Eric Lascelles: Hello, everyone. My name is Eric Lascelles. I’m the Chief Economist for RBC Global Asset Management, and here to share with you our weekly videocast. Really encapsulating the written form of our weekly MacroMemo note.

And, boy, plenty to share with you this week. Of course COVID-19 featured centrally yet again. And I guess to start with, logically enough, just looking through and parsing the various virus figures and these sorts of things. We are, unfortunately, suffering a rising global trend in terms of COVID-19. Not just new cases, that’s been a constant since the very beginning, but an accelerating number of new cases globally. And so whereas, for instance, across the bulk of April into early May we were seeing something like 80,000 new cases per day globally, we’re now up to something like 130,000 per day. So there’s been a significant increase.

We’ve generally taken some solace in the fact that the fatality numbers had generally been coming down, and we tend to think there may be more accurate, less problems associated with under-testing, for instance. And those aren’t really falling anymore. They seem to be going more sideways. And so on a number of fronts we can say the virus situation itself, if anything, getting worse not better. And so that’s certainly a point of concern. Disproportionally, the virus is spreading now in emerging markets. And so, don’t get me wrong, plenty of developed countries still have the virus. That includes Canada, and the U.S., and frankly almost everywhere. But nevertheless, when we talk about accelerating numbers in particular, they’re disproportionally in emerging markets. In fact, we’ve been tracking the six most affected developed countries versus the six most affected emerging market countries. In early April there were 10 times more cases in those developed countries versus EM. We’re now in a position where there’s two times more cases per day in emerging markets than in the developed countries. And so, again, quite a pivot happening there. A concerning thing for emerging markets, certainly.

Some of these countries, by the way, are being forced to abandon their quarantines, even as the virus count goes up. They’ve often been in quarantine since mid-March, just like the rest of the world, and they’re being asked to do it for longer. And in many cases, their economies just can’t handle continuing to suffer that kind of damage, particularly those economies that have a significant subsistence fraction to them.

Now we should concede there are some advantages that certain emerging market and very much the poorest emerging market countries possess. They tend to be very young and so young people are hit much less hard by COVID-19 on average. They tend to be less obese and that’s very much a risk factor for fatalities. At a minimum, they tend to be disproportionally in tropical and subtropical locations, and there’s now a fair body of research arguing the disease is somewhat less prevalent in those kind of climates. There’s even some research, though not fully established, that perhaps tuberculosis vaccines can limit the disease, and that’s something that is vaccinated quite widely in emerging markets.

And so in the end there are important offsets, but let’s just acknowledge emerging markets are increasingly the epicentre here. Per capita, we can still say the number of cases is lower. There are a lot of people living in emerging markets, and so it’s not as prevalent in a relative sense, but it’s nevertheless growing. And there isn’t an obvious plan to tame that back down in the near term.

Turning to another problem area, we look at the U.S., and at the aggregate level it’s looking okay. The number of new cases per day going roughly sideways and notably down from where it was at its worst in early April. However, we’ve been looking more and more at the state level. And so for instance, we can now say there are 22 out of 50 states, plus Washington, D.C., and so not much short of half of the U.S. states are suffering a rising trend in terms of the cases.

Not all countries. Not all the state, I should say. We can identify some states, many states that aren’t and some prominent ones that are improving, include the likes of Illinois and Massachusetts, New York, New Jersey, Ohio. So big states are getting better; however, equally there are some pretty big states that aren’t, including Florida and Texas. California is sort of on the cusp. To my eye, it looks like it’s rising. Our mathematical approach says it’s still debatable, but the bottom line is there are some states running into trouble here.

And so we’ve kind of left the mode of saying, what will states do if they encounter a rising trend? Will they be willing to re-shut their economies, and so on? We’re now into position of saying, there is a rising trend; what will they do in response to that? And it’s really not quite clear. You might say, well it’s obvious they should be shutting down again and stabilize the virus, maybe even get it down from current levels. However, keep in mind it’s very hard politically to go back on a big decision that’s been made, particularly if that change induces economic damage.

You keep in mind, particularly in the U.S., that COVID-19 has been highly politicized. So one party wants to keep things shut down, the other wants to reopen. It’s very hard to reverse given that politicization as well. And so it’s a messy state of affairs. And for the moment I would say, we’re not expecting a significant shutdown from these states that are suffering a rising caseload. And as a result, you sort of have to imagine the caseload could continue to rise. And so that’s very much a risk.

Whether that’s bad or good for the economy, it’s certainly not good societally, but let’s keep in mind, a lot of the economic damage comes from the shutdown as opposed to the virus itself. And so that’s an open question as well. I guess really where we’re landing with emerging markets and many of these U.S. states is there are parts of the world that are seeing an intensification that could become a problem in the coming weeks, and so let’s keep watching that.

Turning to the economy more generally, we can say seeing some interesting things. Still broadly an economic recovery story, I should say, albeit maybe a slowing recovery. And so, for instance, when we look at hours worked data, we saw big leaps and bounds from late April through to late May, and now we’re seeing very incremental improvements from here. So not nearly as significant as it was, but still rising. Really more of an asymptotic function, for those who remember their high school calculus classes, and so the idea being big gains initially and then ever smaller improvements. And so again, the rate of recovery is slowing, though proceeding nevertheless. We’ve seen some interesting anecdotal reports from U.S. hotels. Hotel occupancy rates up from 21 percent in the U.S. to 32 percent now. I’m frankly surprised it never fell below 21 percent. That’s the biggest takeaway for me in all of this. But nevertheless, some improvement happening there in a sector that’s generally perceived to be among the last to get better.

We’ve had some big job numbers come out, both in the U.S. and Canada. In the U.S., we can say 2.2 million new jobs created in May. That was quite a surprise. The consensus had been for the loss of up to 8 million jobs, and so you don’t see 10 million job swings very often. And it’s really a bit of a strange one in the sense that it makes sense. It makes sense because we know the economy is reviving. You can’t have more economic activity without more workers. However, at the same time it was a strange one in the sense that we’ve been seeing continuing jobless claims, the number of people getting unemployment benefits, and that actually rose significantly over the relevant period of time. And so, it’s a bit of a mystery how people are getting more jobless payments while simultaneously working more, but that somehow seems to be happening. Ultimately, though, a good thing that jobs are coming back.

In Canada, similar story. Expectations of a decline in jobs. A reality of jobs created. And so 290,000 net new jobs in Canada in the month of May. I should mention, unemployment rates still quite high. If you use a broad measure that gets rid of some of the distortions being identified by the statistical agencies, we can say U.S. unemployment rate has fallen from 19.7 to 16.3 percent. In the Canadian context, use a broader-than-usual measure, it’s still sitting around 19.6 percent. So still quite high levels. Still a lot of work that still needs to be done here.

An interesting little revelation we came across, actually from a newspaper article, with regard to Canadian pawnshops, though likely true in the U.S. as well, which is that pawnshops are reporting quite interesting activity trends. And so for instance, essentially because government support has been quite generous in some cases, what they’re reporting is, a lot of people have come in and repurchased the items they had pawned off. So a suggestion that people with lower household incomes are enjoying a boost to their incomes. Similarly, they’re saying that very few new items are being pawned. And finally, they’re noting that other items that were for sale are generally being purchased. And so the view being that a lot of people surprisingly have, I suppose, money to burn in their pocket would be the expression. And so again, making the point that there’s probably not as much suffering happening in response to COVID-19 in economic sense than you would first think. And pawnshops are often the canary in the coal mine in that regard, and they’re reporting very much the opposite trend.

I’ll mention as well, the Bank of Canada recently rendered its latest decision. No real change there, though a new Governor, Tiff Macklem. The Fed renders its decision later this week as I record this. And again, no big changes expected there either. We’ve seen them do most of what they’d like to do.

Let me just cover a few other topics off fairly quickly here. One is, we’re thinking more and more about the medium-term outlook. We’ve got a flavour for the short run. We know it’s a big hit in 2020. We suspect it’s a pretty substantial rebound into 2021. But what about beyond that? And when you look beyond that kind of time frame, you’re really talking about how will the population evolve, how will productivity evolve as well. And the population side is tragically being affected. We are getting significant deaths. And so that’s diminishing the contribution from the workforce in the future. Similarly, we suspect fertility rates will be a little bit lower as well. And so these do limit the economy. But it’s a fairly small effect in the grand sense and it’s a fairly one-time effect. It’s not restricting growth every year. It’s a one-time hit. And so we set that mostly aside and say most of the action, if the medium-term outlook is to be any different than normal, will be on the productivity side. And we can make a few comments about that. After crises you tend to get some hysteresis. That’s a statement that you tend to permanently suffer some loses, and some sectors go away, and some companies go away, and some types of jobs go away. And that can have a lingering effect and tends to diminish productivity growth. Let’s remember, after the financial crisis it did take almost a decade for productivity growth to significantly normalize. And so again, it’s normal to see diminished productivity growth for a while, and companies do less CapEx, and they’re more risk averse, they have less risk appetite, and so on. And so it makes sense if we get less productivity growth.

And then also keep in mind, with all the extra public debt that’s been accrued, that tends to nibble away a little bit at the economy as well because you’re just spending more money servicing debt. And so when we add it up, I mean, really it argues for maybe something like half a percentage point or a bit more off growth per year versus normal. It maybe says the U.S. economy, its potential growth rate might be back down below 2 percent, having just edged its way above that over the prior couple years before COVID-19. So that’s that.

Let me mention, higher savings rates. We’ve talked about this a little bit, but it really is quite astonishing. Government support has been sufficiently generous that household incomes have actually surged in the month of April. We’ve simultaneously seen consumer spending fall across March and April, as people were risk averse and maybe couldn’t get to stores and things like that. But it really is amazing when you focus in on the difference between those two things. If people earned more money and spent less, that means definitionally the savings rate went up.

We have seen a massive increase in the U.S. household savings rate. It came into this at 8 percent, which was already pretty high by recent standards. It was 2 percent in 2005, so 8 was already a pretty big number. It rose to 13 percent in March. It’s now risen to 33 percent in the month of April. So one-third of all household income is being saved. It really is an extraordinary thing without modern-day precedent. It almost looks Chinese-esque in terms of the household savings rates that are famously near 50 percent there. So very high savings rate.

If you’re wondering who’s lending all that money to governments who are borrowing, to companies who are borrowing, you now have your answer. And I suppose, to finish on the savings rate side of things, we’ll just say going forward we have a pretty strong sense the savings rate is going to come back down, but it will probably stay fairly elevated for even a few years, though not nearly at 33 percent.

I do want to flag one other thing. And so an item that for the first time, really since COVID-19 came along, has managed to make us look beyond the virus. And that is to say we’ve seen some pretty significant anti-racism protests going on, disproportionally in the U.S., but also around the world right now. And as an economist, I’m hardly well positioned to comment on this kind of thing, but nevertheless I can think of a few relevant implications here, mostly of an economic bent, but also of a societal bent.

And so to begin with, and obviously central to the issue, I suspect we all hope that this kind of protest will reduce racism itself, will perhaps improve police practices, and these sorts of things. And so that’s, of course, the main thrust. And of course you’re always concerned it won’t because we can think of past episodes which really didn’t change very much. But it does feel as though the world’s attention is here and that fairly prominent voices are speaking out, and so there’s the real opportunity for change. So that’s the hopeful thought.

I will, nevertheless, as an economist, look at three other things that are much less central but still peripherally relevant. And so the first one would be that some of the protests did create damage to infrastructure. And so one question that’s been asked of me is, has there been significant infrastructure damage of an economically relevant nature? And the answer is, I don’t think so. Perhaps at the municipal level; not at a national level, though. So I set that aside.

Another question has been, to what extent might COVID-19 spread more easily in the coming weeks? A lot of people were in fairly dense settings, not everyone was wearing masks. And so I think that is a real risk and that adds on to that prior risk we mentioned, which is a significant fraction of U.S. states were already suffering a rise in virus counts. We have to watch quite closely, but it wouldn’t surprise me if the numbers got worse instead of better over the next few weeks.

And then the last thought is very much political in nature. And so here we are now five months away from a U.S. election, and so this sort of thing is potentially relevant. You would think at the aggregate that this would perhaps tilt the public’s sentiment a little bit toward the Democrats, and that’s generally how betting markets have interpreted this.

I should say, moreover we can say, beyond that that as we get closer to that date we’ll learn a lot more. But for the moment those betting markets are making the claim that Biden has a slightly better chance than Trump of winning the White House in November, that the Republicans probably keep the Senate, but the race is getting very, very close, and markets are fairly confident that the Democrats will keep the House of Representatives at this juncture. And so a political element to be sure, as well.

Okay. Why don’t I stop there and simply say, please do refer to the weekly report if you’d like to get more detail here. We also discuss some policymaker mistakes, some other items as well. But, in the end, thanks for sticking with me here. I appreciate your time. I wish you well with your investing, and I hope you choose to tune in again next week. Thank you.