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by  Eric Lascelles Nov 24, 2020

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Inspired by the recent U.S. election battle, we dug out a great board game called “1960: The Making of the President” that pits one player as Kennedy against the other as Nixon. The game is true to history, incorporating such twists as Nixon’s refusal to wear makeup during the televised debate, his immobility after damaging his leg, concerns that Kennedy’s Catholicism would make him a pawn of the Vatican, and the decision of the electorate in three southern states to vote for “unpledged” Electoral College delegates who then backed Democratic Party luminaries not on the ballot, rather than support Kennedy and his pro-Civil Rights stance.

Our result was ultimately true to history, with Kennedy victorious in the debate and then eking out an election win over Nixon. In our alternative history, Nixon managed to win not just his home state of California but also New York – the most important state in the country at the time.  He also enjoyed a considerable advantage in terms of media support, but lagged somewhat in endorsements. The battle ultimately came down to Illinois, with both candidates physically occupying the state on Election Day and Kennedy just barely prevailing despite a late Nixon challenge. This was strikingly similar to the actual outcome in 1960, in which Kennedy won the state by a mere 0.18%.

Come to think of it, we may need to create a 2024 version of the game, as it would probably provide a better way of predicting the next election outcome than the polls that prove so inaccurate year after year!


The new information that has accrued over the past week is slightly more positive than negative, though there are several new factors on each side of the ledger.

Positives include:

  • Another company has reported success in its vaccine-development efforts.
  • Governments are making greater efforts to limit the spread of COVID-19.
  • The daily infection figures are now improving in Europe and possibly stabilizing in Canada.
  • There have been several positive globalization developments.

Conversely, negatives include:

  • The U.S. is registering a rising and record-setting number of new COVID-19 infections each day.
  • Government social-distancing initiatives will likely do economic damage.
  • Indeed, recently-released November economic data now confirms European economic pain.

Virus developments

The number of new COVID-19 infections each day has ceased to set new records, seemingly stabilizing at a still-high level of approximately 600,000 infections, with global fatalities also roughly flat (see next chart).

Global COVID-19 cases and deaths

Global COVID-19 cases and deaths

As of 11/23/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

Developed countries continue to underperform emerging market nations, though the gap is narrowing slightly (see next chart).

COVID-19 emerging market vs. developed market infections

COVID-19 emerging market vs. developed market infections

As of 11/23/2020. Calculated as the 7-day moving average of daily infections. Source: ECDC, Macrobond, RBC GAM

Among emerging market nations, Brazil recently began to deteriorate again and India is no longer improving so readily. Mexico’s improvement has also halted. South Africa’s numbers are beginning to slip higher while Russia is deteriorating badly, easily surpassing its spring wave.

However, not all are struggling: Poland is finally improving after a horrific few months. Peru continues to mend.

Europe healing

Having suffered the worst of the second wave until quite recently, Europe continues the process of healing that we have discussed over the past several weeks. France, until recently the worst-affected of European nations, has made particular strides with less than half as many daily infections as just three weeks ago (see next chart). The country’s fatalities have also seemingly peaked. Of course, all of this has come at considerable economic cost, as discussed later.

COVID-19 cases and deaths in France

COVID-19 cases and deaths in France

As of 11/23/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

Improvement elsewhere in Europe is not quite so dramatic, but is nevertheless significant. Germany’s readings are flat to lower. Italy is now clearly improving and Spain is well on its way (see next chart).

COVID-19 cases and deaths in Spain

COVID-19 cases and deaths in Spain

As of 11/22/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

U.K. stabilizes

The U.K. aggressively locked down its economy a week after France, and the dividends are now starting to be collected. While the country still records roughly 20,000 new infections per day, it is clearly beginning to improve. We anticipate further improvement in the weeks to come. Fatalities are also beginning to decline, and peaked at less than half of the spring level (see next chart).

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

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

As of 11/23/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

U.S. remains out of control

Conversely, the U.S. has not yet made a concerted attempt to limit its third wave, with the result that the number of new infections continues to surge, now reaching 180,000 per day on a trend basis. While the rate of growth has seemingly slowed, the aforementioned policy inaction combined with the breadth of the spread from a geographic perspective argues that the U.S. isn’t particularly close to taming COVID-19.

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

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

As of 11/23/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

While it is heartening that U.S. fatality numbers remain well shy of first-wave levels, they have nevertheless substantially exceeded the peak of the second wave and the virus is claiming a startling 1,500 victims daily and rising.

Canada nears stabilization

Canada appears to be nearing its second wave peak. This is in part based on the substantial social distancing initiatives now being undertaken at the provincial level. It is also in part because the daily infection numbers are now barely rising at the national level, hovering around 5,000 per day (see next chart). The fatality figures are also tentatively peaking.

COVID-19 cases and deaths in Canada

COVID-19 cases and deaths in Canada

As of 11/23/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

However, the experience is quite varied regionally. Ontario and Quebec – which suffered the disproportionate brunt of the first wave – are now seemingly stabilizing their rate of infections after aggressive government action (see Ontario in next chart). To the extent Ontario’s strict lockdown of the most adversely affected parts of the province only began this week, there is reason to think the province’s infection numbers should begin to materially improve within the next two weeks.

Spread of COVID-19 in Ontario

Spread of COVID-19 in Ontario

As of 11/22/2020. Calculated as 7-day moving average of daily cases and total cases. Source: Government of Canada, Macrobond, RBC GAM

However, the Prairies have experienced a serious upswing in infections. Some provinces are now mounting an aggressive policy response. Alberta is particularly worrisome given its more limited policy response combined with high and mounting virus numbers (see next chart). It is now beginning to log more new infections each day than Ontario and Quebec, despite a significantly smaller population.

Spread of COVID-19 in Alberta

ad of COVID-19 in Alberta

As of 11/22/2020. Calculated as 7-day moving average of daily cases and total cases. Source: Government of Canada, Macrobond, RBC GAM

Asian update

China has suffered another of its mini-outbreaks, but this merely means a handful of cases that are dealt with by testing literally millions of people. The virus remains unlikely to mount a serious revival in the country.

Japan is now up to around 2,000 new infections per day – a new record. We expect it will manage to tame the virus yet again without having to resort to the full suite of restrictions implemented elsewhere, but the wave is not risk-free. Nor is it economically cost-free.

South Korea is also suffering a rising number of infections, but continues to log very few on an absolute basis when compared to other countries. It has tightened its social distancing rules slightly, but these remain far less restrictive than most other countries.

Vaccine news

The vaccine good news continues to roll in.

Pfizer announced its vaccine candidate enjoyed a 95% efficacy rate three weeks ago. Moderna announced a similar level of success for its vaccine last week. Now, AstraZeneca/Oxford has announced a 70% average efficacy rate for its vaccine candidate.

Lest this sound underwhelming given the lower efficacy rate, in actual fact it is still most welcome news:

  • Having a third prospective manufacturer of vaccines is better than being stuck with two – it incrementally increases the overall supply.
  • Before the arrival of the Pfizer and Moderna results, 70% efficacy would have been at the high end of expectations.
  • While the average efficacy rate for the Oxford vaccine was 70%, one of several dosage variations yielded a 90% efficacy rate. While the sample size for that particular experiment was small, some fine-tuning may yet achieve a similar measure of success to the other two vaccines.
  • The Oxford vaccine is considerably easier to distribute than the others. It does not require extremely cold temperatures at any point in the process.
  • The Oxford vaccine can be produced at considerably higher volumes than the others – hundreds of millions of doses per month, rather than per year.
  • In part because of how it is produced and in part because the vaccine will be distributed at cost, it is expected to be five to 12 times cheaper than the other two vaccines ($3-$4 per inoculation versus $20 for Pfizer and $32-$37 for Moderna).
  • Due in part to its lower cost but also to the benevolence of the manufacturer, the vaccine is expected to be much more widely and immediately available in developing nations than the other two vaccines.
  • The expected timing of delivery is better than the other two vaccine candidates. Tens of millions are expected to be available by the end of the year.
  • The Pfizer and Moderna vaccines use a new mRNA technique to protect the recipient. The Oxford vaccine, on the other hand, uses the more traditional approach of delivering a weakened virus that is similar to COVID-19 as a means of teaching the body how to protect itself. This approach is better understood and has been more thoroughly tested, reducing the risk of unexpected side-effects. That said, to the extent the weakened virus originates from chimpanzees, a hankering for bananas could yet result!

Elsewhere in the vaccine landscape, the Pfizer vaccine was clarified as having achieved 95% efficacy, versus the original “greater than 90%” figure. And the company indicated that older adults enjoy a 94% efficacy rate – surprisingly high given that the immune systems of older people tend to be weaker.

Russia indicated that its already released vaccine is also more than 90% effective. However, it is hard to reconcile this with the fact that the country is suffering an exploding number of infections.

Meanwhile, China has inoculated more than a million Chinese, though the efficacy of the country’s vaccine has not yet been revealed. The fact that China hasn’t scaled up its production more aggressively and begun so-called “vaccine diplomacy” hints that they are either not done testing the efficacy and safety, or that the vaccine is flawed in some way.


A recent poll from Ipsos found that around 75% of global respondents indicate they will get a vaccine when it becomes available. This is in line with our expectations for uptake. While the share is somewhat lower in the U.S., at roughly 65%, there is reason to think the high efficacy rate and low probability of adverse consequences will nudge it somewhat higher over time.

Furthermore, do not underestimate the effect that companies can have by requiring their workers to be inoculated, or of governments requiring (or incenting) their citizens to be inoculated. Already, Hong Kong has announced it will provide a cash bonus to residents who are inoculated.

Testing and tracing

For many months, efforts to control COVID-19 have been focused on developing a vaccine and

properly calibrating the amount of social distancing. But it was not always this way. At one point, there were hopes that aggressive testing and tracing could limit or even eliminate the virus without requiring so many economic restrictions, or conceivably even a vaccine.

Whatever happened to these testing and tracing efforts? To an extent, they are still ongoing. But they have not grown as originally envisioned, leaving them to play a much smaller role than planned.

Testing insufficiency

Using the U.S. as an example, testing for COVID-19 has increased substantially, from nil at the start of 2020, to 200,000 per day in early May, to 800,000 per day in the summer. Now, in late November, testing reaches 1.2 million per day (see next chart).

COVID-19 diagnostic testing in the U.S.

COVID-19 diagnostic testing in the U.S.

As of 11/22/2020. Positive rate calculated as 3-day moving average of new cases as a percentage of new tests. Source: Our World in Data, ECDC, Macrobond, RBC GAM

This has certainly been useful for properly diagnosing symptomatic cases. It has also helped – at the margin – with detecting asymptomatic cases. But the bulk of asymptomatic and pre-symptomatic cases are nevertheless missed, and these groups can and do spread the virus.

In the early going of the pandemic, there was the hope that testing might be increased radically, to the point that people might be tested on the way into the office every day, with instantaneous results. Alternately, if this was unrealistic, there were proposals for a sizeable minority (say, 10%) of the population to be tested each day, with the expectation that this would keep the transmission rate below one, hobbling the virus. While testing is rising, the 1.2 million conducted per day is well short of the 35 million tests needed per day to implement the latter proposal, let alone the 330 million needed per day for the former proposal.

Tracing inadequacies

South Korea has become famous for its excellent COVID-19 tracing – reaching out to all of the contacts of an infected person to ensure that these contacts isolate and are themselves tested, limiting the scope for the virus to spread.

But South Korea enjoyed the unique advantage of having only a limited number of infections. The country’s approach rapidly proved unworkable elsewhere as other nations began to confront tens of thousands of new cases per day. Most countries have proven unwilling to hire the hundreds of thousands of employees who would be necessary to adequately trace the many new cases now recorded each day.

Instead, people who have been infected are asked to reach out to their own contacts. But few can perform the job with the thoroughness of a professional, they may be too busy (or too ill), and they may even be too embarrassed to admit that they were infected.

In the spring, there was widespread hope that technology would swoop to the rescue. But the uptake of tracing software has been surprisingly low, ranging from a high of 47% of the population in New Zealand to a low of 4% in France. Canada lands at 14%. Furthermore, technical challenges remain. Are two people whose phones appear to be adjacent to one another actually in the same room or instead on different floors of a condo tower? Thorny privacy issues also exist.

The Canadian federal app has alerted the contacts of just 4,200 people so far, representing just 1% of all Canadians who have been infected. Furthermore, to the extent most Canadians don’t even have the app, most contacts are not warned even when a case is reported. As such, technology has not proven to be anything like a silver bullet.

In turn, we are back to waiting for vaccines and using social distancing protocols.

Second wave economic damage

We continue to revisit the question of how much economic damage recent government efforts to tighten social distancing rules should inflict. This has taken on a further significance now that several parts of Canada are going back into lockdown.

The main message is that it is quite unlikely that the Canadian economy will have to shrink by 18%, as it did in the spring. There are several reasons why:

  • Businesses and people are getting better at operating under the restrictions of a lockdown.
  • The second wave is not as fear-inducing as the first wave, since the approximate contagiousness and deadliness of the disease is now known.
  • The social distancing rules are not as strict as in the spring, and not as widespread across the country (or even within provinces).
  • To the prior point, only a small subset of economic sectors are being restricted this time.

It is worth elaborating on this last point. While the situation is incredibly painful for the affected sectors, the aggregate economic effect is fairly small. For instance, the combination of travel agencies; arts, entertainment & recreation; and accommodation & food services (hotels, restaurants and bars) only represented 3.2% of the Canadian economy before the pandemic. The output of these sectors fell by more than half during the first wave, and have since recovered nearly half of what they first lost. Even if they were to retreat all the way to their April low (unlikely), this would only represent the subtraction of 0.7ppt from GDP (see next chart).

Canadian hospitality sector decimated by COVID-19

Canadian hospitality sector decimated by COVID-19

As of Aug 2020. COVID-sensitive service industries include travel arrangement and reservation services; arts, entertainment, recreation, and accommodation and food services. Source: Macrobond, RBC GAM

To be sure, this analysis is flawed in several ways. It fails to pick up the retailers that are also now limited (though large retailers and certain sub-sectors are allowed to continue operating normally, and even smaller shops are theoretically allowed to do curbside pickup and online orders). It also fails to pick up the components of the transportation sector that are restricted, plus any indirect fallout from newly unemployed workers not spending in other parts of the economy. On the other hand, restaurants can continue their takeout businesses.

Nevertheless, the main point is that many other sectors will continue to operate, unlike in the spring. These include big sectors like manufacturing, construction, real estate, mining and education that were significantly quieted during the spring lockdown, in addition to other sectors that have been fairly steady throughout, such as finance, government, health care, utilities and agriculture.

In short, whereas the Canadian economy shrank by 18% in the spring, it could well shrink by only 1% or so this fall. The analysis is similar for the U.S., whenever it finally capitulates and decides to limit the spread of the virus. The damage in Europe is likely to be somewhat greater, but mainly because the continent opted to be extremely aggressive in its lockdown and also suffered outsized damage versus other regions in the first wave.

Asymmetric waves

It is notable that when the infection numbers are rising, they do so quite quickly. The rate of subsequent improvement tends to be slower (see, for the second time in this report, this chart of the three U.S. waves).

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

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

As of 11/23/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

There isn’t an exact science to this. The experience varies somewhat across countries. But, fairly reliably, the improvement side of the wave is longer than the deterioration side.

This probably makes sense. The natural transmission rate for the virus is quite high, such that it spreads quickly when unleashed. It then takes governments some time to get organized and build up the will to react. When they react, the rules are usually tightened to the minimal extent necessary, given the desire to minimize economic damage. Thus, whereas the transmission rate is something like 1.2 or even 1.5 while the virus numbers are deteriorating (versus a reading of 1.0 that would indicate a stable pandemic), it is more like 0.9 while the virus is in retreat. This is enough for the infection count to be falling each day, but the gap to the stability threshold of 1.0 is much smaller on the way down.

All of this is to say that, based on the first wave, the second U.S. wave and now the rate at which the latest wave has ascended, it would be reasonable to expect it to take more time to bring the daily infection numbers back down to tolerable levels than it took for them to soar to present levels. Indeed, as a very approximate rule-of-thumb, one might expect it to take twice as long. So every day of rising infection numbers equals two days of lockdown needed to normalize the situation. We are continuing to refine our thinking on this.

If the goal is to get back to late summer infection levels, the fact that the infection numbers have been deteriorating for three months argues that it could well take six months to return to normal. And, in the case of the U.S., the country isn’t even yet at its peak, so additional time should theoretically be tacked on.

Of course, if governments decide to be more aggressive in their lockdowns – as per Europe—it could be that this asymmetrical relationship is broken.

Economic developments

November PMI data arrives

We have been looking forward to the publication of November economic data with great interest given that Europe locked down its economy at the start of that month.

November Purchasing Manager Indices (PMIs) have now been released, and largely align with our suspicions. The U.S. data remains good, as the U.S. has not yet engaged in significant economic restrictions. The U.S. composite Markit PMI rose from 56.3 to 57.9 – a very strong reading, and even the COVID-sensitive services component managed to eke out a gain from 56.9 to a robust 57.7. Let the record show that the more widely tracked U.S. Institute for Supply Management (ISM) indices have not yet been reported for November. However, their regional proxies have generally edged a bit lower in November, suggesting that the U.S. may not actually be growing quite as robustly as would first appear. Nevertheless, it is clear the U.S. isn’t shrinking.

In sharp contrast to this, Europe is clearly suffering economic damage in November, as would be expected. The Eurozone composite Markit PMI descended from a tolerable 50.0 to a bad 45.1. The services component fell from 46.9 to a putrid 41.3. To be clear, a reading below 50 indicates decline, and a measure near 40 suggests sharp decline. It makes sense that the European service sector is reporting such poor conditions, as restaurants, bars, gyms, retailers, airlines and the like are all service-based businesses.

Understandably, the outcome was even worse in France, which has implemented among the strictest lockdowns. The French composite PMI fell from 47.5 to just 39.9 and the services component descended from 46.5 to 38.0.

To be clear, this remains nothing like the recession in the spring, when the services component fell to an unprecedented 10.2. In turn, we don’t expect economic damage anything like in the second quarter. But the European economy is almost definitely shrinking.

Swiveling to the U.K., the country’s composite PMI was also down, but not to the same extent. The composite PMI fell from 52.1 to 47.4 and the services component dropped from 51.4 to 45.8. The British economy likely shrank in November as a result of its own lockdown, but not as severely as in continental Europe.

Other U.S. economic data

U.S. weekly jobless claims increased for the first time in a month last week, rising by 33K to 742K. This is not good, but the rate of labour market advancement in the U.S. has now slowed to the point that the claims numbers occasionally take a step backwards. We are still inclined to think the country’s job market is improving more often than not.

The U.S. housing boom continues. The National Association of Home Builders survey achieved a new record high of 90 on a scale in which 50 represents a neutral reading. Housing starts rose again in the latest month, and existing home sales are now two-thirds of the way from pre-pandemic levels to the housing market peak reached in 2005.

Looking slightly further backward, to October, it is evident that the U.S. economy was blasting forward at that time. The Chicago Fed’s National Activity Index substantially exceeded expectations and conveyed a growth rate well above the historical norm.

Some international data

Canada’s economic data is somewhat staler than in the U.S., but it is nevertheless welcome news that September manufacturing rose by a big 1.5%. Wholesale trade increased by 0.9% and retail sales leapt 1.1% higher. As discussed last week, some leading indicators for October suggest a subsequent deceleration in growth, however.

U.K. retail sales for October rose 1.2%, confirming that the U.K. economy was growing up until the point that the country implemented a fierce lockdown at the beginning of November.

Geopolitical developments

The main geopolitical developments over the past several years have been negative: the deterioration of relations between superpowers, the U.K. effort to leave the European Union and the erection of seemingly ever-more tariffs.

It is thus with some pleasure that we can report several recent positive geopolitical developments.


First, U.K.-EU Brexit negotiations are apparently going well, with progress reported on the issue of state aid, though not yet on fisheries. We assign a greater than 50% chance that a deal will be struck, despite the ticking clock and a year-end deadline.

U.K. trade deals

Second, and continuing with the British theme, the U.K. has now struck a new trade deal with Canada, having successfully negotiated a deal with Japan not long before that. Negotiations continue with Australia, New Zealand and the U.S.

It merits mention that these agreements merely replace deals already struck between these countries and the European Union. The U.K. is simply making sure that its access to non-European markets does not deteriorate too badly after it has left the EU. The U.K. would need to negotiate 14 other trade deals to avoid losing any access to international markets – an unlikely prospect.

Asian trade deal

Third, much of Asia has now agreed upon a new trade deal called the Regional Comprehensive Economic Partnership (RCEP) after 14 years of negotiations. India dropped out along the way, but the deal is nevertheless a major accomplishment, with China the centerpiece. In some ways, this is a rival deal to the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) – which binds many Pacific Rim nations together, but excludes China.

While Australia made it into the new deal, Canada did not. The U.S. is in neither of the Pacific pacts, having backed out of the CPTPP early in Trump’s term. The new deal is considered less sophisticated than the CPTPP, but should nevertheless facilitate trade within Asia at a time when international trade has been otherwise challenged by a mix of anti-globalization sentiment and the pandemic.

Lame-duck U.S. foreign policy

It was widely reported that U.S. President Trump requested options for attacking one of Iran’s nuclear sites, before being persuaded not to pursue the idea further. While nothing came of it, it is a useful reminder that American presidents have a great deal of control over the country’s foreign policy, and furthermore that Trump remains the U.S. president for another two months.

Canadian public debt

Canada has delivered more fiscal support during the pandemic (as a share of GDP) than any other nation. In turn, the country is on track for a truly extraordinary deficit of 20% of GDP in 2020. This is several percentage points larger than any other major nation. Coming on the heels of a decade in which the country recorded chronic deficits at the federal level even as the economy scaled new heights, and to the extent that Canadian voters no longer appear to value a balanced budget as much as they did in the late 1990s and 2000s, it raises the question of whether Canada might be headed for debt problems.

The short answer is that this probably isn’t as big a problem as many imagine, though it is not trivial. The country is starting from a gross general government debt-to-GDP ratio of 88.6% which, while not good, is far from the worst out there. (For those wondering why this number is higher than the 30-some percent that is often cited, it is because this measure includes both federal and provincial debt. It also looks at the actual amount of debt, rather than netting out the country’s governmental assets.)

To be sure, the debt ratio is set to skyrocket in 2020 and 2021, reaching a big 115% of GDP in the second year. But there will certainly be countries with higher ratios at that time. The IMF (International Monetary Fund) projects that the U.S. is on track to reach 133.6%, with Italy set for 162%. Japan for an incomprehensible 264%.

Furthermore, the Canadian economy should benefit from the government support. The IMF projects that Canada’s output gap will be the smallest (a good thing) among major developed countries by 2022—2023.

Ultimately, the sustainability of public debt is a function not just of the amount of debt, but also of:

  • how quickly the debt is growing
  • how fast the underlying economic engine is expanding, and
  • the level of interest rates.

The reason governments have been able to afford so much debt for so long is that interest rates have been so low that the economy was able to grow itself out of any potential debt problems.

So how is Canada’s debt profile likely to evolve once COVID-19 has been dealt with? Canada’s Parliamentary Budget Office (PBO) projects that, under steady-state conditions, the federal debt should actually begin to fall beginning in the mid-2020s, to the point that all of the debt disappears by the early 2080s.

How does the situation improve so much? There is a bit of fiscal magic involved. Fundamentally, government revenues tend to grow at the rate of nominal economic growth – call that 4% per year. Conversely, most expenditures rise at the rate of inflation plus population growth – perhaps 2.5% per year. This 1.5 percentage point spread is what allows the fiscal situation to gradually right itself over time. Through this lens, Canada’s public debt situation isn’t just manageable, but looks pretty good.

However, let’s scrutinize the underlying assumptions for a moment. The projections assume no future recessions that send the debt load skyrocketing, and also that future governments won’t want to cut taxes or raise spending. In practice, there will probably be five or six recessions over that time period and governments will almost certainly want to spend money or cut taxes when running the surpluses that mathematically mount as time passes. Thus, the projection is unrealistic.

The projection also assumes quite low interest rates. We agree that this aspect is likely, but there is of course a risk that interest rates rise more than expected. Overall, the Canadian federal fiscal outlook isn’t as good as it looks under a steady-state projection, but it is likely manageable.

If Canadians need to be careful about debt, it isn’t so much due to the repercussions of the pandemic, but rather for several other reasons:

  • Canada’s present federal government seems inclined to expand the footprint of government in some fashion, be it through universal pharmacare, universal childcare, greater support for low-income people or some other initiative. To be clear, none of this is necessitated by the pandemic itself. Nevertheless, if implemented, that could put federal fiscal finances offside unless accompanied by a tax hike of some description. In this regard, tax hikes are a real possibility for Canada, but not because of the pandemic.
  • While the federal debt outlook is theoretically sustainable, the same cannot be said of the provincial fiscal outlook. The PBO calculates that quite a number of provinces are seriously offside. Surprisingly, despite their large public debt loads, Ontario and Quebec are theoretically on a sustainable trajectory, as is British Columbia. It is instead Alberta, Newfoundland and an assortment of other smaller provinces that need to substantially increase their revenues or cut their spending to revert to a sustainable trajectory.
  • Finally, Canada’s private debt load is famously high, particularly household debt levels. With ultra-low interest rates and given that most of the debt is matched by a housing asset, it is likely that this proves sustainable. But there is an inherent vulnerability when a population carries a great deal of debt, and a limit to how much higher this should be allowed to go.

Across the board, a debt crisis is unlikely, but Canada does find itself in a less secure position than before the pandemic. At the margin, high debt loads mean there is less room for future government initiatives. More money must be spent servicing the debt. And there is less room to rescue the economy from future crises. Furthermore, the country – and the world – is more vulnerable to rising interest rates or structural economic underperformance than before the pandemic.

In theory, Canadian economic growth might have to be a bit slower on a structural basis due to the additional debt incurred, though only to a slight extent. Don’t be confused by the fact that the country might need to redirect as much as 0.5% of GDP to service the additional public debt. This doesn’t mean that the economy has to be 0.5% smaller, let alone that it has to grow 0.5ppt less quickly per year. After all, there are savers earning those interest payments and redeploying the money back into the economy. Instead, and inspired by the work of Reinhart and Rogoff, one might imagine that the additional debt might subtract perhaps 0.1ppt or 0.2ppt from the sustainable growth rate – an unfortunate outcome but not a disaster.

-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.


This report has been provided by RBC Global Asset Management Inc. (RBC GAM Inc.) for informational purposes as of the date noted only and may not be reproduced, distributed or published without the written consent of RBC GAM Inc. Additional information about RBC GAM Inc. may be found at www.rbcgam.com. This report is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM Inc. takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when provided. Past performance is no guarantee of future results. Interest rates, market conditions, tax rulings and other investment factors are subject to rapid change which may materially impact analysis that is included in this document. You should consult with your advisor before taking any action based upon the information contained in this document. RBC GAM Inc. reserves the right at any time and without notice to change, amend or cease publication of the information.

RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Global Asset Management (Asia) Limited, and BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.

In Canada, this document is provided by RBC Global Asset Management Inc. (including PH&N Institutional) which is regulated by each provincial and territorial securities commission with which it is registered. In the United States, this document is provided by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser. In Europe this document is provided by RBC Global Asset Management (UK) Limited, which is authorised and regulated by the UK Financial Conduct Authority. In Asia, this document is provided by RBC Global Asset Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong.

This document has not been reviewed by, and is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the above-listed entities in their respective jurisdictions. Additional information about RBC GAM may be found at www.rbcgam.com.

This document is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information.

Any investment and economic outlook information contained in this document has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions.

Past performance is not indicative of future results. With all investments there is a risk of loss of all or a portion of the amount invested. Where return estimates are shown, these are provided for illustrative purposes only and should not be construed as a prediction of returns; actual returns may be higher or lower than those shown and may vary substantially, especially over shorter time periods. It is not possible to invest directly in an index.

Some of the statements contained in this document may be considered forward-looking statements which provide current expectations or forecasts of future results or events. Forward-looking statements are not guarantees of future performance or events and involve risks and uncertainties. Do not place undue reliance on these statements because actual results or events may differ materially from those described in such forward-looking statements as a result of various factors. Before making any investment decisions, we encourage you to consider all relevant factors carefully.

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© RBC Global Asset Management Inc., 2020