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by  Eric Lascelles Feb 2, 2021

This week, Chief Economist Eric Lascelles discusses positive vaccine developments and declining infection rates in certain regions of the globe. He also touches on economic surprises against earlier forecasts, including particular strength in the manufacturing sector.

Watch time: 14 minutes 43 seconds

View transcript

Hello and welcome. My name is Eric Lascelles.

I’m the Chief Economist for RBC Global Asset Management and welcome to our latest video MacroMemo and in this MacroMemo, we’ll cover a number of subjects. We’ll talk about significant improvements in the COVID figures. We’ll certainly talk as well about vaccinations, or rising pace of vaccination, though highly varied by country. We’ll acknowledge some new vaccines that have reported promising results. And of course, also delve into the economic space. And so several economic themes will be covered, including the trend for economic surprises, the state of financial conditions, and also just a look at the manufacturing sector and some surprising strength in there. We’ll quickly nod our head toward recent economic data in the U.S. and Canada. In particular, we’ll acknowledge a bit of UK Brexit damage and also look at the balance of macro risks as we revisit our own forecast. And so lots to cover off in the next little while.

Let’s jump in without further ado. And so I’ll start by saying overall it seems to me that recent developments have been a little bit more positive than negative. So I see more constructive than destructive developments these days. And critically among those, in fact central to the entire story of the last year is that the COVID-19 infection numbers are now falling quite significantly. In fact, the global transmission number, reproduction number, same idea, has now fallen to the lowest level since the pandemic began. That means actually the rate of retreat of COVID-19 is the most profound since the pandemic began. Of course, no guarantees that persist forever. All sorts of debate around exactly why that’s happening but certainly we’ll take it for now. Globally, we’ve seen the trend decline from around 750,000 new infections a day to around 500,000 over the last month. In the U.S. and Canada, both have improved by around 40% over the last month in terms of their own daily infection numbers. And quite remarkably, the UK and South Africa are now by around 75%. And if you’re wondering why we’ve combined that odd couple, why those two countries are mentioned in the same breath, it’s because they’re the countries most inundated by these new, more aggressive variants. And so if these countries have succeeded in cutting their infection so significantly despite having the most problematic variants that’s pretty wonderful news indeed and suggests that it’s at least possible to control COVID-19 even with the new more transmissible forms.

In terms of why COVID-19 has retreated as it has, well, a number of competing theories. Certainly the most prominent, and probably plausible one, is just that there were significant lockdown rules implemented over the last few months and those are finally starting to show up. And so I think that’s quite credible, although it’s interesting to note that some countries are also improving that haven’t as obviously gone through that difficult process. It might be that there are some seasonable components and so as much as the flu normally peaks in the winter, it’s worth acknowledging that the Spanish Flu, that last pandemic from 1918/1919, actually peaked in the spring and then the fall and then the spring again. And so it’s conceivable that what lets this spread more isn’t just cold weather but a certain range of cold temperatures that are perhaps less found in the coldest parts of the year. That’s speculation, by the way. But it’s possible and, of course, if true you’d have to be a little nervous again about this coming spring. It might also be though the end of holiday socializing. And so we saw spikes in many countries in December and, well, to the extent that Christmas and those sorts of things are now largely over, we see perhaps a more normal amount of socializing again and perhaps that’s allowing the virus numbers to retreat to some extent. And so I guess regardless of the cause, we’re certainly celebrating the improvement that’s taken place so far.

The other subject of great interest these days in the context of the pandemic is the vaccination numbers. And so there are now three vaccines widely circulating in the western world, at least. And as much as the rate of vaccination has been slower than desired, it is significantly ramping up. And so we have now hit 100 million inoculations globally. To the extent that I said it’s ramping up, over a third of those were just the last five days alone. So there is an active acceleration here. Obviously, it’s not been perfectly balanced. In fact, it’s been far from perfectly balanced in terms of which countries are getting vaccinated at what pace. And so Israel continues to easily lead the way. In fact, it’s now delivered 53 shots per 100 people. That doesn’t mean it’s more than half the way towards perfect inoculation though. Keep in mind each person needs two doses for most of these vaccines. And so it’s not quite that far along but still very far indeed given that this is just the very beginning of February as I record this.

The UK is doing well. It’s at 14 shots per 100. The U.S. also doing quite well compared to most of its peers at 10 shots per 100. Europe lagging significantly in the 2 to 3 range. Canada’s stuck at 2.5, lagging most of the rest. I should say Japan lagging even more. In fact, they’re not inoculating at all yet. They want tests that are done on ethnically Japanese people before they’re willing to go forward and so they’re likely to be significantly lagged compared to others. But, you know, Canada certainly lagging to some extent. And I would say we are getting clear signs that not every country getting these vaccines at the same rate, and indeed mounting evidence of vaccine nationalism as well as countries are jockeying for more supplies and thinking about closing borders to shipments and this kind of thing. And so that potentially will become a mounting challenge. And again, we expect significant variation in terms of when countries now hit that herd immunity finish line.

Two new vaccines have reported positive results, which is quite welcome. We only have three Western vaccines that are currently operating and so two more would be lovely, particularly since each company promises to be able to produce something like a billion doses in 2021 each. And so that would change the equation quite significantly. One is the Johnson & Johnson vaccine, and so I would say ultimately successful but maybe a little bit underwhelming in a sense that it reported a 66% efficacy rate. That’s lower than the 95% or so efficacy rate that many of the others have announced. It does have its charms. And so, for instance, it only at present requires one dose instead of two, doesn’t need to be stored at temperatures that are as cold and, of course, it’s widely available. And so it’s certainly a useful addition, and it did stop hospitalizations and deaths in their tracks which is ultimately the main goal. But the efficacy rate a little lower, and even that might have been a little bit exaggerated in the sense that they excluded mild infections when calculating that efficacy rate whereas to our knowledge some of the other vaccines included those mild infections. So maybe it’s actually below 66%. But nevertheless, quite successful against the most severe versions of the infection.

The other one, Novavax, and so quite good. In fact, reporting an 89% efficacy rate. Now, it does require two doses instead of one. And one thing Johnson & Johnson is doing is now testing a two-dose version, and it could be ultimately the Johnson & Johnson version is just as successful as the others because, in fact, its efficacy rate for one dose pretty similar to how these other vaccines have worked after one of their two doses have been delivered. So that could yet boost Johnson & Johnson. But in the meantime, the Novavax one looking quite good.

And if you’re a bit disappointed, 89%, it’s not the 95% reported by Moderna and Pfizer, well keep in mind it’s a changed landscape now. And so, for instance, these new vaccines have to be tested against this UK and the South African variant, and that variant is more resistant to these vaccines. And actually, Novavax reported that if you looked at its efficacy against the traditional virus it was 96%. This is as good as the Moderna and Pfizer, just in a more challenging testing landscape. Also reported that it does work against the UK variant, just a little bit less well. I think it was 86% effective. And then it also works against the South African one but more like 60% effective. That South African one is going to be the problem, I think, going forward as much as most of the attention so far has been on the UK.

We do continue to see the supply of vaccines rising. And so, again, new vaccines announced with large production capacity certainly is a key part of that. Some factory retooling though. And so Pfizer, for instance, retooling its European facilities to be able to produce more over the medium run, though some short-term outages along the way. And then some outsourcing finally happening. So some of the companies that failed in their own vaccine efforts are now being contracted to produce some of the successful vaccines. And so we don’t know exactly how much extra supply that will produce, but likely hundreds of millions of extra doses which is very welcome as well.

Let’s pivot from there to the economic themes and so a few items I’d like to cover off. One would just be economic surprises. The extent to which economic data lands better or worse than forecasters had expected. And in the initial phase of the pandemic of course it was much worse. In the spring and summer of last year though it was much, much better and so people didn’t expect the recovery to take hold as quickly as it did. We’ve seen some retreat in the surprises since then, but I want to make a point which is that they haven’t retreated all the way to neutral or even negative territory despite some economic hiccups recently. We still see fairly substantive—fairly positive economic surprises. And so, again, economic data still landing better than a lot of people would predict and is one of the reasons why we’re quite content to have above-consensus growth forecast. We think there’s a good fundamental reason for that, but it’s also quite heartening to note that’s been quite reliably the way the economic data has landed now for many months.

A quick word on financial conditions as well. So financial conditions, really just fancy language for the way that markets influence the economy. And so if interest rates are low and credit spreads are narrow and stock valuations are high and maybe a country’s currency has weakened, those are all very helpful things to an economy. And so let’s just emphasize global financial conditions are now extremely friendly. Like the friendliest we have ever seen. And maybe this shouldn’t be a surprise. We’ve never seen rates lower than this, and so on. But nevertheless, very friendly financial conditions. Not the experience, for instance, after the global financial crisis. That was extremely unfriendly initially. It took a number of years just to get back to normal financial conditions. Here we are having gone from initially unfriendly, though not as bad as the financial crisis, to normal, and then extremely friendly in very short order. And so this is just all to say that it would make sense if the economic recovery remained quite enthusiastic in 2021. This is a profoundly helpful situation right now.

Another quick economic theme just acknowledging certainly the service sector has been disproportionately hurt by the pandemic. That’s where restaurants operate. That’s entertainment. That’s many of the most diversely affected sectors. Manufacturing hasn’t done wonderfully well in general under the pandemic. No sector—very few sectors at least have outright benefitted, but what’s interesting to us is that when we look at global manufacturing, purchasing manager indices, a survey essentially of manufacturers and their outlook, it’s actually the strongest we’ve seen in something like three years right now. So we’re not just talking about manufacturers muddling through. They are enjoying some of the best growth rates they’ve had in some time. And so let’s acknowledge, even during this second wave and some economic damage that struck right around the turn of 2020/2021, that sector’s still growing. It’s still growing at a pretty impressive rate.

A quick word now. Just some recent U.S. data and Canadian data. I would say not as bad as feared so far. And so, for instance, U.S. economic data revealed growth through the fourth quarter. Not wonderful growth but growth. And in January, we’re finally starting to see some decline in jobless claims toward the end of the month. The ISM manufacturing index just released mostly held on. It’s consistent with growth at a minimum and keep in mind, the U.S. has big, new fiscal stimulus going out the door and so I think we’re going to continue to see some pretty solid economic data from the U.S. Consensus is for job gain, for instance, later this week when the January employment number is released.

The Canadian story similar in the sense that Canada recently reported to have enjoyed economic growth in both November and December, which I should say is better than we’d initially expected given the damage from the second wave. It looks like there might be a little bit of January damage and, in fact, the market is looking for a slight job loss in January for Canada, but I wouldn’t say every indicator is consistent with that. And so, again, pleasantly surprised by the resilience of the economy so far.

A short word. Just Brexit. And so Brexit has happened. We know that. We don’t need to rehash that, I don’t think. But recently survey is showing that as much as the British manufacturers are doing okay right now, nevertheless, if you dig into the details they are increasingly reporting some problems with supplier delivery times. So in other words, supply chains are being damaged and stretched by the Brexit severing of the relationship with the EU. It’s going to be harder to get things in. It’s harder to get things out. We can see a little bit of evidence of damage from that in the January data.

And then let me finish just with some macro risks here. And so we think a lot about our forecast. We try to get our base case forecast right. As I said, we’re a little above consensus in terms of our outlook for the next year but simultaneously, we can say a few things. And so one would be a quarter ago we thought the risks to our forecast tilted probably more down than up. So there were some bigger downside risks. Today we’re saying we think it’s a more neutral arrangement. Certainly, there are downside risks. Equally though there are roughly symmetrical upside risks as well. And so how have we gotten there? And so one answer would be well, some of the downside risks from a quarter ago happened.

We thought there might be some vaccine hiccups and then there were. We thought that there might be some economic damage from the second wave, and then there was. And so we’ve had to recalibrate our own base case a little bit and that’s eaten away at some of the downside risks. But nevertheless, it does leave us in a more symmetrical position. And as much as there are obvious downside risks in terms of new virus variants and problems with vaccines and these sorts of things, I would say at the same time we do see some real upside risks. And so one would be these COVID numbers could just keep improving. They’ve surprised us so far this month. Another one would be the potential for massive fiscal stimulus is still there. The U.S. likely to do another round. Other countries could and probably would if there were to be significant economic damage or significant further waves of the virus. And then we also feel though there’s significant upside risks to the post-COVID story. The idea being there might be surprisingly little long-term damage from COVID and that could yield some upside surprises as well.

In any event, roughly neutral risks around our forecast. And so why don’t I stop there and say I hope you found some of that interesting. Let’s say thank you so much for tuning in. I hope you consider tuning in again next time and again, thanks very much for listening.



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

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Publication date: February 2, 2021

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