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by  Eric Lascelles Jun 23, 2020

RBC GAM Chief Economist Eric Lascelles sifts through the data and finds that the journey through the pandemic remains a bit of a slog, with significant improvement in some areas balanced against challenges in others – along with fears of relapse. The economic data is basically encouraging as the recovery continues apace.

Watch time: 12 minutes 38 seconds

View transcript

Eric Lascelles: Hello and welcome.

My name is Eric Lascelles. I’m the Chief Economist at RBC Global Asset Management. And happy to have you along for the ride in our weekly economic videocast.

Of course a familiar set of stories at play here right now. We see essentially a continuing revival of economic activity post-COVID-19, and so that’s very much the good news. However, arguably I shouldn’t be saying post-COVID-19 because the virus figures themselves have generally been getting worse, and that’s probably a good place to start.

With regard to the virus, we are getting record numbers of new global daily cases and so this is not a desirable trend at all. Though neither is it a brand new one. We’ve been seeing this trend for some time. However, it is getting worse and so we’ve now seen a day with as many as 180,000 new cases. There are now 9 million people around the world who have been infected by the virus at one point in time.

And so the trend not really going in a desirable direction. We’ve generally taken a little bit of solace that when we look at the fatality figures, and of course that’s its own tragedy, but when we look at those figures they have really been falling as opposed to rising. And so that’s made us feel a little bit better. But even there we’re seeing some stabilization now, and even perhaps the beginning of an upward trend. And so we really just can’t say that the virus is under control.

It is particularly problematic among emerging market countries or, I should rephrase that in a sense that it’s rising most obviously among emerging market countries. Though, if you look at it on a per capita basis, often those countries don’t look quite so bad because they have such enormous populations, but still that’s where much of the rise is right now.

Brazil has been particularly problematic. In fact, Brazil all by itself had a record-setting day of 55,000 new cases, and so it is probably the epicenter at this juncture, but places like Chile, and Peru, and also Mexico have had their challenges as well. So that’s a point of focus.

The U.S. continues to struggle to some extent. We can say that the U.S. numbers at the national level edging a little bit higher in terms of infections. Edging downwards I should say still in terms of fatalities, and that difference explained in part, we think, by more testing, but also by the fact that it’s younger Americans who are tending to get infected now. We still see many of those seniors’ facilities shut down in a way that has prevented the virus from entering as easily as it initially did. But nevertheless, rising numbers in the U.S. And of course enormous divergence at the state level, which I’ll get to in a moment.

Outside of the U.S. and looking at other developed countries, Canada still looking fairly good. Maybe not declining in terms of infections as much as it was as of a few weeks ago, but at a very tame level. The same can be said for the UK. And I think the same, in fact, could be said for places like Italy, and Spain, and France as well. And so generally a positive trend in those places.

We’ve been doing a fair bit of work in terms of the science behind the virus, just tabulating research and this sort of thing. And we can share a few thoughts. I mean, one would be there is mounting evidence, based on wastewater analysis, that the virus was already circulating in many places much earlier than had been previously imagined. And so Italy and France, apparently the virus was circulating there as early as December. In Spain as early as January. So that resets the thinking in terms of when this virus really did go global.

We’ve done a lot of work and thinking about what the true underlying fatality rate is for COVID-19, and I’m not happy it’s greater than zero in any way, but I must say our initial assumption is holding fairly true at this point in time. We’ve said for many months now that 0.5% to 1% probably the true fatality rate. Lower than the case fatality rate, because many infections just aren’t being picked up and those are relevant to the consideration. The body of research out there increasingly does seem to be centering on that set of numbers, and so we think that’s still probably the right assumption.

We’ve also seen interesting work done in terms of what is the safe distance for people to be interacting with one another. And so, for instance, if you’re right very close to someone with the virus, the risk of being infected some research has now claimed is around 13%. If you’re a metre away that falls fairly drastically to a 3% risk. If you’re two metres away it falls to a 1.5% risk. And so I suppose unsurprisingly the conclusion is the further away you are the better, but even at 1 metre you’ve reduce the risk significantly and two metres significantly more I suppose.

And other research in that vein looks at the use of masks, and so I would say no surprise really that wearing masks seems to be a useful thing, at least on hamsters. The research was done on hamsters and does find that an infected hamster, in this case, it does reduce the transmission to others by five-sixths to the extent they’ve got a mask. To the extent that someone else is infected and you have a mask, presuming you’re a hamster, that risk falls by about a third. And so, again, some leaps of faith here to think this applies perfectly to humans, but nevertheless I think logic suggests that indeed masks do work, and mostly a benevolent gesture in terms of preventing others from getting sick, but also a little bit helpful to yourself.

And then I guess lastly, in terms of the virus science and, most importantly, we can say there have been some pretty important developments on the drug front. And so a drug called dexamethasone has been shown to reduce the rate of death for people on ventilators by 33%, which is a big, big step. Obviously it doesn’t eliminate the threat of the virus, but it nevertheless reduces deaths by something like a third, which is huge. And it’s a very cheap drug, and so that’s something that is being rapidly deployed, and does diminish the danger to some extent.

And we’re also seeing incremental progress on antibody therapies. One could be available by the fall. And also in terms of outright vaccines, there are 135 vaccine candidates being pursued. One has already gotten to the phase 3 point, which is the final phase of testing. And so theoretically could become available late this year into 2021. And so some promise there I think.

On the economic front, well quite a bit to report here. Real-time mobility data continuing to revive. So continuation of a prior trend. We can look at some real-time indicators like U.S. business sales surveys, and they’re suggesting a pretty notable jump actually in the latest week from 25% below normal activity to 20% below normal activity.

We are continuing to see increases on other fronts. One that really continues to surprise me at least, is looking at hotel occupancy in the U.S. It’s up to 42% of normal. That means almost half of all U.S. hotel rooms are occupied. And let’s acknowledge 100% isn’t the normal. A normal June figure is 73%. And so, again, quite remarkable gains there. I think we all imagined this would be among the last sectors to revive and yet here it is reviving alongside everything else.

We can also say there’s real-time data out there—I should say not real-time, traditional economic data out there that’s increasingly being released for May, which was the month of the recovery. And it’s again, establishing that a recovery has taken hold. U.S. retail sales up quite a big 18% during that month.

I must say, Canadian economic data is a little bit lagged in this regard. We’re just getting April data, which we know to be the worst month, and so let’s not be too shocked that the numbers are down instead of up. But nevertheless, a worse decline than expected. A big 26% drop in retail sales in Canada in that month, and wholesale sales down 22%. To me that looks like there’s a risk the actual GDP decline in Canada for that month was perhaps worse than what StatsCan has been assuming, which is a minus 11%. They have said there’s a recovery they see brewing in May, but nevertheless it looks like Canada did get a worse hit than the U.S. on that front.

Let’s talk a little bit about the risk of a second wave here. In fact it’s probably more than a risk at this point. We’re seeing some places getting additional viruses. And so we’ve done some serious work on this at an international level, saying which countries have the parameters that make them most vulnerable to a renewed outbreak. And no surprises here, Sweden comes top of the list. The U.S. is fairly close as well. Brazil is right up there too. And so those are countries that are grappling with the virus and may continue to struggle.

We’ve also looked within the U.S., recognizing the very different approach taken by different states. And not a lot of good news there. We find that 29 states, more than half, are suffering a rising number of infections, with many suffering a record high, more than whatever they got in late March to early April.

And when we dig into the actual vulnerability work and the modelling that we’ve done, you find that big states like Texas and Florida are particularly vulnerable to a continued outbreak based on the parameters we see. And then other smaller, but maybe even more acutely at risk states include Arizona, and Idaho, and South Carolina as well. And of course the list goes on.

And one of the big challenges here, just a political reluctance to shut down. You’ve seen a politicization of COVID-19 and Republicans can’t be seen to be shutting down their economies, and so we’re in a position in which it’s very difficult to gain control over this virus in those places.

One somewhat promising development we’ve seen is that in some cases state governors are downloading that decision to the city level. And so you have some city mayors who are being the villain I suppose and shutting their economies back down or mandating masks and this kind of thing. And so there’s a half a chance this can be brought back under control, but it’s not an easy setup at all. This is probably the biggest risk that we see out there to the continued economic recovery and to the health of financial markets as well.

Let me mention two other quick thematic items we’ve been digging into in our written weekly MacroMemo. I won’t do full justice to this, but one thing we’ve thought a little bit about is just the possibility of a no-growth world. The idea that people are taking this pandemic and thinking hard about what matters. And we’ve already, as societies, made the decision that health is more important than economic growth. That’s why we saw economies shutdown. And we’re seeing similar questions about the environment and inequality pop up. And for that matter, working versus leisure and the relative allure of the two. And so it is an opportunity to rethink some of these things. And we may yet see a bit of a shift away from maximizing GDP growth.

But I do want to emphasize it’s not actually a brand new trend, we’ve seen frankly musings on this going back to Keynes in the 1930s. And so, in many ways, we’ve talked about these debates for quite some time and we were already on a trajectory toward a slower growth world. Towards a world that did incorporate externalities like the environment to a greater extent. And so I don’t doubt we could shift a little bit more in that direction.

We are assuming fairly sluggish growth over the long run at this point in time. But I think no growth is probably a leap too far. Let’s keep in mind, fundamentally economic growth comes from more workers. Yes, demographics are challenging, but we are still getting more people and more productivity. Inasmuch as we could even see productivity growth slow, this is not a situation in which it’s likely to see it go to zero, so long as people have good ideas and this kind of thing, you generally see some amount of growth. So I don’t think no growth, but some other priorities are emerging. And then the other item we looked into was just U.S.-China relations, and let’s be clear, these were already very challenging well before COVID-19 came along and we were dealing with all sorts of tariffs and other frictions between the two countries. Many would argue, many have argued that this friction, this conflict is inevitable in a sense that as we pivot from a hegemonic world, where the U.S. is the only sheriff in town, to a multi-polar world, it’s one in which inevitably frictions arise. And so indeed we’ve got that.

Don’t get me wrong, COVID-19 makes it a bit worse. And the U.S. is blaming China for the virus, and we’re seeing supply chains reoriented, and this kind of thing. But a lot of this pre-existed COVID-19. I think a lot of it is going to endure unfortunately after COVID-19. Maybe the one twist would be it does matter enormously who gets elected in November in the U.S., and that could determine to some extent the attitude toward China. But I do think the world has changed and there are going to be frictions between these countries going forward. Not just over the next year or two, but conceivably over the next generation or beyond. And so that’s something we’re going to have to live with.

Okay. I’ll stop there and I’ll say thank you so much for your time. I hope you found this interesting. Please consider tuning in again next week.

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


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