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by  Eric Lascelles Jan 12, 2021

What's in this article:

Monthly webcast

Our latest monthly economic webcast is now available, entitled Hope swells for 2021.


The air is thick with macro-relevant developments. On the positive side:

  • Vaccines continue to be distributed.
  • Fatalities should begin falling sharply over the next few months.
  • The economic damage from the second wave remains fairly small.

On the negative side:

  • It seems inevitable that the new more aggressive virus variant will become the dominant strain.
  • The U.S. and Canada recently recorded job losses in December.
  • Inflation concerns are rising.

Other subjects covered include the belated arrival of a U.S. “Blue Wave” as the Democratic Party captured the Senate. Also COVID-19 fatality figures in context, and an evaluation of pent-up demand.

Virus trends

The pandemic appears to be accelerating again, with global daily cases and fatalities both on the rise (see next chart).

Global COVID-19 cases and deaths

Global COVID-19 cases and deaths

As of 01/10/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

Within this, it is primarily developed countries that have again begun to deteriorate (see next chart).

COVID-19 emerging market versus developed market infections

COVID-19 emerging market versus developed market infections

As of 01/10/2021. Calculated as the 7-day moving average of daily infections. Source: WHO, Macrobond, RBC GAM

Within the emerging market space, South Africa now reports the most new infections on a population-adjusted basis. Many of the most inundated countries are presently suffering a transmission rate that is greater than one (see next chart).

COVID-19 transmission analysis in emerging market countries

COVID-19 transmission analysis in emerging market countries

As of 01/10/2021. Transmission rate calculated as 7-day change (presented as a ratio) of 5-day moving average of daily new cases. Source: WHO, Macrobond, RBC GAM

Asian issues

While China remains an exemplar of successful COVID-19 management, the country is now experiencing a mini-outbreak. It technically registers as the country’s worst since the summer. The numbers are nevertheless still extremely low, with just 63 new cases in the latest day.

Japan, another country that has greatly outperformed the average nation in its COVID-19 efforts, is now experiencing significant trouble. It has logged more than triple the prior record number of daily cases, and numbers are still rising quickly (see next chart). The country is theoretically quite vulnerable given its older population and high density, but in practice this hasn’t been a problem until quite recently.

COVID-19 cases and deaths in Japan

COVID-19 cases and deaths in Japan

As of 01/10/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

North American cases rise again

Last week, we noted that Canada and the U.S. had seemingly managed to stabilize their infection rate. We posited that this was a mix of more stringent controls and holiday distortions. Alas, the holiday distortions are now fading and both countries are reporting a rising infection rate.

Canada now reports around 8,000 new infections per day and around 140 deaths per day. The former is a record while the latter remains shy of the spring peak (see next chart). Ontario and Quebec remain the two large provinces with deteriorating trends.

COVID-19 cases and deaths in Canada

COVID-19 cases and deaths in Canada

As of 01/10/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

The U.S. numbers are also deteriorating, with around 250,000 new infections per day and roughly 3,000 daily deaths (see next chart). Each represents a record.

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

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

As of 01/10/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

Europe and the U.K.

Europe remains in a somewhat better position than most of its developed-world peers by virtue of having already suppressed its second wave of infections. However, the pandemic is far from over and the trend has recently been rising again in France and Spain (see next chart).

COVID-19 cases and deaths in France

COVID-19 cases and deaths in France

As of 01/10/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

The U.K., conversely, is the most concerning part of the world right now. Presumably because the more contagious variant has taken over, the country is beset by a large and accelerating number of daily infections and deaths. The country’s daily deaths are on the cusp of surpassing the spring peak (see next chart). The U.K. has again locked down further.

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

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

As of 01/10/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

New virus variant

We continue to track the new U.K. variant of the virus with considerable alarm given the extent to which it has supercharged the British pandemic. This is surely the most negative development of the past several weeks.

Our high-level views on the subject are contained within the follow table.

New, more contagious virus strain – tug of war versus vaccinations

New, more contagious virus strain – tug of war versus vaccinations

As of 01/07/2021. Source: RBC GAM

Perhaps the biggest takeaway is that the new variant can easily become the dominant global strain given its superior transmission characteristics. In fact, our base-case scenario now assumes that it will become the new norm, given how many countries have already reported instances of the mutation.

In turn, this presents three scenarios:

  • Governments may choose to restrict their economies to a greater extent to control the virus.
  • Governments may, alternatively, elect to allow the virus to run hotter without adjusting their economic restrictions, perhaps fulfilling warnings of a third spring wave.
  • Or, the vaccination of high-risk individuals over the next few months may occur swiftly enough to counterbalance the new variant, or even outmuscle it in terms of fatalities.

It is unclear which of these scenarios will actualize, but we are aware that our economic growth forecasts for the first quarter would be vulnerable to the first scenario. That said, upside risks exist elsewhere. These include the pace at which vaccines may succeed, a mild economic hit similar to that seen at the end of 2020, and the prospect of more U.S. fiscal stimulus.

Revisiting fatalities

Nearly two million deaths are now attributed to COVID-19. This is surely an underestimate, and more deaths are occurring daily. Let us spend a moment trying to better understand COVID-19 fatalities, in the context of how this compares to pre-pandemic times and in the context of the economic and social sacrifices being made to save lives.

The U.S. is a particularly rich source of such information. The U.S. is presently recording around 20,000 COVID-19 deaths each week, in approximate alignment with the peak rate last spring. That’s clearly an enormous number, but how does it compare to the normal U.S. death rate? The answer is that it represents an increase of around a third over the normal weekly fatality numbers (see next chart).

U.S. excess deaths during the pandemic

U.S. excess deaths during the pandemic

As of the week ending 11/28/2020. All causes excluding COVID-19 and COVID-19 death counts are weighted to account for potential underreporting in recent weeks due to delay of submission of death records to NCHS for up to 8 weeks or more. Source: CDC, Macrobond

The initial instinct is to express surprise that COVID-19 represents such a small fraction of the total. Why is it that we exert such great effort to minimize these 20,000 deaths when another 60,000 occur each week with barely a remark?

There are several answers to this:

  1. We are accustomed to the other deaths, but not to the COVID-19 deaths – their newness makes them less acceptable, somehow.
  1. Everyone dies eventually. As such, no amount of effort would drive the non-COVID-19 deaths down to zero, whereas it is very much possible to eliminate the COVID-19 deaths.
  1. There are already great efforts underway to minimize other types of deaths. For example, we have cancer research and treatment, the same for cardiovascular diseases, efforts to minimize auto fatalities and the like.
  1. From the perspective of an economy-vs-fatality trade-off, these other deaths wouldn’t benefit from a wholesale reduction in economic or social activity. As such, it is nonsensical to suggest that we should be sacrificing the economy to avoid these other deaths – that wouldn’t help.
  1. While one might argue that governments should ban smoking or sugar to minimize other diseases, much as they have banned most socializing to minimize COVID-19, the difference is that the COVID-19 injunctions are only temporary whereas the others would have to be permanent.
  1. Perhaps of greatest importance, let us recognize that – without all of the economic and social restrictions in place – the number of COVID-19 fatalities would be several times higher – perhaps to the point of outweighing all of the other causes altogether. The focus on COVID-19 is therefore justified.

Another interesting observation in the chart above is that the non-COVID-19 deaths appear to undulate in approximate synchronicity with the COVID-19 deaths. This strongly hints that some COVID-19-related deaths are being incorrectly recorded as being of other causes. One might imagine that many of these relate to the blood clotting that has been reported with some COVID-19 infections.

Finally, the chart above reveals that the number of non-COVID-19 deaths during the pandemic remain approximately in line with pre-pandemic levels. We weren’t sure what to expect. From a pessimistic standpoint, one could imagine more deaths due to missed diagnoses and forgone treatment, depression and perhaps even additional obesity. Some of these could yet strike with a lag. But from an optimistic standpoint, the pandemic provides less scope for auto fatalities, and limits the spread of other contagious diseases such as the flu (normally responsible for 12,000 to 61,000 American deaths each year).

The death-economy trade-off

Throughout the pandemic, government policy has attempted to balance the needs of the economy and people against the desire to minimize COVID-19 deaths. The pandemic could be stopped in a matter of weeks if nearly every person was physically locked into their homes for the period, but at great economic cost. Conversely, the economy could run nearly normally if greatly more COVID-19 deaths were accepted.

Hiding beneath this impossible debate is the notion that a human life has a particular value. This is not a fresh idea – after all, insurance companies grapple with this constantly and indeed we all place a value on our life every time we buy a car with particular safety characteristics or decide to jay-walk to save a few seconds.

One governmental rule of thumb is that a human life is worth something like $10 million. But that isn’t perfectly applicable to the present situation, as most of the people dying from COVID-19 are quite old, and presumably the value of a life depends at least in part on how many years left the person would otherwise have lived. Another framework presumes that the value of a statistical life year is equal to three times a country’s annual per capita income. For the U.S., this means that each year of life should be worth around $189,000.

If we imagine that the average person dying from COVID-19 would have lived a decade longer – recognizing that some were in nursing homes and likely to die within a year or two, while others have missed out on decades of life, this argues that each death is “worth” $1.89 million.

Had the pandemic been allowed to spread across the U.S. in an uncontrolled fashion, and presuming a 0.5% fatality rate, this means that it would be worth spending $3.1 trillion to prevent the pandemic. Of course, the pandemic hasn’t been completely avoided, and so the amount that can be justified is somewhat smaller. We set this complication aside for simplicity’s sake.

On the other side of the ledger, we figure that U.S. economic output will be $1.5 trillion less than it would have been from 2020 through 2022 due to the pandemic. The government has also propped up the economy via fiscal stimulus, and this needs to be captured. Loosely, we figure the fiscal picture has deteriorated by around $2.2 trillion relative to its prior trajectory. Adding these together yields a $3.7 trillion financial cost.

Since the $3.7 trillion economic cost is greater than the $3.1 trillion value of human lives saved, one can argue that government policy should technically have been to allow the pandemic to run rampant. Notably, this is a different conclusion than we reached in an earlier analysis – mainly because the fatality rate has ultimately proven lower than initially feared, fiscal costs continue to mount and we have better accounted for the value of life based on years left to live. 

Of course, the whole exercise feels slightly absurd – how can a slice of the economy be worth more than millions of human lives? Governments and the public have broadly agreed – one struggles to find any developed country that has opted for the loss of human life over the loss of human output, however high the cost.

Vaccination expectations

The following table lays out our key thoughts with regard to the process of vaccination.

Vaccination expectations: Expect significant milestones even before herd immunity

Vaccination expectations: Expect significant milestones even before herd immunity

As of 01/07/2021. Source: RBC GAM

To summarize the key messages, the first round of inoculations should sharply reduce the COVID-19 fatality rate within the next few months as the most vulnerable people are protected. The second round of inoculations should then blanket the super-spreaders, reducing the transmission rate notably by the spring. The final round of inoculations won’t affect the COVID-19 numbers much, but should allow a significant economic re-opening. A key conclusion is that we don’t have to wait until herd immunity is achieved to see results.

At the bottom of the table, we claimed that most developed countries should experience a fairly similar vaccination timeline, despite significant differences in the initial pace of inoculation.

There is undeniably some risk surrounding this prediction. Not all countries submitted their bids for vaccines at the same time or ordered the same number of shots. Also, there is a history of vaccine distribution being swayed by politics, be it India banning the export of the Oxford COVID-19 vaccine until it has secured a sufficient supply for domestic purposes, or France in 2009 reportedly distributing its H1N1 flu vaccine based on political considerations such as which countries supplied critical commodities to France.

But we nevertheless stick to the view that the timing is unlikely to be too different across developed countries. That appears to be the message coming from vaccine manufacturers, vague as it is. Goldman Sachs appears to think similarly. Its latest forecast anticipates that half of a country’s population will receive their first doses by April in the U.K., by May in the U.S., and by June for the EU and Canada. This is a fairly similar timeframe.

Economic developments

December economic data is beginning to stream in, allowing us to construct a more robust understanding of how economies have fared during the latest wave of COVID-19.

U.S. resilience

The U.S. economy lost 140,000 jobs in December, according to the country’s payrolls survey.  This was undeniably worse than the consensus expectation and a sharp contrast to the many jobs added in each of the prior several months.

However, some context is useful. Even if taken at face value, these job losses are consistent with a monthly GDP decline of just -0.2%. We fully expected the U.S. economy to shrink in December as tighter restrictions were imposed, and this constitutes a fairly slight decline.

Furthermore, there is plenty of other data in the employment report that argues the interpretation shouldn’t even be as negative as that:

  • The competing household survey claimed that 145,000 net jobs were created, rather than lost.
  • The unemployment rate remained unchanged at 6.7%.
  • The prior two months of payrolls data enjoyed upward revisions of 135,000 additional jobs.
  • The loss of jobs was quite narrowly based and concentrated in leisure & hospitality and retail – precisely the areas of the economy that were restricted. There doesn’t appear to be broader contagion.
  • The jobs lost were of a lower-than-average level of productivity and wages, meaning that the economic hit should be less than proportionate to the decline in employment.

Looking beyond the employment data, the December U.S. ISM (Institute for Supply Management) data for both the manufacturing and services sector managed improbable gains. The former rose from 57.5 to a white-hot 60.7, while the latter rose from a good 55.9 to a better 57.2. December economic activity appears not to have been that bad, and businesses expect better times ahead.

This expectation may not be unreasonable. The U.S. has just unleashed a large amount of fiscal stimulus that will spill forth over the next several months. Whether the economy shrank in December, it is very likely to be growing before too long.

Canadian data a bit softer

Canada’s December economic data wasn’t quite as resilient as in the U.S., though that was to be expected as the country has taken its economic restrictions more seriously. Canada’s labour market also lost jobs in December. This happened to a proportionately greater extent than in the U.S., with 62,600 jobs shed. One might imagine this is consistent with something like a 0.5% decline in GDP in December. However, that may ultimately prove exaggerated as the labour market report managed the addition of 36,500 full-time jobs even as many part-time roles were shed.

Additionally, of Canada’s three main leading indicators, while two declined in December, only one (and it was the least reliable of the bunch – the Ivey Purchasing Managers Index or PMI) fell below the critical 50 threshold that delineates progress from retreat. As such, we assume the Canadian economy shrank in December, but this is not certain.

Hazy provincial view

Canadian provincial GDP data is published with an extreme lag. Our principal component analysis model stitches together the available monthly series for each province to arrive at a fresher if rough-hewn approximation of GDP growth by province (see next table). This particular version of the model is especially imprecise right now since the model lacks information on pandemic-affected sectors such as food services, accommodations and entertainment. We strongly caution that it is highly unlikely that any Canadian province is actually generating economic output at a greater rate than it did a year ago, despite the model’s claims to that effect.

Hazy provincial view

Source: Macrobond, RBC GAM
National GDP as of Nov 2020. RBC GAM estimate of provincial GDP year-over-year growth rate as of Nov 2020.

Instead, the model is useful for gauging the relative positioning of provinces – who has done best and who has done worst. Unsurprisingly, Alberta is last, suffering as it is from the combination of the pandemic and an oil shock. Conversely, British Columbia appears to be leading the pack, perhaps benefiting from its less intense pandemic, strong Chinese demand and ravenous appetite for building materials. Nova Scotia also appears to be performing well, presumably based on its strong economic momentum before the pandemic plus the Atlantic bubble. Ontario and Quebec sit roughly in the middle.

European decline in context

It comes as somewhat of a surprise that Eurozone unemployment actually fell from 8.4% to 8.3% in November, as that was the worst moment of the region’s second virus wave. However, the European employment numbers are much blurrier than usual due to the widespread practice of keeping idled workers on payrolls via government support. As such, we set it aside.

Real damage can be seen in the Eurozone’s retail sales decline of 6.1% in November, though we have tentative evidence that things got a bit better in December.

We recently undertook an exercise to map the readings of purchasing manager indexes onto their GDP equivalent. For instance, we now know that the Eurozone PMIs averaged 48.4 over the final three months of 2020. What should this mean for Eurozone fourth-quarter GDP? The answer is that the Eurozone economy should be expected to decline by just 0.18% (un-annualized). We suspect the actual decline will be somewhat greater, but it is good to have empirical estimates to work with.

For what it is worth, U.K. PMIs argue that the country’s economy should – surprisingly – grow by 0.15% in the fourth quarter. We suspect it will actually decline modestly, but welcome the constructive estimate.

Meanwhile, U.S. PMIs for the fourth quarter argue for a 0.88% rate of GDP growth in the quarter, or a 3.6% annualized pace as is more conventionally used in North America. We suspect the U.S. may actually fall short of this as well, but cannot reject it out of hand.

The common theme is that the PMI numbers are probably too optimistic, but they nevertheless highlight an upside risk given that they represent a rare empirical look at fourth-quarter GDP long before the traditional indicators arrive.

Inflation concerns

Inflation has not been a serious issue in the developed world for 30 years. It has barely even been a consideration for the past 10 – it was so reliably low and benign.

That said, inflation concerns are now mounting. Consumer price inflation has edged slightly higher in several countries including the U.S. and Canada. Inflation proxies such as gold, Bitcoin and base metals are all considerably higher. And, most tellingly, bond market break-evens – a proxy for inflation expectations – have increased considerably over the past few months. They are now the highest they have been in several years (see the bottom-right quadrant of the next chart).

Disaggregating bond market movements

Disaggregating bond market movements

As of 01/11/2021. Source: Federal Reserve Bank of New York, Bloomberg, Haver Analytics, RBC GAM

The pandemic and its aftermath have undeniably introduced a number of new potential upside inflation pressures, particularly over the longer term (see next table).

Inflation: should be low in the near term, but may creep higher over longer term

Inflation: should be low in the near term, but may creep higher over longer term

As of 01/06/2021. Source: RBC GAM

Among these, we have added carbon taxes to the set of long-term upside pressures. Our calculations argue that Canadian inflation could run as much as 0.4% hotter per year over the next decade if recently proposed carbon tax hikes are implemented. The U.S. could well follow a similar path under a Biden presidency.

Furthermore, the prospect of a fiscally stimulative Biden presidency – especially with a newly supportive Senate – has prompted many to expect a more inflationary future.

Investors and businesses don’t want too much inflation for a number of reasons:

  • Economies don’t run quite as well at higher inflation rates since they must grapple with Economics 101 concepts like shoe leather costs and menu costs.
  • Additional inflation will raise nominal bond yields, imposing a short-term capital loss on investors and an additional burden on borrowers.
  • Higher inflation increases the effective real tax rate as investors are taxed on both their real and inflationary gains.

Fortunately, while we expect modestly rising inflation over the next few years, there are six reasons why we don’t expect a big leap or outright trouble:

  1. The initial bout of rising inflation is merely making inflation less low rather than too high. That should remain the case over the next year, at least.
  1. Far from forcing central banks to hike rates prematurely, central banks are likely actually celebrating the development. This is in part for the aforementioned reason: it is dragging inflation and expectations closer to their target. Also, from a mathematical perspective, the increase in inflation expectations is allowing the real interest rate to fall in a way that wasn’t possible before given the zero-lower bound on nominal rates (see the bottom-left quadrant in the bond yield chart, earlier).
  1. Of the upward forces listed in the long-term portion of the table above, four out of the five are fairly mild. The Fed’s new inflation mandate is to tolerate a bit more than 2% inflation, not a lot more. If governments opted to permit additional inflation to help erode the public debt (a dubious proposition at the best of times), it would have to be done in a very subtle way via only a slight increase in inflation.

Supply chain onshoring is unlikely to generate more than a few tenths of a percent of additional inflation. In fact, the greatest part of that effect is from the deceleration of globalization rather than instances of outright reversal. And carbon taxes, as mentioned earlier, are also worth up to several tenths of a percent of extra inflation. If each of these struck to their fullest effect, they could well add up to something like 3% inflation rather than 2% inflation. But it is unlikely that they all strike as powerfully as this, and 3% inflation is a far cry from truly problematic 5% or 10% inflation.

The one force capable of generating inflation well beyond 3% is the enormous and increasing size of central bank balance sheets. However, this is self-limiting as well. Central banks are actively targeting inflation of 2% or slightly higher. If inflation were to suddenly spike well beyond this level due to their own actions, they would adjust their policy to reverse the effect. Granted, this would have an effect on the level of real interest rates, but it would ultimately limit inflation. At present, we can see no evidence that the bond market is seriously worried about this scenario given falling real yields.

  1. It isn’t clear that economies are capable of generating problematic wage-price spirals anymore. Unionization is down, and with it the indexation of wages to inflation. Wage pressures were surprisingly benign even when the economy was running hot in 2019. The Phillips Curve is famously flatter than it once was. Consumer survey-based inflation expectations remain completely normal, arguing that workers are nowhere near demanding major cost-of-living adjustments. In turn, any jump in inflation might not be sustained.
  1. We are skeptical of the argument that a deluge of pent-up demand will be unleashed once herd immunity is achieved, discussed later in this report.
  1. We must not neglect the profound downward pressures that also attempt to exert themselves on inflation. In the short run, there is still a massive economic shock that limits inflationary pressures. Over the long run, demographic challenges have proven to be an incredibly powerful deflationary force in Japan, and increasingly now, in Europe. North America is not immune.

U.S. political developments

The past week brought two consequential political developments. The first is that the Democrats have won the U.S. Senate. The second is that the U.S. Capitol building was invaded by people protesting the U.S. election result.

New political configuration

It came to light on election night in November that the final two Senate seats would have to be resolved via a run-off in early 2021. The initial expectation was that the Republicans would maintain their grasp on the Senate given the election-night results, plus the fact that the Democrats would have to capture both available seats to win.

But the races grew tighter over the subsequent two months, to the point that betting markets individually gave each Democratic Party candidate a slight edge on the eve of the run-off elections. This still left the Democrats with a slightly less than 50% chance of gaining a Senate majority since they had to win both races. Nevertheless, that is what the Democrats achieved, delivering the “Blue Wave” that had been expected but not initially delivered on November 3.

Although the Democratic Party only holds 50 out of 100 Senate seats, the tie-breaking vote comes from the Vice President: Democrat Kamala Harris.

What can the Democrats do with their newfound control over the White House, Senate and House of Representatives?

They are undeniably limited by their razor-thin Senate majority. In an age of filibusters, most legislation effectively requires a 60% majority to pass. In turn, grand legislative achievements are unlikely under Biden.

Furthermore, while it is lunacy to speak with any confidence about the mid-term elections that are still two years away, history shows that mid-term elections usually represent a backlash against the sitting president. Democratic Party supporters could also lose enthusiasm without Trump as their bête noire and due to disappointment that the Democratic Party sweep failed to bring about monumental change. Meanwhile, Republican support could rise in two years as it appears that Trump hurt his party’s prospects in 2020. In turn, the Democrats may have a limited window for action.

An exception to the limits of a small Senate majority is that one “reconciliation” effort may be made each year – a piece of legislation that is budgetary in nature and only requires a bare-bones majority to implement. This is how budgets get passed. Thus, it is quite conceivable that Biden manages to deliver the additional fiscal stimulus that he aspires to – perhaps a further $1 trillion in total, including the $2,000 per person that he has repeatedly promised. Incidentally, such blanket stimulus efforts are rarely efficient given that they fail to focus the support on the groups most in need of it.

Other Biden goals that might be implemented through reconciliation include:

  • higher corporate taxes
  • a higher top tax bracket for individuals
  • more health care spending
  • an infrastructure initiative.

However, there are restrictions as to what can be crammed into a reconciliation bill. American politicians do not tend to vote in blocks (making a one-vote majority precarious). And, if legislation does survive the gauntlet, it will likely have to be larded up with pork barrel appropriations that verge on the unseemly.

It should be noted that presidents also have some leeway outside of the legislative space. Due to rule changes over the past decade, presidential appointments – including to the Supreme Court – can now be made with just 51 votes in the Senate. Thus, Biden can appoint who he wants to run every government department. In turn, he will have an easier time implementing his non-legislative agenda.

Indeed, the past decade has demonstrated just how much presidents can accomplish via executive orders – re-interpreting existing legislation or applying more/fewer resources to enforcing certain laws. Though far from certain, and subject to legal challenges, the outcomes possible via executive orders include:

  • Big tech companies may be pursued more aggressively via anti-trust measures.
  • Banks may be overseen more closely.
  • It may be possible to cancel federal student loans.
  • Certain corporate tax exemptions in the Trump tax cut package can be rolled back.
  • The minimum wage could be raised for federal contractors.

We have tended to think that equity markets should like the Blue Wave somewhat less than a Biden-led divided Congress. There would have been fewer risks to the public debt and perhaps also to inflation under the latter configuration. That said, the stock market seems perfectly content with the final orientation and rough math argues that the earnings drag from a corporate tax hike from 21% to 28% should be more than offset by the additional fiscal stimulus seemingly in the offing.

Capitol invasion

In the aftermath of the Democrat Senate wins and a fiery speech by the president, a large group of protestors invaded the U.S. Capitol building in an effort to halt the certification process of the presidential election. While the spectacle was shocking, the process of certifying the results recommenced late in the evening and was completed without further incident.

To the extent that President Trump helped to incite the mob, there has been much talk of removing him from office before the imminent end of his term. The 25th amendment would permit that outcome, but does not appear probable at this juncture, requiring the Vice President and the majority of the President’s cabinet to declare him unfit for office. A spate of recent resignations from cabinet has drained the very people who might have supported such an effort.

It now appears that the House of Representatives will impeach the president a second time, though it is extremely unlikely that the Senate will secure the necessary 67 votes out of 100 to convict and ultimately remove him from office. However, and subject to considerable debate, the Constitution may permit a simple majority of 51 Senators to block President Trump from holding future public office. The Democrats can theoretically achieve this. Given that he has mused about a 2024 presidential run, it would be a significant development.

In all of this, a key question is whether President Trump and his emboldened supporters are coming to the end of their period of influence given his electoral defeat and the failed attempt to interfere with the transfer of power? Or is this instead the start of something greater and potentially more problematic from that constituency. We don’t know, but are inclined to think the former.

Pent-up demand?

Some pundits have argued that when the pandemic finally fades from view, there could be a period of supercharged economic activity as pent-up demand is released, perhaps as early as the second half of 2021. Supporting this thesis, the personal savings rate has been quite high throughout the pandemic, meaning that there is very real money sitting on the sidelines, awaiting deployment. More qualitatively, most people haven’t been on vacation for a long time, and they haven’t patronized bars, restaurants, hotels or entertainment venues with much frequency. People could well be eager to make up for lost time once those things become possible.

Some even see a parallel to the Spanish Flu, as the subsequent decade – the 1920s or “Roaring 20s” – enjoyed fast economic growth and soaring markets. Might there be another Roaring 20s this century?

We are inclined to be cautious on this subject, for several reasons.

  1. The Roaring 20s were not just a function of pent-up pandemic demand, but also the result a stew of other developments, including rapid technological progress.
  1. The virus is unlikely to be completely gone once herd immunity is achieved, meaning some small amount of risk remains. In turn, people will still probably be somewhat restrained in their actions.
  1. People will be out of the habit of going on vacation and socializing as they once did – it may take some time for this appetite to fully revive. Some may even continue the austere lifestyle they have become accustomed to.
  1. Even if spending appetites do fully revive, the fact that the service sector was more affected than the goods sector by the pandemic means that there is less scope for a surge of demand. No one will need seven haircuts – one should suffice. Vacationing is still limited by the available vacation days and school schedules. You can’t have three eat-out dinners in one day.
  1. International travel will probably still be restricted for some time as not all countries will reach the herd immunity milestone together.
  1. If many people continue to work from home, some sectors such as downtown restaurants won’t fully rebound any time soon.

To conclude, we feel good about the economic recovery in 2021 and recognize that some sectors may even operate above their normal capacity as conditions normalize. However, on the aggregate, we believe it will take until this fall for the U.S. and Canadian economies just to return to their prior peaks, let alone their full potential (2023), let alone to operate in a position of excess demand (after that).

-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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