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by  Eric Lascelles Oct 27, 2020

The second wave of the pandemic is worsening, particularly in developed countries, as infection numbers continue to escalate. Chief Economist Eric Lascelles refers to IMF research to draw the connection between the efforts to control the virus and the economy, making note of China’s recent economic success relative to Europe. Peak oil demand and the looming U.S. election are also on his radar.

Watch time: 15 minutes 05 seconds

View transcript

Hello and welcome to our latest weekly MacroMemo. My name is Eric Lascelles. I’m the Chief Economist for RBC Global Asset Management.

And plenty to share with you this week.

We can start with the latest virus numbers, which have, alas, been getting significantly worse again, particularly in the developed world. We’ll talk a little bit about IMF research, highlighting the connection between the virus and efforts to control it, and the economy itself.

Certainly we’ll share the latest economic news, including some preliminary October numbers, suggesting in particularly some stuttering going on in Europe. And we’ll also take a look at China’s relative economic success, the underperformance of cities relative to suburbs and more rural areas in this pandemic. And we’ll discuss peak oil demand and also, of course, the US election outlook. As I record this, there’s precisely one week to go until that election.

Okay. Let’s dig in and start as we always do with those latest virus figures. And so unfortunately they are getting significantly worse. Again, this is a very real second wave. And so globally, for instance, there are now a record 450,000 new infections per day.

It has not been suffered equally in the sense that we’ve seen developed countries in particular see a big spike in infections over the last month or two. And actually now we’re calculating more developed infections per day than emerging market infections per day, despite the fact that developed countries only have 15% of the world’s population. And so quite a difference on that front.

Still a silver lining in the sense that fatality numbers not nearly as bad, or not nearly as increased as much as the infection numbers, but those are going up as well. And so case in point, in France fatalities are running about 10 times higher than they were over the summer. However, still significantly below on a per case basis than what France experienced last spring.

Europe still very much the biggest problem out there. And so in fact France with 35,000 cases per day and rising, the UK up to 20,000, Italy up to 12,000, a variety of other European countries also suffering to some extent. I think maybe the one bit of tentative, neutral to good news would be that perhaps Spain starting to stabilize. Though we’ve been misled by them before and so I don’t think the jury is quite back on that subject. But nevertheless, perhaps the Spain numbers not deteriorating to the extent of others and maybe starting to set an example for how this could improve in the coming weeks. But still a very challenging situation for Europe.

That when we turn toward North America, in the US the numbers now surging again. They had been going up but not very quickly. Now they are racing higher and actually setting records. And so technically now this third US wave actually is seeing more infections per day than the second wave. And the second wave saw more than the first wave.

Certainly worth acknowledging there was a great amount of under-testing in the first wave; that probably was the worst experience. But nevertheless we are seeing some rising and challenging numbers. And it’s the majority of US states that are on that trajectory, so this is not just a rogue state or two. And then in Canada, the Canadian numbers also going up. Rising more slowly than in some of these other countries, but going up nevertheless. We will take the fact that Canada’s most adversely province, Quebec, may be starting to stabilize. The last few weeks have not seen further increases. And actually that makes sense to the extent Quebec has been more aggressive in seeking to control the virus and limiting social activity, and limiting some of the higher risk economic sectors.

And so we will see whether they simply prove a leading indicator. Perhaps Canada can start to peak in the next few weeks. But equally there might need to be a little bit more restricting unfortunately going on in certain other provinces to get to that point. And so broadly speaking, a challenging environment purely from a virus perspective.

The IMF has lately come out with its own semiannual research publications. And a few interesting things I think worth sharing. One would be when they were looking into why so much economic damage occurred, was it because governments created rules limiting activity? Or was it because people voluntarily opted to socially distance and not engage in as much economic activity or as much mobility?

The answer is it’s certainly both. And so that’s what you would expect. However, interestingly, in the developed world they find that more of the damage came from people voluntarily distancing than from the government rules themselves.

And so one of the points or one of the implications of that is that even if governments were to lift all of the rules, you would not see economies completely snap back. The only way you get economies all the way back is if the virus is essentially dealt with. And so that’s some distance off and it helps to explain why vaccines have been so much in focus.

The other interesting item we took from the IMF work was the view that there is some permanent damage that will occur. And so there’s a lot of focus on the next few years and the economy underperforms and it takes a while to normalize. However, they are saying they think several percentage points of output will be permanently lost. In other words, what constitutes a normal economy will be at least a little bit smaller post-pandemic than it was before. We’ve budgeted for some of this. Not quite as much as the 3.5 percentage point loss that the IMF has put in. So that’s food for thought. We’ll be taking a closer look at that over time.

Turning just to the latest run of economic data, a couple quick things to mention. One would just be we’ve updated our own methodology for tracking mobility data. We’ve essentially cut out Apple Mobility. It’s proven a little bit too finicky and too sensitive to seasonal considerations for our liking. And so we have somewhat of a smoother, more reliable measure in the end using Google Mobility and Oxford Stringency data.

And really what it tells us is that these mobility measures have been trundling roughly flat and sideways over the last month or so. And so not ideal. They were rising previously, and so we were getting some pretty good economic growth numbers as a result. However, in our experience, sideways mobility is usually consistent with a slight increase in economic activity. So probably a bit of growth, but not getting a lot of growth there.

And then we now have the latest Purchasing Managers’ Index figures for October, at least for a handful of countries. And the US numbers look more or less fine. However Europe and the UK service sector seems to be struggling. We saw a significant retreat in both. This makes sense by the way. Service sector is more affected by new economic restrictions, which those regions have been putting on.

And so as we flagged in the past, there is a risk that these countries don’t grow in October and November. In fact there’s a risk that there could even be a slight decline. I don’t think it would be the beginning of something persistent, but nevertheless there could be a period of underperformance as this second wave races through those areas. And maybe we’re starting to get a little bit of a hint for that.

Certainly when we think of success stories I think China is one of the few examples that comes to mind. Maybe New Zealand as well, but China is a big one. And indeed China has done surprisingly well through all of this. Of course it was where the pandemic started, and so that’s not exactly a great success, but beyond that China is only recording around 20 cases per day right now, which is incredibly low for a country of more than a billion people.

Its economy is now almost 5% bigger than a year ago. Its car sales are up 7%. Its unemployment rate is just 5%. Its opened movie theatres, and shopping malls, and restaurants, and these kinds of things. And its currency is also up somewhat from the start of the year. And so China certainly has done well compared to most and arguably this makes sense. The country was very aggressive in its virus response, so has come close to eradicating the virus. And China has a dynamic fast-moving economy, and so reasonably well positioned to emerge from a shock like this. And ultimately this is good news. It’s good news certainly for China. It’s good news in a sense that it sets a useful example for the world of what does and doesn’t work, and at least one avenue for normalizing life and economic activity. And it’s also good news in the sense that China’s a big part of the world economy. China can help to carry global GDP during this period of time. And it’s not just an accounting mechanism, it’s also to say China is buying things from the rest of the world more enthusiastically than other countries because its economy is fairly good and China’s in a position to supply products to the rest of the world as needed as well.

And so, broadly speaking, a good-news story. Let me emphasize, it’s not quite as complete an economic normalization as it perhaps first looks. It’s worth acknowledging, for instance, that normally Chinese retail sales rise at about 8 percent a year; they’re only up about 3 percent right now. So the consumer has not fully reengaged. The reason you don’t really notice that in the GDP numbers is industrial production is growing more quickly than usual, and it’s hard to fathom that companies are deciding now is the exact moment they need a lot more factories or a lot more machines, particularly given a diminished global growth outlook. To our eye, that suggests that the government is injecting stimulus probably through infrastructure spending. And so there certainly is some government support and a degree of artificiality to the strength, but for the most part, a good chunk of it is real and the recovery has been impressive. And so, I guess, let’s celebrate that fact.

I want to spend a moment on urban underperformance. And so cities have most certainly done worse during this pandemic than have other parts of the world or parts of countries. A prominent example would be New York City, which has an unemployment rate that’s about twice as the high as the US average right now, and so still a significant amount of suffering there. And it makes sense. High-density living is unattractive at a time of pandemic. We’re all trying to space out and it’s hard to do that in a city. Cities also rely more on tourism than the average part of the country and tourism is down. And so it makes sense from a variety of perspectives.

And indeed, it seems reasonable to expect that divergence to persist for the next few years. It is less attractive to live in a big city at a time like this. Ultimately, though, I don’t think cities are down for the count. And so it’s likely they will revive. There is a long multi-century history of urbanization that continued right up until the pandemic of people moving from rural areas toward cities, attracted by things like higher wages and better health care and high-quality schooling and cultural amenities and shopping and proximity to friends and family. And so all these sorts of things are still very real. And so it’s worth acknowledging some things have changed now. Maybe working from home is more possible. Perhaps that changes the dynamic to some extent, but most people are still going to need to be going into the office semi-regularly, such that we can’t all just move hundreds of kilometres away from our office perhaps. And so proximity to the core is still likely to matter, even in this somewhat altered world. And so maybe there’s a story of suburbs becoming more attractive relative to downtown cores, more enduringly. And there’s been a pendulum that’s swung back and forth on that front repeatedly, and so it had been swinging toward downtown cores over the last few decades. It had swung quite profoundly away from them over the ‘60s and ‘70s and perhaps into the ‘80s. And so conceivably, there will be something like that. But in terms of cities as a general construct, it seems as though they’re still likely to be fairly popular and ultimately fairly successful over the long run.

Two more things from me. One would just be an acknowledgement of peaking oil demand. And so I mention this, not because it’s a brand-new thought. Once upon a time, there were concerns we’d run out of oil from a supply perspective. Now the concern or the expectation is that we may run out of demand for oil, or at least it may stop going up. And so it’s not a brand-new thought as much as it’s maybe new over the last decade or so. But I mention it because we had three prominent entities—the International Energy Agency, OPEC, and BP, the big energy producer—all come out in the last few weeks with big predictions that oil demand would be peaking in the 2030s. And so it was basically the same story from each. BP went further and said that depending on the scenario they could then have oil demand down by between 10 percent and 70 percent between its peak in the 2030s and 2050s. So not just ceasing to go up but starting to go down. And so it is an argument structurally for oil prices to be challenged over the longer run. And in terms of why, by the way, all these predictions are pointing in that direction, some of that is because of environmental pushes, some is because of anticipated slow economic growth and just general deintensification of energy in the economy, which has been persistent as a trend for some decades, also because electric cars may shift the sort of energy needs that transportation requires. And so, an important trend to observe. I think we’re not there yet but we’re only a decade away from the 2030s, and so this might be sooner than people generally imagine.

And then lastly from me, the US election. As I record this, it is precisely a week away. Polls do continue to favor Democrat Joe Biden over Republican incumbent Trump. However, the polls are a little bit closer than they were before. They had given Biden a 10-point-plus lead; now it’s an 8.7 percentage point lead. So getting closer but still quite a significant gap. You would have to look back to the 1940s to find an election that had a surprise big enough to overcome a polling gap like that. Betting markets give Biden a 60 percent to 80 percent chance of winning. Some of the models we look at give an 80 percent to 90 percent-plus chance of winning. And so it’s likely that Biden wins, but not quite certain. States that are in play, seven out of nine right now are tilting Biden; had been eight a week ago, so getting a little bit closer. But worth emphasizing, you don’t need all nine or even five of nine for Biden to win. Actually, Trump needs to win most of those close states if he has any kind of chance, and so you’d need even more to go in a Trump direction.

And then in terms of when we’ll know the result, well, I mean, the election itself is November 3rd. But let’s understand that more than half of Americans have submitted mail-in ballots. The rules by state vary quite significantly. Some states are able to count in advance. In fact they’re doing that right now and can report the results very quickly on election night. Others are not allowed to even start counting until the election has finished. And so from that perspective, it might be realistic to think it could take four or five days for some of these states to report results. And so in terms of whether we’ll know the results quickly or not in terms of who the next president is, it really depends on how close the election is and which states the President needs to win. For instance, Florida is supposed to report fairly quickly. If Trump loses Florida, it would be awfully hard for him to win the election. And so we could find out quickly but just worth bracing for the idea that it could take several days if not a week before there’s any kind of precise clarity as to who the winner is. And so do be aware of that.

And we’ve talked in the past about the policy implications of a possible Biden presidency. I think in a nutshell you could say it might be economically positive to the extent that big fiscal stimulus has been promised. I can argue that bond yields might go a little bit higher. Can argue that the US dollar might go a little bit lower. And the stock market is a little bit torn or conflicted on the subject. Conceivably a slight positive, but I would say maybe the view would be a slight positive if the Senate also goes Democrat and you get a sweep that would then enable that significant fiscal stimulus.

Okay. That’s it from me. And so hopefully you found some of that interesting. Please consider tuning in again next time.

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


Publication date: October 27, 2020

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