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by  Eric Lascelles Oct 6, 2020

Chief Economist Eric Lascelles shares an updated economic forecast amid the second viral wave. He also provides his thoughts on economic implications from a political front, with the U.S. election now only a month away.

Watch time: 12 minutes 36 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 thoughts in our weekly #MacroMemo. And indeed, we will cover off the latest COVID virus numbers, some thoughts on this second viral wave and how it is likely to play out, a new measure of risk by country from Oxford University, the latest vaccine news and developments and thoughts on that front, economic data, updated economic forecasts for that matter and, of course, all sorts of US political coverage. Quite a lot is happening on that front.

And so let’s begin. And on the COVID file, well, COVID-19 is now officially the 20th most deadly pandemic in recorded history. That’s deaths as a percentage of total population.

I should say, as much as there are a million deaths, that still only equals 0.013% of the population as it stands right now. For context, HIV/AIDS killed ultimately 0.57% of the world’s population so far. The Spanish flu was a much higher 2.7%; that’s fifth place in the history of pandemics. And the Black Death, number one, killing 42% of the world’s population at the time.

And so, of course, we’re well, well below any of those sorts of figures. Again, it’s 0.013% as it stands right now. But keep in mind, any kind of reduction of effort to control the virus could easily increase that fatality figure by something like 20 times. And so arguably still a most serious affair, if nothing like the Black Death or even some of the earlier pandemics out there.

Pivoting from that comparison to history just to the latest numbers, we can say that the global figures still show around 300,000 new infections per day. Roughly steady. Maybe not rising quite as much as they were before. An interesting divide: as much as there are more emerging-market cases, it is the developed world that’s seen the most obvious increases. And actually, in the emerging market space we’ve seen a decline in some of the most prominent and some of the previously most-affected countries, including Brazil and India.

In the developed world, we can say the U.S. seeing slightly higher numbers. And so this is not ideal, particularly given the U.S. is already at 55,000 cases a day, but still not looking anything like the second wave that was struck in late June through July and into August. Though up is not a desirable pattern for the U.S.

UK seeing quite rapid increases right now, and so that is genuine trouble, we think. And it’s a similar story, if slightly less severe, in Canada, in the sense that Canada now up, as of this recording at least, to around 2,000 new infections per day.

That actually is a record number, officially at least. It’s higher than Canada ever recorded in the spring. Though in all fairness, there was likely so much under-testing in the spring that it’s doubtful this is actually genuinely worse, if you were to pick up all of the undetected cases. But nevertheless, clearly rising. Rising by about 35% per week.

And we have seen some policy response. I would say Quebec has been the most aggressive and probably stands the best chance at getting these numbers to be wrangled back down over the next few weeks.

However, still rising quite clearly in many other provinces, including in Ontario, where the policy response has been much more ginger so far, and to my eye at least, then probably ultimately insufficient.

And then maybe lastly, purely at least on the COVID transmission file, we can say Europe, which has been very much in the midst of a second wave, perhaps starting to stabilize a little bit. And so when I say that, what I mean is that France and Spain have seen their very high numbers cease to rise; in fact, even to come down a little bit, though they are still very high.

Probably premature to declare complete victory in Europe, though, in the sense that we’re seeing less-affected countries like Italy and Germany still suffer rising numbers, albeit from a lower base. And so some evidence, though, of success in the most-affected countries.

Turning from that to Oxford University data. We’ve long used Oxford’s stringency data as a measure of how governments have closed and opened their economies and comparing across nations. Oxford has a fairly new metric called the Risk of Openness Index. And essentially, it again, looks at what governments are up to in terms of social distancing, but also the quality of the health care, the amount of education going on of the public in terms of how to respond to this, and that kind of thing. Essentially, a more comprehensive index.

And looking at developed countries, that assessment has Spain and France at the top of the risk charts, and so that’s indeed been how all of this has played out recently. Then the U.S., then the UK; this is from worst to best. And so improving, as we say, these countries. And then the four countries less affected in the developed world, or less at risk, would be Japan, Italy, Germany, and Canada. And so Canada actually looks the best out of those countries. But of course, Canada also suffering a rising number.

And so the main conclusion here is that really no developed country has an under-control situation. But among those, perhaps the Canadian setup is a little bit better than most. And so perhaps that’s a positive at least for Canadians who are watching.

In terms of vaccines, this is something that we’re all looking at very closely. And, of course, developing a vaccine would mean perhaps a leap back toward a much more normal life. And we’ve often said we think mid-2021 is a pretty realistic proposition for widespread distribution. That still seems about right, but it’s worth going through maybe the seven key considerations or the seven key hurdles for a vaccine and just evaluating each quite briefly. And so the first is, how likely is a vaccine. The answer is, quite likely at this point in time. There are many vaccines in Phase 3 with at least tentatively promising results. And Russia and China have even implemented vaccines as much as they haven’t gone through the full, normal vetting process.

From a timing perspective, timing has slipped a bit. That really is the main news over the last few weeks. And so at one point, we had 70% of the market predicting there would be fairly widespread US access to a vaccine by the end of March. Now that same percentage thinks it will be by the end of May. So we’ve lost a few months. Nevertheless, 2021 does still seem to be quite plausibly that year, and perhaps some emergency usage toward the end of this year.

The next one is efficacy: how effective will the vaccines be? And so we don’t know with certainty, but it looks likely they will be at least a 50 or 60% efficacy, which is to say enough to be worth doing, if not a perfect solution, for everyone who gets the inoculation.

The duration of the protection is another question. And so, again, we don’t know with precision, but it looks like it should be perhaps multiple years, not just a few months. And so long enough to justify inoculation and make it a practical thing.

Take-up has been a concern; what fraction of the population will be willing to get it. Not everyone will. However, surveys seem to suggest around three-quarters of populations will; around 90%-plus probably for the most vulnerable populations. So that probably is enough to do the trick. And then production, how we make billions of vaccines in fairly short order. It does seem as though pharmaceuticals and their partners have the capacity to genuinely create billions over the next few years, in fact, over the next year. And so, achievable, if a big challenge.

And then distribution is always an issue as well, and maybe more challenging in the emerging market space in particular. But at least in the developed world, there is already a long history of flu vaccines each winter and more than half of the developed world populations get this vaccine. It seems that the distributional challenges are at least surmountable at a minimum.

And so the bottom line is, we’ve slipped a little bit in recent weeks in terms of timing, but a vaccine is still likely and still very much a 2021 proposition, we think.

Let’s talk economic data for a moment. And so, on the economic front, we can say a few things. One is that it does seem as though growth is still continuing into September. We’ve had U.S. job numbers; we’ve had Purchasing Managers’ Indices for a range of countries. And, in general, there’s evidence that growth has slowed. And of course, a second wave isn’t a particularly helpful thing when grappling with this sort of thing. But nevertheless, it does look as though economies are continuing to grow.

You can get some sense for the deceleration, though, from Canadian monthly GDP. And so Canadian GDP grew 6% in June, grew 3% in July, is estimated to have grown 1% in August. We don’t have a September number, to be fair, but you can see a pretty clear trend here, which is decelerating growth. And so it is harder to continue to make progress as we’re not reopening sectors quite as eagerly as before, and it’s just there’s less to reclaim as well. And so it is a decelerating trajectory but we do think the economy keeps moving.

And I should say, in the U.S., we’ve been nervous about the fiscal cliff. There was a big withdrawal of fiscal support at the end of July. We saw the August personal income numbers for the U.S., they were down 2.7%. There was a real damage done to personal incomes, and so not something to be trifled with.

However, the U.S. personal savings rate is still very high because there’s still a lot of money sloshing around. And in the end, personal spending still rose by a percent in the month of August. And so even a loss of income wasn’t enough to stop that spending engine. And so again, our suspicion is, we can still talk about some economic growth over the coming few months, even as we deal with a second wave.

We’ve actually been in the process—we’re in the midst, I should say—of revising our own economic forecast, and so I’ll just flag for you the direction and the approximate new numbers. And for the most part, it’s an upgrade. As much as there’s a second wave, and that’s bad, the bigger news is that the economy has held together better than we’d expected over the last few months, and some of those new headwinds aren’t hitting quite as fiercely as we’d feared right now.

And so, for instance, whereas we had been looking at U.S. 2020 GDP around minus 6, it could be a minus 4. It could even be a minus 3.5. The third quarter has held together surprisingly well, even as the U.S. went through a second wave.

In the Canadian context, we had been looking at a minus 7. We’re now looking at something on the order of a minus 5% GDP. And so still awful numbers by any metric, but a notable upgrade. And actually, in both cases, sending us from a little below consensus to potentially a little bit above the consensus, which is a relevant thing from a financial market perspective.

Let me turn to politics for a moment. And so U.S. politics have been extraordinarily busy over the last few weeks. And so we have a President Trump COVID-19 positive. There was a first, possibly an only debate between the two candidates, Supreme Court developments, election odds swirling. I won’t speak to all of that, though our written #MacroMemo does get into many of these things.

And so suffice it to say, Trump has been infected by COVID-19. It’s quite unlikely that he dies from this, even though he is fairly old. He’s getting the best possible treatment, and the fatality rate, it’s still not overly high, even for people in their 70s. And so that’s not a particularly realistic expectation but it does slow down the campaigning process. And keep in mind, he has been trailing fairly badly in the polls, and so it just reduces the window of opportunity for him to catch up.

The debates didn’t necessarily have a clear victor, though many said the America public lost. It was a very chaotic experience and not particularly content-filled. But we can turn in the end to what betting markets think about the relative odds of different outcomes.

And they think that Biden is more likely to win than he was as of a few weeks ago. In fact, one betting market has gone from giving him a 55% chance to about a 65% chance. And some of the models out there are even more forceful, arguing that the prospect of a Biden victory has increased to as much as an 89% chance. And so not at all done and things can yet happen, but fairly resounding at this point in time. And we’re tracking the eight most contentious states, and seven right now have polls that are supporting Biden as opposed to Trump, and so speaking to some of those probabilities we just talked about.

Let me finish with a real quick bullet or two here. And so to begin with, pundits, political experts are arguing that the odds of a U.S. fiscal package have improved somewhat recently. Seems to me we’ve heard promising thoughts almost every week and nothing has happened yet, so I’m a little bit skeptical. But the experts are suggesting there could be some fiscal package in the next few weeks; that would be a helpful thing economically.

In the UK, Brexit odds have improved to some extent. Both parties seem to be negotiating again, and so a slightly better prospect there.

And then I’ll just mention Japan has a new prime minister. And so the new prime minister from the same party as the old prime minister. Was a very senior member of that prior government, and seemingly a very familiar course, at least economically, going forward.

And with that, I’ll say thank you so much for your time. I hope you found some of this interesting, and please consider tuning in next time.

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


Publication date: October 6, 2020

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