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by  Eric Lascelles May 26, 2020

RBC GAM Chief Economist Eric Lascelles says that the pandemic’s grip remains strong, particularly in certain areas of the globe. The economy, however, is starting to show signs of making its way back from the depths. Negative rates look to be unlikely in the US, UK, and Canada.

Watch time: 11 minutes 08 seconds

View transcript

Hello. My name is Eric Lascelles. I’m the Chief Economist at RBC Global Asset Management, and here to share with you our latest economic thinking. And these days, COVID-19 is always front of mind and that’s where I’ll spend most of my time here, and just looking back over the last week.

It’s been a fairly mixed one, I would say, when we look at the number of new infections per day of COVID-19. There are some negative trends afoot there. We do see, for instance, roughly 100,000 new cases per day, whereas for a while, we were trending around 80,000. So that’s not desirable at all. One partially offsetting feature is that when we turn from the new cases per day to the new fatalities per day, those are broadly still significantly lower than they were over the last few months, and still mostly trending downward, and we suspect that might ultimately be the more accurate data as well. And so, I would say, overall, mixed interpretation when we look at the actual virus count and its immediate implications.

However, when we slice by developed countries versus emerging markets, we see quite a difference. And so, for instance, going back to early April, in early April, you had roughly 10 times more new cases per day among the six most-affected developed countries relative to the six most-affected emerging-market countries, and that has really turned on its head. We’re now in a position in which emerging-market countries are suffering more absolute new cases per day than the key developed countries, and the trend continues in very much divergent directions. We see developed countries having ever fewer cases on the aggregate and emerging-market countries suffering ever more, particularly prominent emerging-market countries that have been affected and that have experienced significant growth, include Brazil, include India, Russia, Saudi Arabia, and Iran to some extent. Peru has become an issue as well.

And so let’s keep an eye on that. That is increasingly becoming the epicenter of COVID-19. And of course, these countries are in a worse position to deal with COVID-19 and to treat it, and also to identify it. Probably there is more significant undercounting there than there is elsewhere. And so that’s a concern for us. I wouldn’t say mostly positive news, ultimately, from a pure COVID-19 perspective.

Turning from COVID-19 and looking now at the economy, let’s recognize there has been a significant recovery afoot now for some time. And so, for instance, when we look at credit card data, more than half of the initial decline in spending seems to have been recovered. I should warn, in the US, we had even more optimistic claims a week ago and a bit of that got taken back, but it’s still the case that more than half of the consumer credit card spending decline has since rebounded. We can look at measures of business revenue, at least surveys of business revenue, and in the US, those report a recovery of roughly 36 percent of the initial drop having been clawed back. When we look at similar surveys of hours worked of hourly workers, we see about 32 percent of the decline having been clawed back.

And so, the point being, we do see a significant rebound here, and plausibly even a third of the initial decline has been recovered as we work our way into fairly late May, and so, broadly positive news there. I won’t say absolutely everything confirms that. For instance, we’ve been watching weekly jobless claims quite closely. Unfortunately, still seeing several million initial claims per week. That hasn’t retreated all the way back to normal. We’ve been looking in particular at continuing claims as a proxy for unemployment, and we’ve been thinking, gosh, we should be seeing some net hiring happening if a third of hours worked has come back, and if a third of business revenues have come back, and if consumers are spending maybe even as much as 50 percent increase relative to the initial decline, we can say that you’d think there’d be more people actually working in jobs. We can’t quite see that yet at the aggregate level. We still have a net increase in continuing jobless claims relative to earlier weeks. But I will say, when you dig into the details, you see, for instance, that 32 out of 50 states in the US saw a decline in continuing claims. And so it wasn’t enough ultimately to dominate the proceedings, and we had some big states that didn’t manage declines, and some talk about lagged indicators that might not be fully capturing the improvement, but the bottom line, 32 out of 50 US states are actually seeing plausibly net hiring at this point in time, and we think the national numbers should start to reflect that fairly soon.

Now when we look at all of this economic good news, perhaps not surprisingly, we have now put ourselves in a position of upgrading our economic growth forecast. That’s something we’ve been hinting at and signalling, and really building a case for over the last several weeks. But we’ve pulled the trigger. We’ve done it officially. And so I’d like to share with you a few of the highlights here.

And so, really, the motivation behind it is, as we started to get traditional economic data for April, it became clear that the full peak-to-trough decline in output wasn’t quite as severe as we’d assumed, and so we made an adjustment there. We assume an 18 percent drop in the US instead of a 22.5 percent drop.

And then simultaneously, as just discussed, we’ve seen evidence that the economic recovery has come together more forcefully than we had initially expected. And when you tack on the fact that central banks and fiscal policymakers have added a little bit more help to the economy over the last month, that does add up to a better economic forecast.

And so, for instance, in the US, we had been looking at a full year 2020 growth forecast of minus 10.6; we’ve brought that up to minus 7.1. The US still leads the way compared to most others. And so, for instance, Canada also upgraded from minus 12 percent growth in 2020 to minus 8.8, so still worse than the US but a significant upgrade as well. And it’s really a similar story for the other main countries also.

Let me be clear that this still leaves us below consensus, just less profoundly below consensus. We do think the actual economic outcomes will prove a bit worse than the consensus currently budgets for, but not to the same extent as our prior forecast had initially suggested.

Now for all of that happy news, I did start this video broadcast by indicating that we had quite a mixed story afoot, and so let me explain how it’s still only mixed.

And so, for instance, as much as our base case forecast has improved, we are still somewhat anxious about the enthusiasm with which some markets opened, countries that really haven’t fully tamed the virus, countries that haven’t even really managed a significant reduction in the virus count. And that applies to regions as well.

And so there is a distinct risk that some places might ultimately have to go into a second lockdown, or might have a second spike in the number of viruses. And as a result, as much as the base case forecast says everything is better because quarantines are proving lighter and recoveries are proving enthusiastic, that could be the undoing of certain regions and certain countries.

And so, for instance, when we think of the US in particular, we have to acknowledge that the risk of a worse outcome is probably higher than in a lot of other markets, just because some of its regions have opened quite enthusiastically at a time when others really wouldn’t have. And statistically, you could question whether that’s a wise move.

To be fair, we haven’t seen any evidence of disaster so far. Places like Georgia and Texas mostly going sideways in terms of virus count, not accelerating as many had feared. But I would say there is a risk, maybe a bigger risk in the US that the ultimate economic story ends up being worse than that base case forecast. So be aware of that.

And then, just to flag stimulus, policy stimulus, there’s been a lot. We’ve talked about that before. Just three big issues I think that are worth touching on for a moment.

The first is, there is a lot of talk about negative interest rates out there. And by that, not just the idea that bond yields could sneak into negative territory, but that policymakers might actively push them there and have policy rates that are explicitly negative, like in Europe and in Japan. We’re very dubious. We don’t expect the US or Canada to go there. Can’t quite rule out the UK; they have mused about that. But we think, ultimately, it’s unlikely across all three, just in the sense that the economic pickup you get is quite slight, the distortions you create are quite significant. If central banks are going to do more, our suspicion is, instead, they will do something on the order of yield curve controls, which is to say, basically saying, don’t send yields above a certain level, telling the bond market not to do that, and hopefully not even having to buy very many bonds at all in keeping yields low, just because their threat is deemed to be credible. And so we think that’s a more likely approach.

And then the other policy issue I wanted to flag was debt mutualization. And so that sounds like quite a mouthful, and it refers to the Eurozone and this idea that when the Eurozone was constructed it was a monetary union with a single currency and a single central bank, but no fiscal union. And this has been a problem and it’s meant that the region has run into trouble more than other areas during economic shocks, it’s meant the central bank has been leaned on more heavily to provide solutions since there haven’t been European-wide fiscal solutions. And, fascinatingly, Germany recently signalled a pivot. And so both France and Germany now are on side with the idea of issuing common European bonds that would benefit from the economic might of the entire region, and giving as grants significant sums, hundreds of billions of euros to countries that are suffering the most, not as a loan, not requiring money to be paid back. And so in many ways, a big leap forward in terms of European integration. That still needs to be approved; it may or may not. But the idea that the two most powerful countries are on side is a big step forward, nevertheless.

And then lastly, let’s talk for a moment about Canadian housing, if we can. And so, in the short run it makes sense that housing markets almost everywhere are somewhat softer. After all, unemployment rates are spiking right now, immigration is, at least for the moment, curtailed, and risk appetite in general is lower than it was. And so all of these things add up to not a very pretty picture for housing.

And we’ve seen, for instance, the Canada Mortgage and Housing Corporation predict that Canadian home prices could be down 9 to 18 percent over the next year. I would personally pick the over on that. I would say, zero to minus 10 might be the range that I would give. And I feel as though the data so far holds up to that. April has seen only the slightest of price declines. And so my suspicion is it won’t have to be quite as severe as CMHC says, but it’s not impossible, to be clear.

To my eye, though, the more important point about housing is just the idea that from a long-run perspective I don’t think there’s going to be too much of a lasting influence. Certainly, some interesting debates about preference for high-density, vertical living versus lower-density living elsewhere, and that sort of thing may linger for several years. But ultimately, I fully expect Canadian immigration to come back. I expect Canadian unemployment to look much more normal over the next few years. I think risk appetite broadly returns. And so I’m not sure we’re going to see a radically different housing market over the long run.

Okay. Why don’t I stop there and say thank you so much for your time. I hope you found that interesting.

As always, our full weekly MacroMemo, the written form contains many more subjects than that and more detail on the subjects I’ve managed to just address.

But in any event, thank you again for your time, and I wish you very well in investing, and hope you choose to tune in again next week.

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


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