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by  Eric Lascelles Nov 17, 2020

In this video, Chief Economist Eric Lascelles shares an update on the latest virus numbers and related economic developments. He explores how Europe and the U.S. are managing with the second wave, while highlighting the positive progress around a second vaccine candidate from Moderna - also with an efficacy rate above 90%.

Watch time: 14 minutes 47 seconds

View transcript

Hello and welcome. My name is Eric Lascelles.

I’m the Chief Economist for RBC Global Asset Management, and here to share with you our latest video #MacroMemo. And this week we covered quite a range of subjects, certainly starting with the latest virus numbers. We also talk about good vaccine news, in fact, a second straight week of positive vaccine news, before venturing into more classic economic terrain. And so we’ll discuss, of course, the latest economic developments. We’ll talk a little about whether the U.S. will be willing to lock down to control its latest wave and what that might mean from an economic perspective in the U.S. And a similar discussion for Canada. We’ll also talk about the potential structural damage this pandemic could leave. In other words, how the economy might be different in an output sense a decade later relative to initial expectations and the prior trajectory.

And also just a word on U.S. politics; a word on Brexit as well.

And so let’s jump in. And just to begin with and to summarize how things have changed over the last week, we can say on the aggregate the situation looks a little bit better, though not uniformly so. We can say that the vaccine news has continued to be quite positive. That’s probably the big positive news, but let’s not understate the fact that Europe now seems to be improving from a virus perspective. Fewer new cases per day and that was previously the epicentre. On the hand, conversely, we can say that the big negative is that the U.S. figures, the virus numbers are continuing to get quite a lot worse and we’re not expecting that to turn in the near term. But again, on the aggregate, perhaps somewhat better.

Let’s start maybe with vaccine news, and so the thinking just being that to return the global economy to something approximating normal, a vaccine and herd immunity are the key. And so a week ago we heard that Pfizer had seemingly succeeded in achieving a high efficacy rate on its vaccine candidate, more than a 90% efficacy rate. And Moderna has now come out with a very similar style of vaccine and it’s reporting a 94.5% efficacy. And so let the record show, both of those numbers are well higher than what most people had assumed going into these recent announcements. The thinking was you might get a 50% to 75% type of efficacy, and instead, it looks like 19 out of 20 people who get the vaccine can reasonably expect to be protected from the virus subsequently.

Also, the Moderna announcement comes with good news of another sense, which is that the distribution requirements are a little bit less onerous. These types of vaccines need to be kept at cold temperatures, and previously the thinking was you’d need to keep them at minus 75 degrees Celsius, which is beyond the scope of most fridges and freezers, and so conceivably a problem. And it looks as though this Moderna vaccine can actually survive for up to 12 hours at room temperature, it can survive, I would say more importantly, for up to 30 days in a common fridge, which is probably the key in all of this and so conceivably easier to distribute as well.

And stepping back and just recognizing we now have two seemingly viable vaccines, and so two being better, of course, than one, both in terms of the likelihood of reaching the finish line but also in terms of the amount of production that can take place. It also suggests a pretty good chance we’ll get more vaccine candidates enjoying fairly high efficacies as well. And indeed, when you look at herd immunity, herd immunity is a function of how effective the vaccines are and how much people are willing to take the vaccine, the uptake. And so the effectiveness is practically off the charts and the uptake will probably be higher as well because of the high efficacy. If something is very likely to protect you, people are more likely to get it. And so on both counts, we can talk with a straight face about herd immunity being an achievable proposition in an economy that gets back to normal sooner and does better in 2021 and 2022 as a result of that.

Let’s pivot from the vaccine news, now, just to the virus numbers themselves. And we can say on the negative side of things, the U.S. is getting worse quickly. It’s around 150,000 infections per day, which is the worst that was ever seen recorded. And no immediate end in sight. Our suspicion is these numbers keep getting worse before they start getting better. And up until a few weeks ago, we could say that the infection numbers looked bad but in practice, we weren’t seeing that many fatalities and those weren’t really budging. And unfortunately, now we are seeing hospitalizations at record levels, we are seeing fatalities also rising significantly. And if the current trajectory persists, it wouldn’t be a surprise at all if over the next month we actually saw fatalities in the U.S. exceeding their per-day peak in the spring. And so that’s not a preordained conclusion. We could yet see compensatory actions and a response from the government, but at the moment, we aren’t seeing enough of that to bring this under control.

In a European context, the situation, though, is quite different. And so Europe has struggled mightily, it has been the epicentre for the virus for some time now, but now clearly starting to get better. And so France had been the worst country of all. It was recording 50,000 cases a day until recently. It is now recording just 9,000 a day. This has been quite a remarkable pivot over the span of just a couple of weeks. And I should say Spain is also improving, Germany and Italy are flattening, and so we are seeing improvements almost across the board. But, let the record show, at a considerable economic cost. And so there have been very fierce lockdowns imposed in most of these countries. We are now assuming that Eurozone GDP in the fourth quarter is negative. In other words, the economy shrinks in that fourth quarter and fairly substantially, if not nearly as much as it did in the spring of this year. And so there is an economic cost to that but Europe is now getting distinctly better.

Pivoting from there to the economic data. Well, it will come as no surprise that the mobility data is clearly declining, particularly in Europe. This is to say, people are moving around less. Governments are imposing stricter rules. That’s exactly why Europe is getting better from a virus perspective and why it’s getting worse from an economic perspective.

Turning to the U.S. The bellwether U.S. economy, we can say a few of the real-time indicators we tend to track are looking a bit weaker. So the New Orders measure has soften a bit, hours worked by hourly workers has softened a little bit. I would say despite that, or maybe we should say those indicators do suggest at least a decelerating U.S. economy. But despite that, we think probably the U.S. economy is still growing for the moment. There’s a New York Fed Weekly Economic Activity Indicator [sic] that suggests that at a minimum. New sentiment indices in the U.S. are still rising enthusiastically on the back of vaccine news and an election outcome that one might construe as being economically positive as well. And so we still think the U.S. economy is growing, but perhaps it’s growing a little bit less quickly at this juncture.

I’ll spend a moment just on consumer spending. And so to say that throughout this pandemic, consumer spending in the U.S., but also in Canada and globally, has been surprisingly strong. And, of course, it’s been surprisingly strong at least in part because of government support. But what I want to do right now is just to highlight that the strength is quite varied and so we can’t say that consumer spending is uniformly strong. It’s strong in some areas and so, for instance, online sales are 71% higher in the U.S. than they were a year ago. Home improvement spending is 27% higher, grocery sales are 11% higher, furniture sales are 10% higher. These are sectors that have actively benefitted from the way the economy has changed during this pandemic. However, as you might imagine, other sectors are doing considerably worse. And so entertainment spending is down 73% over the last year, air travel spending is down 65%, lodging spending is down 46%, transit spending is down 22%, department stores are down 21%, gas station sales are down 18%, and clothing sales are down 12%. So a real variation here. And so some big, big winners, but a lot of big, big, losers as well. So let’s not pretend that the retail sector is doing uniformly well, despite the headline figures.

One question we’ve thought really important and we’ve been grappling with recently is, okay, Europe decided to lock down and Europe has now had luck in controlling its virus outbreak. Will the U.S. lock down? The U.S. has these very challenging infection numbers again. It’s a more politically complicated environment, it’s not quite so straightforward, it would seem, to impose the necessary rules. And so it’s an open question, and we are of the view that yes, the U.S. will significantly restrain activity again. And I remember back in June and July the same debate happening, and the U.S. being ideologically opposed to shutting down and ultimately, it did shut down the necessary sectors and it did control its own second wave, which took place over the summer. And so we suspect it will be similar this time, probably less shutting down than in Europe, probably less economic cost than in Europe as well. In fact, we can say that Europe probably has overdone it in terms of strictly what they needed to do to get the virus under control. And I think the European attitude has been, we don’t want to just go from 50,000 cases a day to 40,000 cases a day, we want to go from 50,000 to 5,000 or 1,000. And so they’ve gone very aggressively and done far more than you would need to in isolation to get this back under control.

And so, in the end, we suspect that we will see some tightening measures in the U.S. and in Canada, I should say, from here, but not to the extent of Europe. And let’s recognize these North American economies are also somewhat more dynamic, more flexible in other words, have somewhat of a higher speed limit in terms of the rate that they’re normally able to grow. And so essentially, we are budgeting for tighter rules, we are budgeting for some economic damage in North America. We are not budgeting, though, for a recession or an outright decline in quarterly GDP. We think there could be a month or two in which the economy sputters or even declines slightly, but not to the point that Q4 of 2020 or Q1 of 2021 actually goes down. Could be a weak Q1 though in terms of the actual reported growth rate.

Let’s spend a quick moment on structural damage. And so through all of this, we’ve been focused on getting back to normal and getting past the virus, but it’s worth asking, what is normal? And will it be the same as what the normal would’ve been had there never been a pandemic? And the IMF, for instance, thinks that normal or the sustainable level of the economy will be something like 3.5% smaller once the pandemic is done and several years have passed than it would’ve been without the pandemic. And they say many emerging markets will be 5.5% smaller. So some considerable structural damage. Our suspicion is, while there will be some structural damage, we don’t expect it to be quite as large as the IMF expects. And so as we think about that, we think gosh, you know, this recovery has exceeded expectations at almost every turn so far, and so it could well be a pattern that persists.

We’re cognizant that the damage that’s been done is artificial at this time and so can be unwound by government edict, it’s not excesses that need to be burned out of the system as was the case, for instance, with the Global Financial Crisis. We know there’s been enormous stimulus delivered to plug holes and prevent the kind of structural damage that sometimes happens during deep recessions. And for that matter, it seems to us that the structural damage done during the Financial Crisis was ultimately a bit smaller than people had feared. I remember conversations about how, gosh, we need to expect in the U.S. an unemployment rate, normal will be 6% or 6.5% after this crisis. It was 5 before, but we’ll never get back there. And we did back there. In fact, we got back down below 4%, better than the normal before the Financial Crisis. And so our suspicion is, maybe less structural damage than many are currently thinking. Still a bit, maybe a percentage point or two, but not the three to five and a half that the IMF is saying.

Okay. A couple quick words from me. Just the U.S. political story. And so I don’t think the outcome is any serious doubt to—Joe Biden is the U.S. President-elect. Yes, there’s recounting. Yes, there’s legal challenges. Yes, this is a contested election. But as we had widely suspected beforehand, it would be contested but not really in serious doubt. And so markets are reasonably content, they think they know the outcome with a pretty high level of confidence.

The Senate situation isn’t quite so certain, though. As you likely know, there are two run-off elections for senators in the state of Georgia. Republicans are thought likely to win both, about a 75% chance of winning each individually. You should know the Democrats would have to win both to control the Senate, and so the odds of that are probably under 20%. If you do the math and recognize there’s a correlation between the two outcomes and really in the end as much as this could happen, it’s not all that likely. And, you know, if you think of Georgia as being this centrist state that just barely chose Joe Biden and it wasn’t quite sure which way to go on the Senate, the very fact that there’s a democratic president probably means that Georgia would prefer a republican senate to keep that balance of power from skewing too far one way or the other, but we will see on January 5th.

And lastly from me, just a word on Brexit. And so in the UK we can say in theory the deadline is now coming and going. Middle of November was thought to be the last opportunity for a deal to be struck between the UK and the European Union before the end of this transition arrangement at the end of this year. In theory maybe so, but in practice, it looks like they are still negotiating. There is perhaps still a little bit more wiggle room to get things done. It’s the same old sticking points, and so fishing rights and a level playing field. The competitiveness environment of the two regions are still issues. We suspect they will find a way to cheat their way through that and reach some sort of mild free-trade agreement. I will say, simultaneously, the Northern Irish border continues to be challenging. There’s already been an agreement between the UK and the EU on that and promising no hard border between Ireland and Northern Ireland, however, the UK continues to propose domestic legislation that would seem to challenge that interpretation. And one was recently cut down by the House of Lords in the UK, but another one has popped up. And so that remains challenging. We’ve even seen democrat President-elect Joe Biden commenting and suggesting that there’s no U.S.-UK trade deal if the UK doesn’t respect the Good Friday Accord that does bind Northern Ireland and Ireland together.

So, messy on a number of fronts. We will still say, for the moment we think there’s a fair chance of a slight free-trade agreement being signed, but gosh, time really is running out. And we have to know—we will know with certainty over the next month and a half.

Okay. I’ll leave you there. Hopefully, you found some of that useful, perhaps even interesting. I wish you well with your investing and please consider tuning in again next time.

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


Publication date: November 17, 2020

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