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by  Eric Lascelles Jun 16, 2020

RBC GAM’s Chief Economist Eric Lascelles says that the economic recovery continues, but the timing of the return to full capacity remains uncertain. Might it take longer than the optimists suppose? The Fed, Lascelles notes, made markets nervous with its expectation of a slow recovery. The global economy remains uneven, with some countries faring better than others during the pandemic.

Watch time: 11 minutes 29 seconds

View transcript

Hello and welcome. My name is Eric Lascelles. I’m the Chief Economist at RBC Global Asset Management.

And you’re tuning in to our latest weekly videocast; really a video version of our written MacroMemo.

And I’m here to share with you any number of macro insights, but of course disproportionally tilted toward COVID-19, which remains that dominant macro issue of the day.

I can celebrate there are some positive things to report. We can say the economic recovery is broadly continuing around the world, and so that’s a key positive. We can also say, at least within most of the developed world, the number of new infections per day mostly going down, as opposed to up. And so I think those are the two main points to celebrate.

There are some challenges though, out there right now. And perhaps one of the more obvious ones is at the global level we are still seeing a rising number of new viruses per day. And so really a story in which emerging markets are getting worse at the same time as many developed countries are getting better.

Within the emerging market space we’re seeing particular challenges in places like Pakistan and India. We do continue to see quite a high caseload in Brazil, though it’s come down to some extent. Still see very significant infections as well in the likes of Russia and Iran also. And so emerging markets, the place to watch in the sense that we are mostly getting a deterioration there.

And I should mention China as well. And so China of course was the epicentre for the virus originally, but then had clamped down so aggressively that there really weren’t very many new cases at all. It has now suffered at least a mini second outbreak in the capital city of Beijing. It’s shutting down the economy again in response to that. I suspect if anyone’s going to successfully stop that outbreak it will be China. And so I’m not expecting that one to persist for too long, but nevertheless some challenges even in countries that have treated the virus quite seriously.

In the US, the thing that makes us most nervous is that almost half of US states are now suffering a rising number of daily infections. And so you look at the aggregate level, the caseload nationally is roughly flat, but at the state level it is rising in many states, including some pretty big ones, including Texas and Florida and California as well. And so this is a challenge and—now it’s not clear that the leaders of those jurisdictions are going to be particularly keen to shut their economies down again. I happen to think that masks and social distancing may take them some chunk of the distance towards controlling it, but nevertheless there are a lot of unanswered questions right now, and the risk this could continue to get worse in those parts of the US. And so double-dip fears from an economic standpoint, double-peak fears from a virus perspective are entirely valid, particularly when looking at the US.

As we worked our way through the various issues of relevance over the last few months, one thing we didn’t do in late April was publish our regular quarterly business cycle update. And so again that’s a quarterly thing we normally do. In late April, there happened to be other slightly more pressing issues. We knew without any question it was a recession so we weren’t going to learn a whole lot from the exercise, and moreover there were some pretty urgent questions that needed to be answered at the time and so we dedicated our resources there.

We have since turned around though and we wanted to fill that hole. We would have never forgiven ourselves for not having an answer to what the business cycle indicator was saying during the deepest recession in something like a century. And so, in turn, we have now done that. And so to no one’s surprise, indeed our indicators do confirm this was a recession without a shadow of a doubt. We focused on the March–April period because subsequent to that will then be relevant for the next business cycle indicator. But I can say, as we looked at those charts and looked at the data, it is increasingly possible to claim that we are now in a start-of-cycle phase, and indeed that’s just consistent with the view that we’ve seen some economic growth happening since very late April to early May.

But the indicator was clear, and as much as there were some claims to end of cycle, there were some claims even in March and April to start of cycle, the overwhelming conclusion was recession. I suspect to no one’s surprise. And so I’ll leave that right there.

As we track this economic recovery, the mobility data is continuing to rise. And so people are travelling around more, going to stores more, going to workplaces more, and the like. That’s a fairly universal theme. We see that in almost every country, though to varying degrees.

We can say that when we look at some of the real-time data, it would appear that the recovery is slowing a little bit. And this makes sense. We had big gains made in the early weeks and months and now there’s less room to accelerate from here. And so, for instance, looking at US hours worked data of hourly workers, looking at US surveys reporting business revenues, those things are getting better, but they’re only getting incrementally better now after having made those big leaps and bounds earlier. So a decelerating recovery, which makes sense to us.

Housing markets have been quite interesting. I know there are quite varied views on how housing markets should respond to all of this, and at a minimum you would think there should be some negative impact. Unemployment rates have gone up a great deal and uncertainty is high, people have lost their jobs, and the list goes on. And so from all of those perspectives, it would make sense if housing was somewhat weaker. I suppose it is, but in the end not a whole lot. And so, for instance, we’ve now seen US mortgage applications rebound to completely normal-looking levels; I think much earlier than anyone might have imagined.

In Canada, we’ve seen housing starts rebound essentially back to normal type levels. And existing home sales still running below normal, but recorded a 57% increase in the month of May. And so consistent with a better sentiment in that market.

And of course we always look to China for some sort of clue as to how the economy will respond to COVID-19 and its aftermath, just because it got the virus first. And in China, home prices have now been rising for a number of months, and it would appear that market has more than stabilized as well. And so I wouldn’t suggest that’s the final word on the subject. Let’s appreciate that the longer people are unemployed, the more they might struggle to make mortgage payments and you could imagine some incremental building challenges that exist for the housing market, but in the end it’s not proving as devastating, at least in the short term, as many had initially expected.

I do want to report one late-breaking piece of news. In fact, you won’t find this in the written report. It’s just come out since I wrote that, and here we are now with the video version. And so US retail sales for May have come out and everybody expected a pretty good-looking jump. The consensus was that retail sales probably rose by something like 8% in May. They didn’t. The rose by 18%. That’s a massive jump. It almost completely unwinds the decline that occurred in the month of April.

And we are acutely aware, for instance, that there was a one-time big stimulus cheque delivered to Americans over the month of April and spilling into early May. And so that may help to explain all of the extra spending taking place. But nevertheless, that was more than double the increase that was expected. It seems as though consumer spending is in significantly better shape than first imagined. I have to say, it makes sense.

We knew that savings rates were colossal. In April they were sitting at 33%. There was ample room for people to spend more if they had the ability to. And, as stores have reopened and people have adjusted their spending habits and gone online and that kind of thing, it would appear they have found that ability.

We keep watching Chinese data very closely as well, by the way. And so China has had its latest data dump as well. And we can say Chinese retail sales looking somewhat better. Still 3% lower than they were a year ago, but at one point they were 16% lower than a year ago. And so that has been a pretty substantial revival of the Chinese consumer base.

But actually in the industrial base has bounced to an even greater extent. And so we can say, for instance, industrial production in China is now 4% higher than it was a year ago. Now that’s still not normal, you’d think it would normally be 6% higher, but it is a significant bounce.

And when we think about our own forecast then, no changes really of substance to report. I can say that we’re still comfortable with our assumptions about the economic decline, how long the trough lasted, the initial nature of the rebound. Those things are mostly holding together as we had expected.

But, I have to say, if there’s a risk to our view, it’s that we may be having the rest of the economy come back more quickly than is reasonable. And, I should say, we’ve been careful not to be too, too optimistic on that. We’ve generally been at consensus or even more pessimistic than consensus on that. But, just the more we think about it, there’s a real risk you don’t get the other half of the economy back by the end of 2021.

And indeed the Fed, the US Federal Reserve, recently came out with its own views. And if you read between the lines, they seem to be suggesting they don’t think the economy gets all the way back to normal until maybe something like 2024. So a lengthy process. Consistent with past recessions, but nevertheless a slower response than people have normally expected.

I do want to spend one moment on a non-COVID-19 subject. It’s rare we get this luxury, but maybe it’s a statement about how much time has passed and the extent to which economies have revived. But let’s take a moment to talk about the US election in November. It’s now only four-and-a-half months away. We now know the main combatants. It will be President Trump against the Democratic nominee, Joe Biden.

And, as we look at some of the betting markets out there, the betting markets seem to think Biden has at least a slight upper hand right now, giving him a 57% chance of winning, versus Trump at 43%. That’s notable by the way. Incumbents usually enjoy quite a big advantage, and so something of a reversal has taken place here.

Let’s not count Trump out by any means. He had a worse probability than that of winning in 2016, and yet he did win, so 40% chances are 40% chances, and it happens four times out of ten. But nevertheless, for the moment Biden seems to have the advantage.

And similarly when we look at Congress, The House of Representatives seems to be fairly firmly in Democrat hands. But the Senate now, currently Republican, may be up for grabs. And so, of course, much could happen between now and the election. For that matter, we could yet see any number of reversals. And a great deal will depend on whether there is a second spike of infections and whether the economy does continue to revive, and those will inform as much as anything else.

Frankly, the Joe Biden platform is barely discussed. This really is an election that is a referendum on Donald Trump as opposed to anything else. And so we see Biden frankly quite cleverly staying out of the way on that subject and recognizing that it isn’t in fact all about him. But nevertheless we’re going to learn more in the coming months.

And I’ll set political stripes aside. Some people might be delighted with those betting market results. Some might be not so much pleased. But I will say, from a market perspective, from a business perspective, there is some concern that a Democrat sweep, as one scenario, could result in higher taxes and prove damaging to stocks and corporate profits, and that kind of thing. So keep that in the back of your mind. We’ll watch as this evolves and as the date grows nearer. But increasingly becoming a subject of relevance, much as Brexit is entering the discussion once again, and we’re able to look beyond just COVID-19.

Okay. Well I thank you so much for you time. Again, I wish you well with your investing and I hope you choose to tune in again next week.

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


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