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by  Eric Lascelles Jul 7, 2020

RBC GAM Chief Economist Eric Lascelles notes that the pandemic continues to show its force. Outbreaks within the United States and the emerging markets – along with an uptick in Japan – are causes for concern. What does this mean for the economic recovery?

Watch time: 11 minutes 58 seconds

View transcript

Hello and welcome. My name is Eric Lascelles. I’m the Chief Economist at RBC Global Asset Management. Welcome to our weekly MacroMemo.

Here with you, as usual, some COVID-19 thoughts, but also a few other things with a macro bent. But, of course, starting on the virus front, we can say alas that at the global level the virus count is still rising. We’re getting around 200,000 new cases per day and indeed we’re now up to 11 million cumulatively since this all began back in December/January.

Still a silver lining in the sense that the global fatality figures going more sideways. Now that’s not ideal, they had been falling up until not too long ago, but still going sideways, not going up. And so we think the gap in terms of rising infections versus flat fatality can be explained by three things.

One is more testing. So capturing more infections, not just seeing them. Younger people getting infected, and so younger people having a better outcome on average. And then similarly, better medical care. And so we’re having some drugs developed that reduce the fatality rate, but equally just a better and more consistent quality of care. And lessons learned in terms of delaying putting people on ventilators, but putting them on oxygen quite quickly and that sort of thing.

And so at the grand level, at the global level not seeing a great trajectory overall though. When we look at the emerging market/developed market split, for a while we were able to say that emerging markets were running into significant trouble but developed countries weren’t. Now unfortunately both sets of figures are getting worse.

And so many prominent emerging market countries like Brazil and India, Mexico, and others still encountering very high numbers, and in many cases still a rising number of infections. Much of the developed world looking fairly good. And I should say Canada, for instance, still quite a tame virus count. The UK; similar prognosis, as with much of continental Europe.

However, the US does have a problem. We are getting around 50,000 new cases per day in the US, which certainly isn’t desirable. And as of a few weeks ago we could say that a minority of US states were suffering a rising virus count in terms of their daily infection rate, unfortunately that’s now the majority of states. In fact more than 40 US states are suffering a transmission rate higher than one. Meaning that the virus is actively accelerating, as opposed to retreating. And so not a happy situation. We’re not convinced the number stays quite that high for long, but it’s fair to say there is a very significant fraction of US states running into trouble, and we’ll pivot around to what’s being done about that a little bit later.

Let me talk about the economy. And on the economic side, well it depends what data you’re looking at. And so if we focus in on the month of June, which is now just finished as we record this, for the most part we had some pretty good looking economic data in June.

In the US for instance, 4.8 million jobs were created, which was notably higher than expected. You tack that on to the job creation in May and about a third of the jobs that were lost in March and April have since been recovered and that’s pretty good. And so some positives there.

We see some of the ISM indicators, which are considered classic leading indicators, having moved higher above the important 50 threshold. Both for manufacturing and nonmanufacturing sectors. And so seeing signs of a normalization there as well. And again, a bigger jump higher than had been expected by the consensus.

Now also looking at some of the doctor indicators. And so copper prices, the Korean stock market, the Baltic Dry Freight Index. And they’re called doctor indicators just because they’re viewed as having a PhD in economics. They do a good job of judging where the economy is going. And all three of those measures have staged something of a rebound. They’re not quite where they were before COVID-19 came along, but it’s nevertheless been quite significant. And so seeing broadly positive figures there as well.

However I must say, particularly in the US, we are now getting signs of faltering as we look into very late June and now into early July as well. And so looking at the most real-time and highest frequency of indicators, things like a survey of hours worked by the day. In fact, for different US states, looking at a measure of reported business sales, a measure that has come around since COVID-19 arrived. And those measures do show some retreat in the US over the last week or two. Not an aggressive one, but nevertheless what had been a fairly neat and tidy improvement is no longer actively improving.

And so we do think that the US economy is starting to stagnate, if not retreat slightly here. It’s not a second recession in the sense that it’s all lumped in with the first recession you might say, but nevertheless the US on something of a different trajectory and obviously that’s not good from an economic standpoint.

However I have to say, maybe it is from a virus perspective, because we think this reflects some businesses shutting down, some individuals behaving more cautiously, and that is the recipe, of course, to controlling this virus. And so there is some hope there as well.

And in fact I can say I’m feeling fairly good about the response now in the US. I wish it had all happened a month or two ago, when there simply was, to my view at least, too much reopening that happened. But nevertheless, we can see a response. And for instance, we weren’t sure at all that many of these US states would be willing to shut anything down again. And we are starting to get that.

We’ve got the likes of California closing indoor dining quite recently, and Arizona closing its gyms and bars, and notable changes in mask requirements and the like in many of these states, including North Carolina and Texas. Nevada now requiring masks, including gamblers on the Las Vegas strip.

And even places doing a fairly good job are either going slower or pausing, or in some cases delaying activity as well. New York State, first most adversely affected and most recently doing quite well, has for instance delayed reopening its malls, its movie theatres, and these sorts of things. And so we’re seeing state-level adjustments, I would say more than I’d hoped for, and so I’m happy about that.

We are also seeing quite a number of changes at the city level. So municipal governments and county governments as well making important changes. Nashville, and Austin, and Tampa, and many others, shutting down their economies at least partially or mandating masks. And so ideally, hopefully a recipe toward controlling this.

We are seeing businesses also make adjustments, as they have since the beginning, but continuing down that path. And Apple closing its stores in many of the most adversely affected states is one prominent example. And then we can also say households, at least can be expected to respond to some extent. There’s been some great research that’s come out over the last few weeks making the case that as much as government rules are a key element of controlling COVID-19, they find that even in regions that didn’t institute such tight rules, there was nevertheless a considerable adjustment of human behaviour. And so the household response is also key and conceivably we will get something from that.

And so I’m resigned to the idea that in the US we will likely continue to get worse virus numbers, probably now worse economic numbers over the next month or so. However I do think it’s more than plausible that with the adjustments we’re now seeing, those figures start to stabilize and perhaps even improve as we look beyond that next month or perhaps as we work our way into August. At least that’s what I’m hoping right now.

I should make one other economic comment, which is we are starting to see some second round economic damage. And so I know I’m using the word second in two many different ways here. We’ve got a second wave of sorts in the US. Second round really refers to the idea that even as the economy has been reviving, economic activity is still below normal. There is still some accruing pain hiding beneath the surface here and we can see that show up in some measures.

And so for instance, there’s a measure of US unemployment and it differentiates between people who are temporarily unemployed and non-temporarily unemployed. And so the great bulk of job losses in the US were temporary. They were people who still had a company they were affiliated with. They had a reasonable expectation of returning to it. And actually quite a subset of those people have since returned to it.

You then look at the non-temporary unemployed and it was around 2 million people before all of this started in the US, and that has been steadily rising now and it’s now closer to 4 million. And it still pales in comparison. It’s still mostly a temporarily unemployed population, but that non-temporary fraction is rising at this point in time. And as a result, something to be a little bit nervous about because that’s the kind of unemployment that’s harder to fix and that’s just going to dribble along for months, and quarters, and perhaps even years.

I should mention a few other things. One is that we’re in the midst of working through our forecasts yet again. And really just acknowledging the US is stumbling here for the moment and having learned a few other things along the way. And so that’ll be forthcoming over the next few weeks, I suspect.

And I want to finish with one other thing, which is just an optimist’s guide to COVID-19. I wouldn’t say COVID-19 or pandemics in general normally lend themselves to optimism, but I think it is worth at least thinking about and highlighting some of the positives, just the silver linings we can take from what has been a pretty unpleasant and unhappy experience overall.

And so just to highlight a few of the key ones. First of all, this is not a threat to human existence. There’s no scenario in which COVID-19 wipes out humankind or comes close to it. There are threats like that that exist out there, but this isn’t one of them. And so we should take some solace in that. We’re happy the fatality figures aren’t rising, despite the fact that the infections may well be. And that’s really where push comes to shove and the ultimate metric of success. And that’s actually not getting worse as it stands right now.

Let’s recognize how lucky we are to live in the computer and internet age. Can you imagine trying to do this? I certainly couldn’t be speaking to all of you right now if we weren’t in that mode. And so that’s an awfully fortunate thing and it’s allowing us to be a lot safer than at any earlier point in human history if we were to achieve this kind of control of the virus.

Let’s celebrate the massive scientific and medical effort that’s being made right now, with regard to people who are infected but also in terms of trying to come up with solutions here. And the number of vaccines being pursued, and antibody medicines, and medicines more generally, is really quite remarkable. And we are now starting to get some incremental gains there as well.

And we’re also seeing other things. It seems like there’s a greater focus on racial injustice in the world, and these sorts of issues are bubbling to the surface and capturing attention for a world that was previously far too distracted to pay very much attention to these kinds of critical issues.

And it’s probably also fair to say, and I’ll finish on this one, that in many ways we’ve just pushed our way a decade into the future. We were gradually working towards more people working from home and telecommuting. We were gradually working towards videoconferencing, replacing plane trips to faraway offices and these sorts of things. But the pandemic has really forced all of that upon us all at once.

And in many ways it’s a big opportunity, and it’s something we should take advantage of. And of course all sorts of lasting implications, be they for the use of office space or where people can opt to live, or where people can work. You can work in a company perhaps in a different city to the extent many of these things stick.

And so all sorts of silver linings here, though of course at the root of it, it is still a pandemic and something that’s still quite a concerning situation for us all.

Okay. Why don’t I stop there and say thank you so much for your time. I hope you found this interesting. And please consider tuning in again next week. And also consider taking a look at the written form of the MacroMemo, which has a few other items in it as well.

Thank you.

For more information, read this week's #MacroMemo.


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