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by  Eric Lascelles Feb 9, 2021

With ongoing vaccine progress and declining hospitalization numbers, governments are exploring a limited reopening strategy – but certain risks persist. In this video, Eric Lascelles visits the latest COVID developments and shares refreshed economic data for late 2020 and early 2021.

Watch time: 14 minutes 19 seconds

View transcript

Hello. My name is Eric Lascelles. I’m the Chief Economist for RBC Global Asset Management and welcome to our latest video #MacroMemo. In this version, we will talk about a number of things.

As usual, we’ll begin with the latest COVID-19 infection figures. We’ll acknowledge some incremental reopening efforts on the part of governments. We’ll talk, of course, about the progress in vaccination efforts around the world, and for that matter, why some countries appear to be getting more vaccines than others. We’ll, of course, then venture into the economic space and talk about a better-than-expected end to 2020 and the state of early 2021 growth as well.

We’ve just refreshed our business cycle analysis and so I’ll share with you some thoughts on that, and we’ll just nod our head in the direction of the U.S. fiscal situation with the prospect of extra stimulus perhaps coming down the pipe. Overall, I would say more positives than negatives over the past week.

Let’s jump and start in with infections and fatalities and hospitalizations and the like. And so the big news, and consistent with the prior week’s trend but nevertheless a welcome addition, is that we’re seeing big improvements in all of those measures. The global infection rate has now fallen by 43% compared to early January, so this is quite a big improvement in a fairly short period of time. Those improvements are more profoundly visible in the developed world, though emerging market countries are broadly improving to some extent as well.

It’s very broadly based. When we look at the major countries we’ve been tracking over the last year, we can say that almost all of them are improving. Just a small handful of exceptions at this juncture.

The U.S. has now reduced its daily infection count by 53% versus early January. Canada has cut its infection count by 57%. The UK is down by 69%, though let’s keep in mind, they had particularly struggled until recently. Though nevertheless, they’ve done that despite playing host to this new, more contagious variant. And so that’s quite a promising development for the world as perhaps that variant becomes more dominant elsewhere. We were doing a little bit of math recently and we were thinking particularly in the UK case, which has sharply reduced its number of infections, as just discussed, but is also proceeding very well from a vaccination perspective, and in particular, the most high-risk people getting vaccinated first. It would not be a surprise if the number of UK fatalities fell by a factor of 10 over the next month, or at most, over the next two months. We should see really quite profound effects, and again, in part because there are just fewer infections, but in significant part, because the people most likely to die are now being very substantially protected. And so we could see big changes on that front and, of course, that would be most welcome.

While we’re celebrating all of these improvements, certainly at the global level, I would say let’s nevertheless be aware there are still or there is still the risk of future waves. We can’t say this is the end necessarily. There are new virus variants out there that spread more easily.

We can say that we can now start to see countries reopening their economy. So that presents risks and perhaps opportunities for COVID to spread again. There may be some seasonal issues. We don’t know the extent to which COVID spreads most easily in the winter, which is how normal flus operate, versus perhaps having a spring and fall component. You think back to the Spanish flu of 1918, 1919. There were three waves. It was the spring, the fall, and the spring. You think of COVID-19. We had a spring wave last year. We had a late fall wave. Could there be a spring wave again? Not sure. But that is a risk. There are ways in which the virus could yet become more aggressive in the next few months.

And then also just in terms of event risks. As much as it seems as though there was a spike in infections after Christmas in much of the world, could there be a mini spike after the U.S. Super Bowl, after Chinese New Year, which is coming shortly after I record this? And so certainly there are still risks. As much as I think the most likely scenario is the COVID numbers remain under control over the next few months, it wouldn’t be a shock to see some partial reignition over the March, April time frame. I think, though, at that point we should start then to see vaccines significantly taking over and quelling those various lingering issues.

In terms of reopening, while we are seeing countries begin to reopen now, we’ve thought all along that the main criteria for governments to reopen was whether hospitals were at capacity or not. And so we can see, particularly with the very strong U.S. high-quality hospital data, we can see that the U.S. hospitalizations are falling significantly. I suspect that’s the case elsewhere where data is harder to come by. And so we are seeing some limited reopening. California’s stay-at-home order has now been lifted. Massachusetts has increased its capacity limits for restaurants and gyms. Schools across much of Canada are reopening and so on.

And so it’s limited so far, but it is the beginning of something. And from what I can tell, we should probably expect more reopenings which is, of course, short-term good for the economy but then presents that risk of another wave, unfortunately, of the virus as well, if done prematurely.

Of course, parallel to that is this enormous vaccination effort. We’ve said we think 2021 is the year of the vaccine and so that is still, I think, the case. We are now up to 119 million vaccines delivered globally. That’s a 20% increase just over the last week, so progressing quickly. Still accelerating in most countries. Israel still leading the way. In fact, they’ve now delivered 63 doses per 100 people. Keep in mind you need 200 doses to inoculate 100 people since it is a two-shot solution. The UK and U.S. well behind that, but nevertheless, well ahead of most countries, and so up in the realm of 15 and 12 shots per 100.

Europe lagging significantly but nevertheless making progress. Three to four shots per 100 people, depending on the country. Canada still very much stuck in the mud. Still sub-three and so really not making a whole lot of progress and, indeed, struggling to get vaccines in the short term as much as it seems as though the supply should significantly pick up in the second quarter. And so quite a significant variance in terms of how countries are doing.

In terms of vaccines themselves, another new vaccine reporting positive results. And so a week after the Johnson & Johnson and Novavax reported promising results, we now have the Russian Sputnik vaccine reporting a 92% efficacy rate, which is pretty comparable to the top vaccines out there. And so that’s a welcome addition and one that probably gets deployed disproportionately on emerging market countries. Another thought on vaccines is just the mutation worry subject. And so as much as these new variants are hardly desirable, the South African strain seems to be a particular problem, and so it’s more contagious, as with the UK strain, possibly more fatal, but certainly more resistant to the vaccines. And so we’re getting just about all the vaccine makers acknowledging that now. A recent study from AstraZeneca suggesting not good results at all on that front. It’s unfortunate since that’s the vaccine South Africa had actually picked and so they’ve now paused their vaccine rollout. And so that is a concern, particularly given there’s a chance that this virus variant could yet spread and take over the world. So not a desirable thing at all.

I wanted to spend a moment just thinking about how vaccines are being distributed and using Canada as a bit of an example. And so the honest is we don’t know exactly how these different considerations and variables interact with one another and how ultimately vaccine manufacturers have decided to distribute.

But I would say, to my eye, it looks like there are six factors. The first one is, how many vaccines did you order on a per-capita basis? And by that measure, Canada has done very well. U.S. and UK also look very good on that front.

The second one would be the nationality of the vaccine maker. What’s the company making these vaccines? What country are they domiciled in? What country are their factories in? And so from that perspective, Canada has not done well. There are none domestically at this juncture.

What about order timing? So when were the orders submitted? With a thesis that the countries that submitted first might get them sooner. And so on that front, Canada was somewhat late. The U.S. and UK were fairly early, and so, indeed, they are near the front of the pack.

The order price is probably a relevant consideration, we just don’t know a lot about that. We haven’t seen much transparency into the subject, so can’t really comment there.

I think geopolitical considerations probably play a bigger role than many would want them to. And so from that perspective, who has a lot of clout globally? Who’s in a position to bully a vaccine maker? Well, Canada not in a particularly strong position there, and the U.S. certainly very well positioned from that perspective.

And then the sixth factor is just the actual contracts negotiated. And so I would start by saying, of course, that’s then influenced by the political clout and influenced by all of the things we’ve just talked about. But it seems as though Canada is in somewhat of a worse position there, not with a great deal of negotiating leverage.

And so we walk away and try to understand why Canada has fared so poorly, at least in the initial going in terms of the vaccination efforts and really the supply of the vaccines. And so I would say, it seems to me it’s no domestic capacity is a big one. The orders for Canada were submitted somewhat late after a dalliance with a Chinese option that ultimately fizzled, and a lack of geopolitical clout compared to some of the bigger countries. And so I think that’s Canada’s failings.

You think of the U.S. and the UK, which have done very well. You know they have virus makers—vaccine makers, pardon me—who are domestic to those countries. Their order timing was earlier. They possess, particularly the U.S., quite a lot of geopolitical clout, and so perhaps it isn’t a surprise they were able to negotiate much more ironclad contracts, and insisting on exclusivity in the U.S. case, and so on.

And so that’s the best we can understand. I would say for the Canadians watching, it does seem as though the rate of inoculation should pick up a lot in the second quarter, but it nevertheless does mean a significant lag to some of the bigger countries out there.

A couple of quick economic thoughts from me. And so one would be, it seems as though the end of 2020 wasn’t as bad as we had feared. We knew that the second wave and the lockdowns associated with that wave would do some damage. And the eurozone economy did shrink in the end in the fourth quarter, but only by 0.7% unannualized. And so it could’ve been worse. That was a better outcome than the consensus and than we had expected.

The U.S. actually grew in the fourth quarter, 4% annualized. Canada actually appears to have grown, though this is still tentative, by around 8% annualized. And so not a bad end to the fourth quarter compared to expectations.

I would warn, of course, from a North American perspective, some of the damage probably a little bit back loaded into early 2021. And so let’s talk about that. And so we can still see a bit of weakness in the U.S.; only 49,000 jobs created in January, for example. That’s weaker than we’ve been used to. But the unemployment rate continues to fall, the ISM Services Index continues to rise, and indeed is at quite a strong level. It looks like the U.S. might have actually grown in January as well.

I can’t quite say the same thing for Canada. Canada lost 213,000 jobs in January, a second month of decline. So we are seeing some real weakness there. Some very mixed leading indicators, I should say as well. Not all bad, but not all good either. And so we’re assuming Canada suffers a slight decline in output in early 2021, but I can’t say that’s a certainty either right now.

Let me pivot from there. A word on the business cycle. And so every quarter, we revisit a U.S. business cycle scorecard that we run. It’s just a nice empirical way of analyzing where we might be in the cycle. And certainly, we have our guesses, and often the scorecard confirms those guesses. But it’s good to do these things rigorously and not just to make grand assumptions.

And so what we found when we went through that process—and it’s quite a rigorous one—is that it looks as though we are in fact indeed in the early phase of the business cycle. I shouldn’t just say fairly. It’s indeed early cycle is the conclusion. And so compared to a quarter ago, early cycle was also the best guess a quarter ago, but there was a significant counter bet on start of cycle, which is meant to represent the moment the economy starts growing as opposed to the first few years.

And indeed, there was still a significant claim on a recession as well, since we were seeing some things that weren’t all that great. I can say this time, the recession claim has weakened substantially. The start of cycle claim has weakened substantially. Early cycle is the dominant choice. Interestingly, midcycle actually is the second-best guess. That’s where the second-most number of votes went. It’s still quite low. It’s not really seriously competing with early cycle, but nevertheless, just illustrating the progress that’s occurring.

And so it doesn’t guarantee the economy therefore has years and years to grow. I think it probably does but it doesn’t guarantee that. But I would nevertheless say it makes us feel a little better when we see some empirical mechanical approaches say, well, historically you would actually have a number of years to grow when you’re in this kind of environment. So we’ll certainly take that.

And then let me finish just with a U.S. fiscal comment. And so it appears the U.S. is moving closer and closer to another round of significant fiscal stimulus. We’ve flagged that potential before. What’s happened now is it looks indeed as though the reconciliation process will be used. And essentially, this is just a legislative trick that allows you to—I think just once a year—have simply 50 votes plus 1 in the Senate to pass legislation instead of the 60 votes you would normally need. And so it makes it viable for the Democrats, without Republican support, to do some big fiscal stimulus. We’ve been saying for a while we expect another $1 trillion of fiscal stimulus in the U.S. I think the risk is that it could even be a little bit bigger at this point in time, just given that they’ve now gone down this path. We’ve talked before about how the fiscal multiplier is not that high when you’re giving money to households, and households are actually saving quite a chunk of it instead of deploying it. But nevertheless, it should add to U.S. growth.

We’ve got much of that already priced in. We have an above-consensus U.S. growth forecast. We upgraded it recently, very much because of this expectation. It may be there’s even a bit of upside risk to it, as again, the stimulus could wind up being a bit bigger than the $1 trillion that we budgeted for it.

Okay. I’ll stop there. Thank you so much for tuning in. I hope you found this useful and I’ll talk to you again next time.

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


Publication date: February 9, 2021

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