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by  Eric Lascelles May 12, 2020

In his latest weekly discussion of the economy during the pandemic, RBC GAM Chief Economist Eric Lascelles sees indications of small victories in the data. Many regions, indeed, are beginning to explore economic reopening. Stubbornly high rates of COVID-19 transmission remain a concern, however.

Watch time: 11 minutes 29 seconds

View transcript

Eric Lascelles: Hello. My name is Eric Lascelles. I’m the Chief Economist at RBC Global Asset Management, and here to share with you some latest economic thoughts with regard to COVID-19. And just starting with the obvious numbers that we spend a great deal of time on when we look at the number of global cases in the world, still going roughly sideways on a daily basis. And so no great improvement by that metric.

But, I should say, when we turn instead to some of the mortality rate figures, we do see a more substantial decline in numbers. And arguably, that may be the more accurate of the two sets of figures. And so it is at least plausible to say that the intensity of the pandemic is starting to diminish, though, of course, not gone altogether by any means. .

When we look from an economic standpoint, one of the issues we’re trying to grapple with is just the extent to which the economy declines in a peak-to-trough sense. And we’ve certainly come out with estimates. They’re embedded within our growth forecasts. But we’re always circling back, trying to get a better sense of things. .

And so for instance, what we did most recently with the latest job numbers out of the U.S. and Canada was to look, certainly, at the headline figures and some pretty grim numbers: 2 million jobs lost in Canada, 20 million jobs lost in the U.S. And so, quite unfortunate and pleasant, on the surface and beneath the surface, for that matter. .

But we can try to say something about how household incomes have evolved. And it was a bit of a surprising finding because here we are with enormous job losses. Beneath the surface initially we can say even bigger declines in hours worked. In fact, in Canada there’s been a 28% drop in hours worked since February. In the U.S., it’s been a 16% drop. And so very big declines there. .

However, when you adjust for several things, it doesn’t seem quite as large. And so for instance, many of the jobs being lost pay somewhat lower wages, and so the decline in household incomes across the countries hasn’t decreased as much as the decline in hours worked. .

When we look further, we have to recognize that not all income is labour income. And so when we look more broadly and recognize pensioners might still be getting the same wage as before, people who are already unemployed might be doing somewhat similarly, we get a smaller decline in household income. And then, of course, we have to adjust for the fact that governments are delivering massive fiscal stimulus, with a significant chunk of that going toward households. .

And so, you actually end up with the conclusion that, at the aggregate level, household income isn’t obviously all that much lower than it was before COVID-19. That’s not to say consumer spending doesn’t have to drop. In fact, we know that savings rates tend to go up, and so that’s where a chunk of the decline in spending likely comes from. But at least this one way of looking at things yields the tentative conclusion, that consumer spending doesn’t absolutely have to go down by 20 or 30% or more. .

Now don’t get me wrong. We can see other things and we’re using other techniques, and some of those do point to 20 and 30% declines, be they measures of business revenue or measures of credit card usage, and these sorts of things. And so I wouldn’t say this is a sudden revelation that this is no big deal from an economic standpoint, but let’s just say, even with the big job losses occurring, it’s not quite as automatic as you might first think that household incomes are actually substantially lower than before. So there’s one central comment. .

Let me pivot from there, and let’s talk a little bit about the reopening of economies at this point in time. And so we’re now in a position where we can start to see some parts of the world reopening. And some of this is explicitly done, and Italy and Spain and others are actively reopening certain segments of the economy. It’s a similar comment, for instance, in Georgia in the U.S. and a variety of other states, and then smaller, more incremental openings happening in much of the rest of the developed world. But the bottom line is we can start to see this happening, and we can begin to estimate the extent to which the decline in economic output is being recovered. .

And so for instance, focusing on Georgia, it’s captured quite a lot of attention. We can say that the amount of driving in the state has rebounded significantly. It was down, at its worst, by 60% versus normal. It’s only down 8% versus normal now. So Georgians are back in their cars moving around. It doesn’t seem like they’re quite spending as much as you would think based on that driving data. For instance, when we look at visits to retail stores, that’s recovered from about a 40% drop to a 23% drop, so less than half of the decline in retail visits has been recovered. But nevertheless, a significant bounce there as well. And when we look at it from an hours-worked perspective in Georgia, we see that about a quarter of the decline in hours worked has been recovered. And so these are very significant recoveries, but equally, not complete, if that makes sense. .

Now let’s talk as well, about the extent to which the reopening of economies might prove premature. That’s a concern of ours. We are worried about a second wave of viruses, or a double dip from an economic standpoint. Some of these regions and countries might well be opening too early. And one way we’ve thought about this in a semi-rigorous mathematical way is to say before all of this started and before the efforts began in earnest to control COVID-19, the natural reproduction rate or the natural transmission rate was around three—each sick person infected three others, and on it went, ever accelerating. .

I’m happy to say that in most parts of the world, indeed, at the global level that reproduction rate has fallen from something like three down to around one. And so it’s no longer accelerating. It’s now in a holding pattern, where each sick person is unfortunately infecting one other, but it’s no longer accelerating. And so we’re in a better position. .

However, as some of these easing of social distancing measures occur, the risk clearly is that those reproduction rates and transmission rates begin to rise again. And we don’t have a lot of wiggle room. You might say in Italy and Spain, places that did get those reproduction rates down below one to something like 0.7, there is room for a little bit of easing of measures. However, in many parts of the world, including the likes of Georgia and perhaps large swaths of North America, it’s not clear there’s much room to ease those measures. And so that’s a concern for us even in Italy and Spain. If they’re sitting at a 0.7 reproduction rate, they need to keep this below one. If they want to keep COVID-19 on a diminishing trajectory, they can only afford to ease about 13% of the things they did to get from three down to 0.7. .

And so it’s not a carte blanche to completely reopening economies. It’s still a very limited state of affairs. And so we are quite cognizant, one of the big downside risks out there is that it’s quite realistic to say there could be a second wave of viruses, particularly in areas that aren’t actually in all that good of a position to reopen. .

Let me talk a little bit here about politics. And so not to get into the weeds too much and not to render any danger upon myself here, but one of the general views people have espoused is that populism is likely going to be notably higher after all of this is done. And I would say, maybe it is true that after financial crises, one does often see populism. That was indeed a defining result of the global financial crisis of a decade ago, and so it’s perfectly reasonable to make that claim. But keep in mind, there are some counterpoints as well. .

And so one would be that people who are actually dealing with COVID-19 tend to be doctors and epidemiologists and policy experts. And so, conceivably, you could see the opposite result, which is, we could see a push toward more technocratic responses, and a preference for those kind of politicians. And so there is a possibility that we go in the opposite direction. I will not deny that globalization is taking a hit, and that’s classically associated with populism. However, it seems to me that it’s not so much that people don’t like trade and don’t think trade makes sense. It seems to me instead it’s just going to be a situation in which many people are reluctant to go on vacations internationally. And for that matter, countries now appreciate there is some value to on-shoring perhaps the health care supply chain, not just the military supply chain or the food supply chain. And so these things aren’t done because there is a distrust of others or a dislike of trade. It’s just a recognition that perhaps pandemics are a real risk and there are special things that need to occur. .

And so maybe I’m splitting hairs there, but I will say this. To me, the central political development, and maybe the enduring one, is that incumbents win. When we look around the world—with a few exceptions, including, notably, the U.S.—we can see that many of the world’s prime ministers and presidents have enjoyed massive boosts in popularity. In Australia, 30 percentage-point increase. In Canada, 25 percentage points. In Germany, nearly 20. In the UK, 15. In India, it’s more than 10. In France, it’s more than 5. These are big increases in popularity for incumbents. To me, the enduring political implication probably has more to do with the idea that incumbents are likely to win another term, whenever their next election is. And then let me finish here, with some comments from an inflation perspective. And so we’ve talked about the outlook for short-term inflation, the idea that it should, in the end, be quite low. We are already seeing that. The formal numbers are beginning to be released. They are indeed low. We can see real-time measures, and those real-time measures are even lower. If anything, undeniably, food inflation has gone up a bit more. That’s true. Many have observed that. However, other components of the price basket have fallen by more than that. So even factoring that in, inflation does appear to be lower in the short run. .

What I’ll say, though, is if you think more about the long run, I’m starting to become more attuned to the idea that there is a real risk here of additional inflation. I wouldn’t quite call it a base case forecast. I think the most clear claim you can make is that inflation uncertainty is particularly high, and there are quite a variety of scenarios you could conceive over the long run. But I’ll say, there is the risk of more inflation over the longer run. And you think of some of the things that are going to stick around, not just over the next year, but over the next decade or beyond. More public debt is one, and so there can be temptations to inflate away that debt, though I don’t think it’s a guaranteed outcome. .

Central Bank balance sheets are likely to stay quite big. That can be inflationary as well. Supply chains are on-shoring, and that’s likely to be an enduring development. That is inflationary. It costs more to make things in rich, developed countries than in emerging markets. And so those are possibly inflationary trends. .

And when I try and offset those, there are many arguments for why inflation should be low, but few of them are long-term in nature. And so for instance, economic demand has been destroyed, but that’s more of a short- and medium-run story. There’s been an oil shock. That’s more of a short- and medium-run story. It’s not likely oil prices fall forever, and that’s what you need for deflation. It’s not enough for prices to be low; they have to keep on falling. And that doesn’t seem likely, in an indefinite sense. .

And so you’re left with these inflationary factors that stick around, these deflationary pressures that might prove more temporary. It’s possible there’s more inflation down the line. Not a base case forecast, but the sort of thing that conceivably bond markets may ultimately choose to price in as a form of inflation risk premium. .

Okay. That’s it from me this week. I thank you so much for your time. I wish you well with your investing. Hope you choose to tune in again next week. .

Thank you so much.

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


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