaring infections per day.

South Africa has reported a similar variant. It arose independently but with the same kind of mutation, also creating problems there. And of course, the big fear is, as we begin to count cases of this variant in other parts of the world, including in the U.S. and Canada, that it could well become the dominant strain and just prove more difficult to control. So that’s the big challenge as it exists right now.

We are seeing vaccinations underway, though, and so this is the offset. This is meant to be one of the big themes of 2021, and so certainly a very positive thing that we’re now finally getting some vaccinations happening. I’ll admit, the actual rate of vaccination for the most part is somewhat undershooting initial hopes. And so for instance, the U.S. had wanted—probably over-optimistically—but had wanted 20 million vaccinations by the end of 2020. They got to 3 million. And when you look for where the failing came from, it was a mix of things. They only ever got 12 million vaccines or 12 million doses, and so they were never going to get to 20 million without 20 million doses. But equally, the very fact that they only inoculated 3 million people with 12 million doses means they were also struggling logistically to get this off the ground.

When we look now in early January and the percentage of populations in different parts of the world that have been inoculated, we can say the U.S. has now inoculated 1.3% of its population. The UK is at 1.4%. They’re some of the leaders. Canada, just 0.3%, so genuinely lagging behind for the moment. That’s the same level as Germany and China, by the way.

Israel easily besting everyone else, though, with 14% of its population already inoculated. And so I see various reasons being presented for this—a dense population is helpful, and quite a sophisticated electronic medical records system there. And so this is part of the reason. But I think at the root of it, though, you have to also say, they did clearly get more vaccines per capita than other countries, because other countries would be nowhere near 14% even if they’d used every single inoculation that they’d been given.

I should note, though, Israel now conceivably having to slow down. They’re starting to outpace their supply of vaccines. And so actually, one of our thoughts, despite the significant differences in the initial going, is I wouldn’t say we expect big differences in the timing of the achievement of herd immunity for different developed countries. Maybe a few months here or there, but for the most part, it seems to us that vaccine-makers intend to distribute this fairly equally across the countries that have submitted orders on a population-adjusted basis, loosely speaking.

And so to the extent Israel is leading and maybe places like Germany and Canada, and actually quite badly, France, are lagging, I do expect some convergence over time and herd immunity likely a summer kind of proposition, or at worst, a fall proposition. And so fewer differences over time and progress being made, as much as it’s been a bit of a slow start.

One thing to keep in mind here is that as much as the goal ultimately is herd immunity, a big enough fraction of the population being immune, that the virus just doesn’t gain traction and can’t spread widely, keep in mind, we should reap some benefits well before that herd immunity point. That might be a second-half-of-2021 proposition.

For instance, the first group of people broadly being inoculated tend to be the old and those quite vulnerable to COVID-19, to the extent that the average person dying of COVID-19 is more than 80 years old and the fraction of the population 80-plus is quite small. Even the fraction of the population 65-plus is only around 15% in the U.S. and similar for Canada. To the extent we focus on that group first, conceivably, the fatality rate could be falling quite significantly by February. And indeed, it might well find itself something like five times lower, since the great majority of deaths are in that vulnerable group, within the next couple of months, long before herd immunity is achieved.

The second round of people to be inoculated seems to be those who have trouble isolating, and so have jobs that are frontline in some context, or maybe have living arrangements that preclude proper social distancing. And that’s a bigger group and maybe a group that’s harder to precisely quantify and define, but to the extent that group then gets targeted, that’s when we should see the infection rate fall quite significantly.

And that still leaves a very significant, maybe the majority of the population still left to be inoculated, but keep in mind that last group, those are the young, the healthy, the people working remotely from home like me right now. We’re not necessarily the active spreaders and so we should see both fatalities and infection numbers down quite significantly before that last round of inoculations occur.

Don’t get me wrong. The last round matters. It will affect quite a large fraction of the population. It will allow a very significant economic reopening. So from an economic standpoint, maybe that’s the most important group. But ultimately, we should see significant progress well before the vaccination process is complete. I suppose that’s the main point. In terms of, just briefly, vaccine developments. Oxford or the AstraZeneca-Oxford vaccine has now received its first set of approvals, including from the UK. So that’s the third big Western world vaccine that is now being deployed. China has been using two vaccines on a emergency basis, but it’s now approved one of them for broader commercial usage. And China has big plans. They hope to inoculate 50 million people over the next month. Timing is tight for them. Chinese New Year is early February. They’d like to go a long way in this process and to allow some amount of normal celebrations. India has also approved one of its own vaccines for internal use.

Maybe the other vaccine comment is we’ve all been a little bit nervous that we could see vaccine nationalism; countries refusing perhaps to export vaccines and preferring to keep them for themselves. It seems to be seeing a little bit of that right now. India is a big vaccine-maker globally and has been commissioned to make 1 billion of one variety of vaccine, and they’ve recently announced they will not be exporting them for the next several months. They will keep those for their own population and only then export. And so to the extent those vaccines were meant for the developing world, it seems as though much of the developing world will now have to wait a few months.

And so we’ll need to keep watching if other countries do similar things. So far, it doesn’t seem to me that’s the case. We’ve seen vaccines flowing across borders without these kind of decisions elsewhere.

From an economic standpoint, and that’s what I am, an economist, well, we’ve seen the European economy do less badly than we feared. They’ve locked down quite significantly. There has been some economic damage. We do still think that Q4 GDP might be a little bit negative in the Eurozone, but ultimately, the data we’re getting isn’t that bad. And so the European Services Purchasing Manager Index, for instance, bounced in December. We didn’t think it would bounce until the new year, and so that’s an earlier partial recovery than we thought. And the tentative trough we’ve seen so far, which was November, really wasn’t all that deep. It was much, much milder than in the spring.

And so, this is all consistent with our thinking, but nevertheless, I guess just to reassert a view, the damage from this latest wave and the lockdowns associated with them appear set to be something like an order of magnitude less than in the spring; 10 times less. And so still damage but quite a lot more limited, if that makes sense.

Just continuing on the economic front for a moment. We’ve been tracking U.S. and Canadian data, of course, as well. Seeing a little bit of weakness there, and we expect that because we have seen some lockdowns in North America as well. A bit of damage in the U.S.-leading indicators. Some of the traditional ones, U.S. personal income, for instance, has been falling for a few months, and personal spending fell in November.

In general, though, less notably, the damage less notable than in Europe, as we’ve been forecasting. Canada holding up fairly well. Keep in mind, the U.S. also challenged by some fading fiscal support up until quite recently. But ultimately, we do expect a little bit of economic pain there as well.

One big subject of recent note is a major U.S. fiscal package. And so this had long been sought. There have been efforts since last summer to strike a deal, but unsuccessful until recently. And then on December 27th, a deal was struck, and a deal was passed. And it’s a fairly big one. It’s a $900 billion program. Granted, not the trillions of dollars that had been discussed at one point, but that’s still very large by any reasonable measure.

And its timing is quite important because we do see some evidence of U.S. economic weakness, and we have seen fiscal drag emerge in the U.S. since last summer as prior support and programs had begun to fade.

In terms of some of the headline initiatives within this package, there’s a $600 cheque for every eligible American, though it is income tested. Unemployment insurance payments are boosted by $300 additional per week, as they had been earlier in the year, and that then had stopped. Quite a lot of support for businesses in terms of forgivable loans, in terms of supports for paycheques of workers as well. And then, also funding for vaccines, for testing and tracing, and for affected institutions, and so schools and daycares and airlines and rail service, postal service and so on. Quite a lot of money; billions going to each of those groups as well.

And as an economist, I could say, ultimately, this package is worth about 4% of GDP. That’s a pretty big stimulus program. It’s meant to be implemented quite quickly. Most of the money should flow out the door over the next three or four months. And so it’s a January-to-April kind of proposition, and so that means it is a lot of money over a fairly short period of time. And it’s fairly well-timed in the sense that this money will fill a hole at a time when the virus numbers are challenging, when the economic lockdowns are significant. And if all goes well, we may get to April and the vaccination process should be well, well underway, and we might be in a position where the economy is starting to revive more naturally by itself. Wouldn’t surprise me if there was another round of fiscal support coming at some point under Biden. That depends in part on the Senate. But ultimately, this is a good starting point and a fairly significant effort, and it does fill an important hole.

I should mention as well, the U.S. Senate by-election, as I record this today, I probably can’t say much of great interest because as you listen, it likely will have already happened. But it’s a close one, and at this point in time, if the Democrats were to win both of those two, they would then take the Senate. It would be a blue wave with Democrats in charge of the House and the Senate and the White House as of January 20th at least. And arguably, that would be a slight negative from a market perspective. It’d be a risk of higher taxes and more regulation, maybe offset by more fiscal support. But we do view it as potentially being a mild stock market negative.

And let me finish with a comment on Brexit. And so, as with U.S. fiscal support, a Brexit deal has now been struck at the last moment. It was a Christmas Eve deal and then passed by the UK Parliament subsequently. Still pending in European parliaments but it should ultimately make its way through. And it is that shallow, narrow free trade agreement that was expected by us in recent months. It’s a goods-only deal. No tariffs on goods. Nothing really there for services. And so that’s an issue for financial services and for other services as well that will have to be worked on over the coming months and years.

So far, surprisingly few problems at borders with new custom checks, although there have been a few. Some economic damage, though, should be expected. And so Citibank, for instance, predicting a 2% hit to UK GDP in 2021. I might say a little bit less than that, but nevertheless, some damage is reasonable. The UK Treasury predicting nearly a 7% hit to the economy spread out over 15 years. And so not a cataclysmic hit but nevertheless a real drag on the British economy compared to what might otherwise have been.

And so to conclude from me, I would say, a real mix of positives and negatives. I would focus probably more on the positives at this point in time, just the progress on vaccinations being a major thing and conceivably quite substantially changing the tenor of the virus and of the pandemic over the coming few months. And so ultimately, more positive than negative, but quite mixed.

And with that, I’ll say thank you so much for listening and tuning in. I wish you well with your investing, and please consider tuning in again next time. Thanks so much.