Hello and welcome. My name is Eric Lascelles.

I’m the Chief Economist at RBC Global Asset Management, and welcome to our weekly video #MacroMemo.

And of course, COVID-19 figuring centrally in any economic discussion these days, but we will take the luxury to flit beyond that for a moment and to at least mention Brexit and tariffs and a few other things that are not quite so intimately linked with the virus.

But of course, first things first. Let’s acknowledge the general landscape. And I would say we’re seeing generally good news more than bad news out there, at least in a COVID-19 context. And perhaps the most important development is after many months in which the number of daily new infections of COVID-19 was mounting, seemingly without stop, we’re now in a position where it looks as though over the last few weeks it has begun to peak and perhaps even start to come down.

Don’t get me wrong. It’s still 350,000 cases per day or thereabouts, so hardly a pretty picture, but nevertheless, perhaps coming down and something we haven’t really been able to say at all since COVID-19 came along.

Emerging markets are still very much one epicentre at least of the virus. And we can say Brazil and India still recording very large number of infections daily each.

However, also perhaps peaking. I would say Brazil looks in fact to be outright coming down in terms of its daily infections. India, it’s less clear; maybe peaking, maybe not, but nevertheless, some infections there. And similarly, South Africa, which had come to the fore as perhaps the prominent African country running into trouble, it seems to now be starting to tame the virus as well. So some good news on those fronts.

And then of course, the U.S. has been the true epicentre of the virus, regularly recording the most new infections per day and hitting an unfortunate milestone recently of 5 million cumulative infections. But nevertheless, we are seeing some peaking and outright decline in the U.S. as well, and that wasn’t at all the story as of several weeks ago. Whereas the U.S. had been averaging around 65,000 new infections per day, that’s down to around 50,000 now, so still a huge number but not quite so huge.

And as we track things at the state level in the U.S., not too long ago, more than 40 out of 50 states were suffering a rising number of infections per day. That has dropped quite significantly. At latest tally, it’s only 12 states now with a rising infection count. You can do the math. That means that, of course, the majority, the great majority are enjoying a declining number of infections. And that includes many of the states that had seemingly been in quite serious trouble. That includes Texas, Florida, California, North Carolina, Georgia, Arizona, really all of the hotspots seem now to be managing to pull down the infection rate.

It’s hardly zero; more hard work is needed. But there is some very important progress happening and that’s a big piece of good news.

Speaking of Canada, Canada looking fairly good still. Didn’t suffer a second wave of any significance. Still, if anything, on a slightly downward trajectory in terms of infections, and so we’ll most certainly take that.

Perhaps the only squeamish element is that while Ontario and Quebec look quite good right now, and of course, they had been the bad provinces not long ago, we’re starting to see a rising number of infections in some other provinces such as British Columbia, Manitoba, perhaps Alberta as well. And so that needs to be watched, those provinces that had been doing very well perhaps getting a little bit complacent. And so that’s the new spot to look at. But I would say, in general we’re fairly comfortable here. We feel that the necessary policy tools exist and so it’s unlikely that a big second wave occurs.

And in fact, I would make a similar comment when we talk about Continental Europe, Europe, of course, getting hit by the virus first after China, having a serious problem with it but taming it quite nicely. Unfortunately, many of the Continental European countries are now seeing a rise in infections as well. In fact, Spain is now at the point of suffering around 4,000 new infections per day; France up to 2,000. So this is a real second wave that they’re grappling with and not a good thing at all.

However, we don’t expect it to go quite as the U.S. did. We don’t think it will take several months to control. And really, the main argument behind that is that it hasn’t been so politicized. The policymakers still have their tools. We see evidence that they are beginning to partially shut those economies back down again, and that, we think, should do the trick over the coming weeks. But there is, unfortunately, some new work to be done in Continental Europe as well.

On the subject of vaccines, or maybe the science behind the virus, still seeing incremental progress there. Betting markets still indicating a slightly rising level of optimism for vaccines and perhaps even for significant numbers of vaccines by the middle of next year, as opposed to beyond.

You may be aware, there’s also been reports that Russia is claiming victory in terms of a vaccine that it’s developed. I think that remains to be established just how effective and how safe this vaccine is. But nevertheless, a lot of efforts being made and some forward progress on that front. And that’s part of the good-news story as well.

Don’t get me wrong. Until that vaccine comes along and is widely available, there are still quite significant limitations on what is economically possible. In fact, we’re seeing that right now in Continental Europe. We saw that not long ago disproportionately in the U.S. South; bars and perhaps gyms and indoor restaurants and these sorts of things are higher-risk activities. And it seems as though when those sorts of things were opened, as often as not, trouble brewed, and now many of those jurisdictions have shut those entities back down and we see infection rates coming down. So there are still limitations on what can be done.

I will say, one point of blurriness that perhaps argues against what I’ve just said is, we can see restaurant reservation statistics by country, and Ireland and Germany have seemingly returned their restaurant sectors more or less all the way back to normal and yet aren’t having overwhelming problems. And so I guess it goes to show there are exceptions to every rule and perhaps there are ways to safely have these more social activities without having a big virus problem. But for the most part, it seems as though that’s when countries start to run into trouble.

I want to talk for a quick moment about our economic forecast just because we’re still in the business of revising them rapidly. This is an ever-changing situation. It would be foolish to sit on the same numbers for any significant period of time.

We’ve tweaked our forecasts again and the U.S. has been upgraded. It’s now up to a minus 6 percent GDP print for 2020. That is some improvement. And the logic behind that isn’t that we’re suddenly more optimistic about the near-term outlook. It is really more that we got data about the past. We now have second quarter GDP, for instance. We were able to work that in. We also had some additional modelling we were able to do just to refine the numbers a little bit.

That does put the U.S. now ahead of the likes of Canada and the Eurozone. They’re at minus 7 percent; the UK is in the vicinity of minus 9 percent. And so the U.S. is ahead but to a lesser extent than before.

And I should emphasize, the U.S. has nevertheless lost ground over the second half of the year versus many others because of course, its economy has been forced to go sideways over the span of the last few months. And so there is still some pain hiding beneath the surface in the U.S.

And then pivoting toward economic data, we can say that the real-time indicators mostly going a little bit higher to sideways. The U.S. looks like it’s starting to come out of its period of stagnation as it begins to control the virus anew, and so that’s a positive development.

When we look at the ISM indicators, up a little bit. We’ll take that most certainly for the U.S. However, we can say, maybe of more importance, the new orders to inventories ratio has now turned quite substantially positive. And that’s classically an indicator that the recovery is well and truly underway, and so a positive there.

And when we look at the twin employment reports for the U.S. and Canada, positive numbers, more than expected. In fact, Canada may be the more impressive of the two, now having reclaimed 55 percent of the jobs that had previously been lost. And so, some positive news for the most part on the economic front.

And then perhaps, not surprisingly, I can turn to the business cycle and say that we are now getting very clearly via our business cycle scorecard and indicator that we are likely at the start of a new cycle. I doubt that’s a surprise to anyone listening. It’s pretty clear based on the growth we’ve just been discussing.

But nevertheless, this is a regimented scorecard approach and it’s a useful thing as a check. And we’re happy that it told us indeed, as we suspected, last quarter was a recession and it’s suggesting now we are starting something of a new cycle.

A couple other things from me. One would just be acknowledging fiscal cliffs. At the end of July, the U.S. had some pretty big stimulus programs that were expiring and there was some nervousness that might impose quite a serious economic headwind.

There is going to be, it seems, a bit of a headwind but not quite as severe as initially feared. It looks as though the U.S. has now issued an executive order to not quite be as generous in terms of supplemental unemployment benefits as it was up until the end of the July, but to cover around half of the extra amount that unemployed people were getting above the usual amount. So $300 a week instead of $600. So some drag, nevertheless, as the other money comes off but not all the way back to zero.

But let’s be aware, fiscal cliffs are relevant, and the U.S. states as well are worth watching because many have balanced budget requirements. As their revenue has fallen, they’re going to have to spend less, and that often is a lagged depressant on economic activity.

In fact, second-round damage, when we think about that and we think what’s going to keep economies from moving quickly over the next year, we can think of a number of things. Fiscal cliffs maybe come first, as just discussed. The fact that debt problems tend to accrue with a lag. You don’t tend to see the peak default rate during the recession; you tend to see the peak default rate perhaps six months or a later. There’s accumulating or accruing problems over time and so we’re watching that quite closely.

We’re also watching sectors that aren’t directly affected by COVID-19 but are indirectly affected by other economic weakness. And so some bleeding through happening there.

In the end, we think this is manageable. We don’t think it’s a second-recession kind of argument. But do be aware, other headwinds arrive with a lag and we do need to think about that, even as the worst of COVID-19 is perhaps past.

Let me talk about Brexit for a moment; I promised that off the top. And so Brexit, we’ve been flagging for quite some time that the risks of a harder Brexit were rising. Policymakers are distracted, isolationism instincts are growing, negotiations just aren’t going that well between the UK and the Eurozone. And so we’ve officially revised our thinking. We now, inconsistent with what we’ve been saying for some time, we now think the risk of a no-deal Brexit is actually above 50 percent. We have it at 55 percent.

Let me be clear. No deal really refers to no free trade agreement. There are other little side deals, important side deals, that are occurring, but no free trade agreement now slightly more likely than not.

We do think there’s a 40 percent chance of a fairly small free trade agreement and so that would be the better outcome. Not very likely, 5 percent chance that you get a deep agreement or a customs union just seems hard to achieve. In fact, many insist that to get any kind of deal by the deadline at the end of this year, you need the negotiations to be done by September, which is getting awfully soon. So some extra UK drag perhaps in the offing over the coming year there.

And then let me conclude by mentioning protectionism. And so we know geopolitics are complicated right now. We know the U.S. has been in isolationist mode for some time. There was some hope, though, that over the next few months we wouldn’t get much more of that. In other words, there wouldn’t be new tariffs. After all, the U.S. is distracted by COVID-19 and it has some political problems with fiscal cliffs and there’s an election coming up and this sort of thing.

Alas, it looks as though the U.S. is still in the business of tariffs, so Canada was the one getting dinged by an aluminum tariff. Canada has responded. It’s not something that’s overwhelmingly consequential from a macroeconomic standpoint as much as the sectors involved are affected. However, I’d just flag that, because it seems as though the U.S. is back into that protectionist mindset, it apparently won’t be waiting until after the election to do more. And so I think China, UK, Eurozone, Japan, other countries that are still hashing out elements of their trading relationship with the U.S. probably need to be on guard, and there is a risk we could see some extra tariffs come on.

In the end, not overwhelmingly consequential. We’ve got bigger fish to fry in the form of COVID-19, but nevertheless, worth flagging. And so why don’t I conclude, then, just by saying, circling all the way back to COVID-19, to me, the big message is the number of daily infections globally seems to be coming down. That’s a big deal. That’s good news. But plenty else to think about as well.

And so, I’ll leave you there and say thank you so much for your time. I hope you found this interesting and please consider tuning in again next time. Thank you.