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by  Eric Lascelles Dec 15, 2020

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This will be the final #MacroMemo of the year. As such, it seems appropriate to provide a brief encapsulation of the year that was, alongside a succinct preview of 2021. We also offer the usual analysis of the latest virus numbers and vaccine developments, and review the economic situation. Within this, we present fresh economic forecasts and highlight key downside risks. The report also provides an update on the latest Brexit and U.S. fiscal stimulus thinking.

Overall, recent developments have been roughly neutral.

Positive developments include:

  • The vaccine rollout is now properly underway across a fair swath of the developed world.
  • We have upgraded our economic forecasts for 2021.
  • There is renewed hope for a Brexit deal and a U.S. fiscal package, though time is very tight.

Negatives include:

  • The latest virus wave continues to wash across much of the world.
  • There is some evidence of a weakening U.S. economy.

Reviewing 2020, previewing 2021

It is normally a struggle to encapsulate the concluding year into a single macroeconomic theme. The honest answer is usually “a bit of this and a bit of that.” That clearly isn’t the case when summarizing 2020. The global pandemic was the story of the year, and may yet prove to be the story of the decade. We say this not because we expect the pandemic to be raging in 2029, but because it is far from certain that there will be another multi-year shock such as this one within the next decade.

Through an economic lens, the pandemic induced the deepest recession in nine decades, the fastest decline in modern history, and spurred an unprecedented government intervention. Government actions were without precedent with regard to:

  • the limitations imposed on what people were allowed to do
  • printing huge sums of money and borrowing equally large amounts
  • deploying all of these funds in a frantic effort to minimize the damage from COVID-19.

All of this happened in the first four months of the year. From there, the year took a fascinating turn. The most remarkable recovery in memory took hold, restoring around 70% of the lost economic output in short order. At every turn, the recovery proved more vigorous than initially expected.

What might the year ahead bring?

Alas, COVID-19 is almost certain to remain the dominant theme. Fortunately, it should be in the context of a further recovery – notwithstanding a likely soft patch at the very start of the year as the latest virus wave leaves its mark.

One might equally describe the year ahead as the year of the vaccine. The dominant consideration in evaluating the contours of the pandemic and the nature of the economic recovery is the extent to which vaccines prove effective and how quickly they are disbursed. We are hopeful that a significant amount of normalization will prove possible over the second half of 2021.

Lastly, the coming year should also provide the luxury of once again incorporating non-pandemic matters into the discourse, such as:

  • the U.S. political transition
  • the U.K. economy post-Brexit
  • geopolitics (with a particular emphasis on the U.S., China and Iran)
  • underlying structural forces such as demographic changes.

Infection numbers

The global COVID-19 numbers remain in record territory, with more than 650,000 new infections recorded per day and around 11,000 deaths (see next chart). At this altitude, the virus has never been worse.

Global COVID-19 cases and deaths

Global COVID-19 cases and deaths

Note: As of 12/14/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

Europe divided

The European virus situation was extremely dire earlier in the autumn, before significantly improving over the past month. However, the situation is now diverging. The likes of Italy and Spain continue to heal from their second wave (see Spain in the next chart).

COVID-19 cases and deaths in Spain

COVID-19 cases and deaths in Spain

Note: As of 12/13/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

Conversely, Germany briefly stabilized but is now deteriorating again (see next chart). The country is now imposing another set of social distancing measures, including the closure of schools as of this Wednesday. This seems likely to halt the rise over the span of the subsequent few weeks.

COVID-19 cases and deaths in Germany

COVID-19 cases and deaths in Germany

Note: As of 12/14/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

Finally, France occupies a weird middle ground. It improved a great deal from its worst readings, but is now again deteriorating slightly (see next chart). This is presumably because it eased some of its restrictions three weeks ago. The country had aspirations of continuing to ease its rules over the coming months, but it now appears that a reversal is instead necessary.

COVID-19 cases and deaths France

COVID-19 cases and deaths France

Note: As of 12/14/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

For its part, the U.K. pattern has been similar to that of France. A significant improvement is now being undermined by too much re-opening (see next chart). 

COVID-19 cases and deaths in the U.K.

COVID-19 cases and deaths in the U.K.

Note: As of 12/14/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

There is a further risk that the European-wide situation deteriorates over the coming months. Quite a number of European nations – including Germany, France, Spain and the U.K. – have announced a temporary easing of mobility restrictions for the days surrounding Christmas. While this is a warm-hearted act, it seems inevitable that it will lead to a temporary acceleration in COVID-19 transmission.

Canada tentatively stabilizes

In theory, Canada should have been on a stabilizing or even improving trajectory for the past month given significant tightening in all of the most adversely affected provinces. This outcome is better late than never, though the improvement so far is miniscule and could yet be unwound (see next chart). At a minimum, the improvement is unlikely to be a statistical gremlin given that three of the four most adversely affected provinces have all reported a newly improving (British Columbia and Alberta) or stabilizing (Ontario) trend. That said, Quebec continues to deteriorate. Alberta has instituted another round of tighter rules.

COVID-19 cases and deaths in Canada

COVID-19 cases and deaths in Canada

Note: As of 12/14/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

U.S. challenges remain

The U.S. remains in a challenging position, with around 200,000 new infections each day and more than 2,500 new deaths each day (see next chart). It is some consolation that the rate of deterioration appears to be slowing, and further that a number of states are now implementing significantly stricter rules. Still, the U.S. lags notably in its social distancing rules compared to other countries. This includes relative to Canada, which is only now beginning to stabilize. The latest wave has already set a single-day record for fatalities, with the smoothed fatality trend nearing the spring peak.

COVID-19 cases and deaths in the U.S.

COVID-19 cases and deaths in the U.S.

Note: As of 12/14/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

Developed-world Asia

South Korea and Japan have usually been held up as examples of successfully limiting the spread of COVID-19. Both are still in an excellent position compared to the rest of the developed world, but they are nevertheless deteriorating.

South Korea is now recording its greatest number of daily infections, and is responding by shutting down physical schools (see next chart).

COVID-19 cases and deaths in South Korea

COVID-19 cases and deaths in South Korea

Note: As of 12/14/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

Similarly, Japan has relatively few infections, but the number is rising significantly (see next chart).

COVID-19 cases and deaths in Japan

COVID-19 cases and deaths in Japan

Note: As of 12/14/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

Vaccine news

Approval and start date

Vaccine candidates continue to be approved for emergency usage. The Pfizer vaccine is now approved for such use in the U.S. and Canada. The Moderna candidate’s proposal will be heard by the U.S. Food and Drug Administration later this week.

The U.K. began to inoculate its citizens last week. The U.S. and Canada begin this week.


China’s Sinopharm vaccine claims a good 86% efficacy rate, as reported by the United Arab Emirates. Russia claims a 95% efficacy rate for its vaccine. These are plausible numbers to the extent that two of the three Western vaccines have also reported extremely high efficacy rates. However, the Chinese and Russian vaccines have not yet been tested as thoroughly.


Demonstrating that not everyone will be able to be vaccinated, the U.K. medicine regulator now advises that people with significant allergies should not get the Pfizer vaccine due to two adverse reactions. The original trials did detect a slightly greater number of allergic reactions among those receiving the vaccines relative to the placebo group. Other vaccines will hopefully prove viable for those with serious allergies.

Meanwhile, the Sanofi vaccine candidate apparently does not work well with older adults. Fortunately, several other vaccines have provided a pleasant surprise in their fairly high efficacy for this group.

Peru has just halted its testing of a Sinopharm COVID-19 vaccine after a volunteer had an adverse reaction. While this could ultimately prove serious, other vaccine candidates have also experienced similar setbacks without the scientific efforts failing altogether.

Vaccine timing

We have lately argued that most people in the developed world should be inoculated by the second to third quarters of 2021.

Providing some support for this view, the Good Judgement Open forecasting market has created a new question that asks when 200 million Americans (around two-thirds of the population) will be inoculated. The most popular answers are quite similar, with 45% of respondents predicting the second quarter of 2021 and 48% predicting the third quarter. It is quite unlikely that this critical mass is achieved before then, and almost as unlikely that it happens at a later date.

Elsewhere, Goldman Sachs has made a similar if slightly more optimistic prediction, forecasting that around 60% of the residents of major developed countries will be inoculated by May 2021.

The timing of mass vaccination is critical, as this then permits the substantial re-opening of economies and a resumption of normal activities.


The matter of distributing vaccines is not just one of logistics, but also one of ethics. Which groups will get inoculated first? As we discussed last week, the answer in most countries is that the most vulnerable people are inoculated first. This includes those who are especially old, infirm or working in high-risk medical settings.

But there is a second dynamic to this. To the extent national governments are purchasing vaccines but inoculations frequently occur at the regional level, there is also the question of what regions within a country will get vaccines first. The two obvious options are to distribute it equally based on population or to distribute it based on the intensity of COVID-19 in each region. The second is arguably more desirable from the perspective of maximizing human life, but the first is ultimately less controversial from a political perspective – and appears to be how the Canadian government is opting to distribute its vaccines.

Testing and tracing done right

In the spring, there was an active debate as to whether the pandemic would ultimately be solved via a vaccine or by extensive testing and tracing. It would appear that the vaccination solution is winning out, but it is worth reflecting back on the testing and tracing idea. The notion was that if you could find a way to test everyone for COVID-19 at a high frequency – say, weekly or even daily, people could go back to their normal lives since the risk of being infected would be very low.

In practice, testing capabilities just haven’t ramped up enough to get to that point, and tracing has faltered in many jurisdictions as the caseload has grown. In fairness, it is unclear whether it was ever possible to expand testing infrastructure quickly enough to make the testing and tracing option a viable one relative to the timeframe for developing a vaccine. So perhaps it was never the best option.

But Cornell University in the U.S. is nevertheless showing what might have been. The school tests all undergraduates twice each week, having set up its own laboratory that handles a remarkable 50,000 tests per week. The cost is not cheap: the school is spending over $12 million on the testing campaign. Further, Cornell has a system for isolating infected people that includes a 150-room hotel.

While the school has hardly eradicated the virus, it has not suffered the serious outbreaks that so many others have. On-campus infection numbers are running at approximately one-sixth the expected rate. It is interesting to reflect on what might have been had a different path been pursued by policymakers.

Economic developments

We have steadily upgraded our 2021 growth forecasts over the past several months, to the point that we now sport forecasts that are on or above the consensus outlook, even as the consensus itself is rising. Broadly, our optimism comes from the serial outperformance of economic growth since the spring, our belief that vaccines will prove a game-changer, and expectations that government stimulus will remain substantially in place (or, in the U.S. case, that another round will be introduced).

We now look for 4.0% 2021 GDP growth for the U.S, 5.0% growth for Canada, a 5.6% gain for the Eurozone and remarkable 6.6% growth for the U.K. (see table).


Note: RBC GAM vs. CE calculated as RBC GAM forecast minus Consensus Economics (CE) forecast. Source: CE, RBC GAM as at 2020-12-14

While it looks as though we are especially optimistic about the U.K. and the Eurozone, this is not actually the case. A better measure of relative optimism is when we expect economies to return to their prior peaks. For the U.S. and Canada, we now believe this should be achieved toward the end of the third quarter of 2021. Conversely, for the U.K. and Eurozone we think this will take until the middle of 2022. As such, the impressive 2021 growth numbers for the latter jurisdictions have more to do with how far they fell in 2020 than with any position of fundamental strength.

These forecasts factor in a moderate decline in fourth-quarter GDP in the U.K. and Europe at the end of 2020. We also anticipate a smaller swoon in the U.S. and Canada at the turn of the year (though we do not budget for an outright decline on a quarter-over-quarter basis).

U.S. deceleration

Just last week, we reviewed a deluge of economic data that argued the U.S. and Canadian economies were still growing in November, despite falling mobility and rising restrictions. However, it is fair to say that the rate of economic growth is decelerating.

From a U.S. perspective, two updated pieces of real-time data endorse this assertion. The first is the hours worked by hourly workers data. This measure is now in moderate decline after one looks through a Thanksgiving blip (see next chart).

Percentage change of hours worked by hourly workers in the U.S.

Percentage change of hours worked by hourly workers in the U.S.

Note: As of 12/08/2020. Impact compares hours worked in a day vs. median for the same day of the week in January 2020. 7-day moving average used. Source: Homebase, RBC GAM

The second is our own real-time U.S. economic activity indicator, which appears to be very slightly softening (see next chart). To be clear, the U.S. economy was growing fairly robustly as this metric was trending sideways. So the slight decline is probably consistent with slow growth as opposed to no growth.

U.S. economic activity has shifted to low gear

U.S. economic activity has shifted to low gear

Note: As of 12/05/2020. Economic Activity Index is the average of 10 high-frequency economic data series measuring the year-over-year percentage change. Source: Bank of America, Goldman Sachs, OpenTable, Macrobond, RBC GAM

The National Federation of Independent Business barometer also slipped in November, from 104.0 to 101.4. This is still a healthy level, but down.

By far the most undesirable recent U.S. economic development is the spike in weekly jobless claims from 716K to 853K (see next chart). This represents the reversal of three months of progress. The deterioration was broadly based given that 37 of 50 states reported rising claims. One solace is that the series is notorious for its big swings between Thanksgiving and Christmas given the irregular hiring and laying off of temporary workers over the peak retail season.

We refrain from concluding that the U.S. economy is shrinking in December until we see what the subsequent week brings. Note that our base-case forecast does anticipate a mild economic decline in December, so while unfortunate this would not be contrary to expectations or disastrous.

U.S. jobless claims no longer improving

U.S. jobless claims no longer improving

Note: As of the week ending 12/05/2020. Shaded area represents recession. Source: DOL, Haver Analytics, RBC GAM

Canadian developments

Canada’s Ivey PMI (Purchasing Managers Index) for November fell from 54.5 to 52.7, but remains consistent with economic growth – as per the indicators published over the prior week.

The Bank of Canada’s latest rate decision yielded no major changes. The overnight rate remains unchanged at its theoretical floor of 0.25%. Quantitative easing efforts continue, and the overall level of policy support is expected to remain in place until economic slack is gone and inflation returns sustainably to normal. This is not expected until 2023. The economy was described as having evolved as expected, though the Bank did indicate that the latest virus wave should dim growth in the first quarter of 2021. This is consistent with our own view.

European developments

The ZEW survey of expectations for the Eurozone staged an impressive revival in December, having bounced from a low 32.8 to a mediocre 54.4. This is an interesting development, as it hints that the Eurozone economy may be returning to growth at the end of the year. Indeed, this would make sense in that some countries have lightened their social distancing rules, though we fear such actions may need to be reversed shortly. As such, we refrain from concluding that the Eurozone economy is back into a sustainable growth mode. That may still be a good month off.

Last week the European Central Bank expanded its stimulus by pledging to extend support into 2022 and increasing its efforts by a further €500 billion. This decision was viewed as a disappointment by markets, but mainly because market expectations had become frothy leading up to the meeting.

Checking in on inflation

There are some upside risks to inflation, discussed in the next section. But in practice, U.S. inflation remains tame, with a 1.2% year-over-year increase in headline inflation and a 1.6% rise in core inflation in November. Each figure is unchanged relative to the month before. So far, the demand shock is dominating the various inflationary forces that theoretically now exist.

Reviewing risks

While we are entirely comfortable with our base-case economic forecasts, discussed earlier, it is always worth considering alternate scenarios. The risks to our base-case economic forecast skew moderately downward, for three reasons.

  1. The virus is not yet under control. Cold winter weather could make the second wave more challenging to control than expected, and there could even be a third wave in the spring, as happened with the 1918 flu. This could translate into multiple periods of economic decline.
  1. Vaccine optimism is extremely high at present. While not unjustified, any unexpected side-effects, lower than expected real-world efficacy, or complications linked to production, distribution or willingness to be inoculated could delay the return to normality.
  1. There is some upside risk to inflation: the possibility that prices might advance by more than expected in our forecasts. It is not so much that this outcome is more likely than that inflation undershoots our expectations, but that it would be more consequential. Low inflation would be fairly benign, whereas high inflation could create problems, including higher borrowing costs.

For all of this, note that it is fairly standard for the balance of risks to tilt in a downward direction. There are usually more ways for a growing economy to stumble than for it to suddenly become supercharged. Furthermore, there are also upside scenarios associated with some of these risks, such as the possibility that the virus retreats of its own volition over the coming months or that the vaccine rollout is perfectly orchestrated.

Brexit briefly

The time remaining for a Brexit deal is running extraordinarily short, but optimism is nevertheless rising. A declared Sunday December 13 deadline has come and gone, but both parties say they are willing to “go the extra mile.” This willingness suggests that the U.K. genuinely believes a deal is possible, whether ultimately achieved or not. Both parties would certainly benefit economically from a deal.

Earlier, the U.K. removed one impediment to a deal by eliminating a clause in an internal market bill that would have violated a previous agreement with the EU over the nature of the Ireland-Northern Ireland border.

One betting exchange now calculates a 57% likelihood of a trade deal before the end of the year, up from just 40% last week. The new figure is in line with our own view that a deal is slightly more likely than not.

U.S. fiscal update

Much as the Brexit deadline has been extended, so too has the window of opportunity to implement fiscal stimulus and fund the government in the U.S.

Last week was expected to be the last opportunity for Congress to address these issues, but the House of Representatives extended its session through this week, and the Senate organized temporary funding to avoid a government shutdown through December 18. As such, this week is the new deadline. While the same tricks could yet be pulled for a second week, one imagines politicians aren't especially keen to legislate into the Christmas week itself.

Negotiations drag on. The $908 billion bipartisan plan is still the main option. Wrangling centres on:

  • liability protection for businesses (so they cannot be sued if an employee or customer gets sick from COVID-19)
  • the amount of support for state and local governments.

The White House has now gotten involved, proposing its own $916 billion plan. While this is extremely similar in size to the other option, the contents differ somewhat. For instance, rather than paying an additional $300 per week to those on unemployment insurance, the White House proposes a single $600 cheque that would go to all Americans. This doesn’t appear to have gained much traction with either party.

There is now talk of a narrower deal – one that excludes some of the most contentious elements for later deliberation. This is certainly possible, though the Good Judgement Open forecasting market assigns just a 34% chance of a deal being struck by the end of 2020. We concur. While government funding should be secured into the New Year, we continue to believe a proper fiscal package is more likely to be secured by the next Congress and with a new president in the White House.

Happy holidays, and wishing you a healthy, fulfilling and prosperous 2021!

-With contributions from Vivien Lee and Kiki Oyerinde

Interested in more insights from Eric Lascelles and other RBC GAM thought leaders? Read more insights now.


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