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by  Eric Lascelles Oct 27, 2020

What's in this article:


This week’s note covers a wide range of subjects:

  • The latest virus figures, which are getting significantly worse in the developed world
  • Recent IMF research highlighting the connections between the pandemic, government measures and economic outcomes
  • The latest economic news, which confirms ongoing economic growth but hints at an October deteriorating in the European service sector
  • China’s relative economic success
  • The underperformance of cities versus suburbs and rural areas
  • An evaluation of why the U.K. economy did so much worse than others
  • A discussion of oil demand peaking in the 2030s
  • An update on the U.S. election outlook

On the aggregate, the overall situation has arguably deteriorated on the basis of the increasingly rapid spread of COVID-19 in most developed nations. However, economic growth appears to be persisting for the moment, and U.S. election uncertainty will soon be resolved.

Virus developments


At the global level, the COVID-19 situation is deteriorating badly (see next chart). There are now roughly 450K new infections per day – a record. Fatalities remain shy of the prior record, but are nevertheless significant and rising slightly at nearly 6K per day.

Global COVID-19 cases and deaths

Global COVID-19 cases and deaths

As of 10/26/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

Within this trend, emerging market (EM) infections have been holding roughly steady versus a disturbing acceleration in the number of new developed world cases (see next chart). A week ago, we predicted that the developed world would be suffering more new daily infections than EM nations within just a few weeks. This prediction proved correct, except it happened even faster than expected: within a single week! In fact, given that developed nations only contain around 15% of the world’s population, they have arguably been in a worse position on a per capita basis throughout the pandemic (that said, and further complicating matters,  EM nations are thought to be undercounting their true infection count to a much greater extent -- though this is likely only a partial offset).

COVID-19 emerging markets vs. developed market infections

COVID-19 emerging markets vs. developed market infections

As of 10/26/2020. Calculated as the 7-day moving average of daily infections. Source: ECDC, Macrobond, RBC GAM

Europe is deeply troubled

The European virus numbers continue to deteriorate badly. France is now up to an alarming 35K new infections per day and still skyrocketing. This is seven times greater than its first-wave peak. The country’s daily fatalities have now increased roughly tenfold from the summer, although these remain around five times lower than in the first wave.

COVID-19 cases and deaths in France

COVID-19 cases and deaths in France

As of 10/26/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

In response, the French government has announced further tightening measures including the expansion of its overnight curfew to envelop a larger fraction of the country.

The European numbers continue to deteriorate elsewhere as well. Germany is now up to more than 10K new infections per day. Italy has now risen to 16K per day and is seemingly on track for much higher readings. Developing Europe is also now experiencing significant virus spread after having mostly dodged the virus in the first wave. Poland now has more than 10K new cases per day and is still increasing.

Spain was until a few weeks ago the worst of the European countries, but its rate of deterioration has since slowed (see next chart). In turn, its roughly 12K new infections per day now looks positively pedestrian relative to the likes of France. However, it is premature to declare victory: a previous period of stabilization in mid-October was followed by a more recent spike; furthermore, the country’s data reporting leaves something to be desired such that the most recent day’s data usually looks unrealistically good before this is later revised away. As such, we argue that Spain is no longer deteriorating so badly, but stop short of claiming that it is beginning to heal.

COVID-19 cases and deaths in Spain

COVID-19 cases and deaths in Spain

As of 10/25/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

The U.K. is now notching over 20K cases per day, though the rate of increase appears to have slowed slightly after a truly explosive period in early October (see next chart). Significant tightening efforts are presumably starting to have an effect, but as yet they are insufficient.

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

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

As of 10/26/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

Canada’s deterioration slows

Canada has now recorded more than 200K infections dating back to the beginning of the pandemic. While the country is very much in the midst of its own second wave, the raw number of infections remains somewhat less than its European or U.S. brethren, even on a per capita basis. Canada now records around 2,500 new infections per day – in the vicinity of record levels, but no longer deteriorating as badly as before (see next chart).

COVID-19 cases and deaths in Canada

COVID-19 cases and deaths in Canada

As of 10/26/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

In fact, we wonder if Canada is nearing the peak of its second wave. This hypothesis is presented for a number of reasons:

  • The rate of deterioration at the national level has slowed.
  • The most adversely affected part of the country – Quebec – appears to be starting to improve (see next chart).
  • The country has started to impose what appear to be sufficiently stringent rules with regard to high-risk social and economic activities. It is likely no coincidence that Quebec has imposed the strictest new rules and is now reaping the most visible benefits.

Spread of COVID-19 in Quebec

Spread of COVID-19 in Quebec

As of 10/25/2020. Calculated as 7-day moving average of new daily cases and total cases. Source: Government of Canada, Macrobond, RBC GAM

Of course, the prediction that Canada’s numbers could begin improving within the next few weeks is subject to considerable uncertainty given the uncertain/imprecise effects of such factors as cooling weather, re-opening schools and tightening social distancing rules (see next table). If there is a risk to our prediction, it is that the economic restrictions have not been quite tight enough.

Virus outlook

It makes sense that the virus is spreading more freely this fall, but this shouldn't be indefinite given off-setting forces:

Virus outlook

As at 10/15/2020. Source: RBC GAM

U.S. third wave clearly underway

Up until recently, the U.S. infection numbers were again deteriorating, but only slightly. This is no longer the case. The U.S. is now experiencing a clear third wave, and the reopening of various economic sectors across a variety of states seems likely to exacerbate the trend in the coming weeks. In fact, the U.S. is already recording a record number of new infections per day – around 70K, exceeding the official peak figures from the first and second waves (see next chart). The virus numbers are rising in the great majority of states. The U.S. fatality rate is also beginning to rise again, though it remains low by the standards of the first two waves.

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

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

As of 10/26/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM

Update from the IMF

The International Monetary Fund recently published its semi-annual World Economic Outlook, Fiscal Monitor and Global Financial Stability Report. We already discussed the IMF’s updated economic forecasts in an earlier note. Several research findings are also worth sharing.

Lockdown versus mobility

The IMF confirmed a clear, empirical relationship between more stringent lockdowns, reduced mobility and sharper economic declines. This is unsurprising, but it is useful to get a sense for the precise figures involved. For instance, a full lockdown reduces mobility by around 25%, while a doubling of COVID-19 cases “only” reduces mobility on a voluntary basis by around 2%.

The temptation is to conclude that lockdowns are much more significant than human behavior in mapping the effect of the virus on the economy. However, that isn’t true. Note that a doubling of infections from one case to two, and from two to four, and from four to eight, and so on, each represent a doubling. To the extent the virus has gone from a mere handful of cases to thousands of new infections per day, the intensity of the virus does ultimately have a significant effect on the amount to which people opt to socially distance, irrespective of the official rules.

Mapped onto the global economy, the IMF figures that lockdown rules explain slightly more than half of the global economic decline experienced in the spring. In contrast, for developed nations, voluntary social distancing was actually the greater limiter of economic activity than were tighter government rules.

This has important implications, most centrally that completely eliminating government restrictions would not result in economic activity fully reviving, at least not unless the virus was already vanquished such that people voluntarily lifted their own social distancing.

Age-based distancing

It has been widely reported that younger people have been less compliant with social distancing rules and have experienced a disproportionate share of the infections in recent months. These assertions are not in doubt. However, IMF analysis sheds a slightly different perspective on the subject, at least over the initial months of the pandemic.

Yes, younger age groups were more mobile than older demographics during the first part of the pandemic. However, they were also more mobile than older groups before the pandemic. It is probably not realistic to expect all demographics to move around to the same extent given that young people often have physical schools to attend or jobs to work, whereas other – frequently middle-aged – people can work virtually, and retirees can remain at home nearly all of the time.

Given these complications, a reasonable measure of compliance is the extent to which each age group reduced its mobility on a percent basis in response to the pandemic. Measured this way, the sharpest decline in mobility in the spring actually came from the youngest demographics, while the smallest decline was from the age 45 to 64 group. Furthermore, to the extent the virus itself presents a radically reduced risk to young people relative to older people, one might argue that the decline in mobility by young people has been even more notable than it first appears.

Of course, this doesn’t let anyone off the hook for ignoring social distancing rules. The IMF analysis did not investigate whether the compliance of young people has slipped to a greater extent since the first few months of the pandemic.

Short and aggressive or lengthy and mild?

IMF research concludes that it is better to have a short and aggressive lockdown from an economic standpoint as opposed to a lengthy and mild lockdown. As such, governments have arguably gone about their virus control efforts in a suboptimal fashion since the spring.

Return to normal

Whereas we forecast that most developed economies will return to their full potential in 2023, the IMF anticipates lingering output gaps averaging about 1% of GDP in 2022—2023. Incorporating reasonable growth expectations for subsequent years, this hints that the IMF looks for normalization to be achieved slightly later than we do, in the 2023—2025 timeframe.

Among major nations, the IMF has Canada closest to normal in 2022—2023, followed by the U.S. and Germany. Canada’s relative lead is likely in part to its better pandemic outcomes and partly because the country has delivered more fiscal stimulus than the others and is set to withdraw this less quickly.

New definition of normal

The IMF further conjectures that permanent economic damage will diminish the definition of “normal.” It anticipates that developed world economies will suffer a reduction in their economic potential of an average of 3.5% relative to the pre-pandemic forecast. Thus, even when economies have returned to normal-looking unemployment rates, the amount of output will remain somewhat shy of what was previously anticipated.

For the 10 largest EM economies, the expected loss of potential is even greater, at an average of 5.5%.

We have budgeted for some reduction in the economy’s potential due to the pandemic in our own forecasts, but not quite as much as this. A common theme is that the recovery from here might be slower than commonly expected, though it is worth flagging that the IMF has been too pessimistic in its pandemic forecasts so far.

Economic developments

Reviewing the five big questions

We have sought to answer five key economic questions throughout the pandemic (see answers detailed in the next graphic).

Five key economic questions

Five key economic questions

Source: RBC GAM

Questions number one through three have now been definitively answered, with only numbers four and five remaining open for debate. A key theme is that the outcome for each of the first three questions was better than initially expected. This lends some hope that a similar result may be achieved for questions four and five, in contrast to the IMF’s predictions.

Real-time mobility

We have updated our real-time mobility measure. In an attempt to reduce the severity of seasonal distortions, we have removed Apple Mobility data from the index. The measure now consists of a 67% weight allocated to the retail and workplace components of the Google Mobility data and a 33% weight for Oxford stringency data. We believe the result is more trustworthy and less inclined to fluctuate with the weather and season.

With the improved metrics in hand, it appears that mobility levels were roughly steady or declined slightly over the month of September (see next chart). This is better than what the previous methodology claimed. Furthermore, based on our experience with the mobility data, a flat reading is usually consistent with modest economic growth.

Severity of lockdown varies by country

Severity of lockdown varies by country

Based on latest data available as of 10/18/2020. Deviation from baseline, normalised to U.S. and smoothed with a 7-day moving average. Source: Google, University of Oxford, Apple, Macrobond, RBC GAM

Purchasing manager indices (PMI)

A handful of early PMI indicators have now been published for October. This is important, since we have highlighted the risk that economic activity stagnates or even falls slightly in October and November due to the intensity of the second virus wave.

While the U.S. PMI numbers look fine – the manufacturing measure was flat at a decent 53 and the services component rose from 55 to 56 – it is important to acknowledge that U.S. social distancing rules were, if anything, being eased slightly through early October. As such, this growth makes sense – for the moment.

However, the European PMI numbers were considerably worse. The Eurozone services PMI fell from 50.4 to 49.4 – breaching the 50 threshold between growth and decline. The U.K. equivalent tumbled from 56.1 to 52.3. It makes sense that the service sector is suffering as these jurisdictions have been imposing tighter economic rules that disproportionately limit the service sector. It is premature to conclude that these economies were shrinking in October, but it would appear they were, at a minimum, growing less quickly during the month.

U.S. jobless claims

U.S. jobless claims happily fell from 842K to 787K in the latest week – a welcome decline after the jump suffered in the prior week. The figure remains worse than the reading from two weeks ago, but is plausibly on the right track again. The rate of job creation in the U.S. has likely slowed based on the fact that the jobless claims numbers are no longer improving every single week.

Once upon a time we would have turned to the continuing claims numbers for confirmation of the underlying trend, but these are increasingly being distorted by the loss of eligibility for many people previously receiving unemployment insurance payments. For instance, it is highly unlikely that a million new jobs were created over the past week, even though the number of continuing claims fell from 9.4M to 8.4M. In fact, it is concerning to realize that the bulk of that decline was probably people losing their unemployment payments rather than finding a job.

U.S. housing strength

Consistent with the global trend, the U.S. housing data dump last week remained quite positive. The already strong survey conducted by the National Association of Home Builders improved yet again. Housing starts and building permits rose moderately in September. And existing home sales rose by a huge 9.4% in September versus August. There are still no signs of lagged damage.

U.K. retail strength

The U.K. economy recorded a strong retail sales number in September, rising by 1.5%. This puts retail sales 4.7% higher than the year before. Naturally, much of the strength is due to government stimulus that will eventually fade. Furthermore, the U.K. economy fell so much more sharply than other countries during the spring that rapid improvements should be easier to come by for the country. But it is still a good outcome, especially given that the U.K. infection numbers have been rising for some time and the country was already beginning to impose new restrictions in September.

Bank of Canada decision

The Bank of Canada decision arrives later this week. While the economic recovery has been sprightlier than expected so far, the second virus wave is a serious matter. As such, it seems unlikely that the central bank would opt to significantly reduce the country’s stimulus footing at this juncture. The policy rate is almost certain to remain at 0.25%. While there has been talk about “calibrating” (scaling back) the quantitative easing program (and the program has indeed been immense, now giving the Bank ownership of something like 30% of the country’s government bonds), the timing arguably isn’t ideal for such an endeavor. Should the second wave peak over the coming weeks, as we hope, that could create a window for more formally reducing bond-buying operations at a future meeting.

China’s relative success

China has done remarkably well through this pandemic. Not only does it log just 20 or so new COVID-19 infections per day, but its economy has rebounded with remarkable enthusiasm:

  • The country’s GDP is now 4.9% higher than it was a year ago.
  • Auto sales have surged, now up 7.4% YoY through September. China now buys more cars than any other country, and by a significant margin.
  • Chinese new home prices continued to rise even during the worst of the pandemic.
  • China’s unemployment rate is just 5.4% (though this metric should be given minimal weight as it failed to reflect the displacement of tens of millions of migrants during the lockdown phase of the pandemic).
  • Chinese life has normalized significantly, with movie theatres, shopping malls and restaurants enjoying considerable activity. Some Beijing bars have live rock bands and report a vibrant nightlife.
  • During a recent 8-day holiday period, China recorded 637 million domestic tourists. While this was 21% below the prior year, it shines compared to tourism figures in other countries.
  • The renminbi has appreciated by 4% since the start of the year.

Let us start with the observation that it is a good thing that China has rebounded so enthusiastically. It is certainly good for China itself. But China also provides a useful template for other countries as to how to successfully corral the virus and revive the economy. The country can also help to carry the global economy through this difficult period, providing a major source of demand for the world’s goods and services, and supplying its own products as needed.

China’s relative success is arguably a function of two key things:

  1. It took a very aggressive approach to controlling the virus, practically eradicating it.
  2. The Chinese economy is big and dynamic, allowing it to recovery quickly and thrive even as the rest of the world remains depressed. Interestingly, the country did not deploy a huge amount of fiscal stimulus, though there has been more than first meets the eye.

All of this said, has China’s economy completely recovered? No, it hasn’t. China’s economy is still around a percent smaller than normal. Furthermore, retail sales are only up by 3.3% over the past year, versus an 8% growth rate before the pandemic. The consumer is not fully back despite cheery anecdotes.

The only reason the economy is growing by 4.9% is that industrial production has surged to +6.9% YoY. This is around a percentage point faster than before the pandemic and on the surface makes little sense since future growth prospects have diminished somewhat. We suspect Chinese government infrastructure spending is filling the hole. As such, Chinese growth is not entirely organic.

Furthermore, and on a much more minor note, venues like movie theatres are hardly all the way back to normal. Setting aside two giant weeks, movie theatre sales are running around 40% below the year before. And movie theatres report that they have half as many screenings as usual, with a limit of 30% of their normal capacity. Furthermore, the theatres are not selling food and drink – a traditional cash cow. In fairness, this movie theatre softness is not solely the result of cautious consumers or theatre restrictions. It is also because very few new films have been released over the past seven months.

Urban underperformance

The pandemic has not affected all parties equally. There have been key differences by country, by economic sector, by company, and also along gender, age and racial lines. A further significant divide exists along urban/suburban/rural lines.

Take New York City. Goldman Sachs calculates that the city suffers an unemployment rate that is nearly twice as high as the national average. The city is also recording a consumer spending undershoot that is nearly three times greater than the national average. Small businesses also report particularly depressed revenues compared to other regions. Abstracting away from New York and toward cities more generally, (largely urban) condo prices have underperformed (more suburban) detached homes as some people opt to exit the downtown core.

All of this makes sense. During a pandemic, living in a high-density location is undesirable. Using public transit – the circulation system for many cities – is unattractive. Tourism and cultural amenities are a big part of the economy in major cities, but these are greatly diminished during this period.

However, it isn’t clear to us that the pandemic will mark a permanent change in the relative allure of cities. Some historical context is useful. Living in European cities wasn’t very attractive during the bombings of World War II, but they nevertheless revived once that threat disappeared (and despite massive infrastructure damage). Working in a tall office tower became unattractive after 9/11, but demand for such spaces rebounded quickly. It is hard to imagine that people were keen to live in crowded cities during the Spanish Flu, but there was no sudden inflection away from cities afterwards.

In fact, the experience was quite the opposite: an ever-rising fraction of the population has opted to live in urban areas over the centuries, including right up until the pandemic. Urban workers tend to be more productive and receive higher wages, on average. City-dwellers have better access to health care, high-quality schooling, cultural amenities, shopping and can be in closer proximity to family and friends.

It is fair to concede that some things may be different this time. The rising ability to work from home does present a threat to cities, but most workers cannot do their work without physically being present, and even most office workers will be expected to be in the office for at least a few days per week. This makes living in distant rural locales unpractical. Furthermore, to the extent that public transit suffers a sustained drop in demand, traffic congestion could worsen – reducing the allure of more distant dwellings.

Perhaps the real story is more subtle: one in which cities remain dominant but the balance tilts back toward suburbs relative to the downtown core. This pendulum has swung back and forth over the past century, most recently favouring downtowns. While it is unlikely that downtowns hollow out, suburbs could see greater development for a period of time going forward.

British underperformance

It is eye-catching that whereas the U.S. economy shrank by a grim 15% between February and April, the U.K. decline was much worse, shrinking by 25%.

Does this make sense? Could the U.K. really have done 67% worse than the U.S.? Or might unprecedented challenges around data collection and analysis during a pandemic result in highly varied estimates regarding something that was – at its root – a global economic shock?

To start, the U.K. did have a particularly bad first encounter with COVID-19 in the spring. While the country officially tallied a similar number of infections as the U.S. on a per capita basis, it suffered significantly more deaths on a population-adjusted basis.

In addition, the mobility numbers show that government restrictions and the public response were more severe in the U.K. than the U.S. Trade numbers make a similar claim: U.S. imports fell by 18% between January and April, versus a 24.5% drop in the U.K. The U.K. economy is also quite tourism-oriented – among the most adversely affected sectors. So it makes complete sense that the U.K. economy performed worse than the U.S.

In fact, the U.K. COVID-19 infection numbers were fairly similar to Italy, Spain and France. And, perhaps unsurprisingly, those countries have been on a similar trajectory – declining more than the average and set to record 2020 GDP figures that are similarly worse than the U.S. and in rough alignment with the U.K.

The divergence between the U.S. and U.K. still feels a bit large even after factoring in these differences – for instance, the gap in imports is just 6 percentage points versus the bigger 10 percentage point GDP gap. Unrelated drags such as Brexit could explain a small fraction of this, but not much. We conclude with the view that it makes sense that the U.K. economy significantly underperformed the U.S., but highlight the chance that future revisions could partially reduce the size of the wedge, either via U.K. upgrades or rest-of-world downgrades.

Peaking oil demand

Once upon a time, there was much hand-wringing about the world eventually running out of oil. But those concerns have largely faded over the past decade as additional sources of oil became viable such as the oil sands in Canada and shale oil in the U.S.

Now, the situation has flipped on its head: peak oil demand is the new focus.

To be clear, whether supply or demand peaks, the other variable eventually has to meet it. There is no scenario in which the world consumes more oil than it produces or produces more oil than it consumes for any length of time. In this sense, supply and demand will peak – or not – together. But it matters whether the primary constraint comes from the supply or the demand side since insufficient supply would theoretically increase oil prices while insufficient demand should theoretically reduce them.

As such, a world of peak oil demand is arguably an environment in which the price of oil is lower than otherwise. However, let us recognize that oil prices are presently artificially depressed by the pandemic. Thus the proper forecast is not necessarily that oil prices must be significantly below current levels, but rather below normal levels.

The past month has seen three highly respected authorities forecast peak oil demand. The contours are quite similar. The International Energy Agency (IEA), the Organization of the Petroleum Exporting Countries (OPEC) and energy-giant BP have all forecast that oil demand will peak in the 2030s – just over a decade away.

The IEA anticipates a modest 4% increase in steady-state demand between pre-pandemic levels and peak demand, resulting in a maximum global demand of 104 million barrels per day.

BP predicts that, by 2050, demand will fall by between 10% and 70% from the peak – depending on which of several scenarios unfold. This is potentially quite significant.

Why will oil demand peak? For a range of reasons.

Policies to improve energy efficiency and to shift energy consumption toward more environmentally friendly sources are one important factor. Oil is now used primarily for transportation and so less directly impacted than coal, natural gas or nuclear by the improving cost-effectiveness and rising government (and societal) preference for renewable energies. Electric vehicles represent a conduit by which renewable energies may partially supplant oil. Electric vehicles are only 1% of the global fleet today and 2.6% of car sales in 2019, but demand is rising at a torrid 40% per year.

Simultaneously, structurally slower economic growth due mainly to demographic change limits the extent to which demand for raw materials will grow in the future. Finally, the energy intensity of the economy has been in steady decline for decades as economic activity shifts toward service-oriented activities. There is no reason to think this trend will swerve.

Of course, providing a partially offsetting viewpoint, vehicle demand will likely continue to soar in the developing world as their middle classes grow. This scenario has played out in China over the past decade.

It is important to appreciate that when oil demand stops rising, this doesn’t mean that all exploration activities must stop. The decline rate in existing oil fields is such that around seven million new barrels of daily oil need to be found and developed each year just to keep oil supply at a steady level. This already represents the bulk of exploration activities, though not all.

Another U.S. election update

The end is in sight. The U.S. presidential election will be held in just over a week from when these words were written.

It should be noted that this is distinct from saying that we will know the result of the election in a week. Due to widespread mail-in balloting and mind-bendingly varied rules depending on the state, it is unlikely that all results will be known within a week of the election, let alone the first night. As to whether there will be enough information to surmise who has won the presidency, much depends on how close the election is, and which states prove to be the swing states. If Florida goes to Biden, for instance – a reasonably likely outcome – the White House winner could be known quite soon after the election since Florida is considered a must-win for Trump and the state is expected to tabulate its mail-in results quite quickly.

The race has narrowed somewhat in the closing stages. The second presidential debate was not a clear win for Biden in the eyes of the public, unlike the first debate. Whereas Biden enjoyed a 10.5 point lead in the polls a week ago, this is now down to 8.7 points.

To be clear, this is a sufficiently large advantage that it would have won every election since the 1940s. Nevertheless, the memory of the 2016 surprise and the prospect of “shy” Trump voters means that betting markets are assigning victory odds to Biden of between 61% (see chart of PredictIt market probability) and 86% (from the Good Judgment Open). We assign a 75% probability.

Biden leads Trump, but gap has narrowed in past two weeks

Biden leads Trump, but gap has narrowed in past two weeks

As of 10/22/2020. Based on prediction markets data and RBC GAM calculations. Source: PredictIt, RBC GAM

Statistical models that study the polls at the state level are more generous. Fivethirtyeight.com assigns an 87% chance to Biden and The Economist magazine model gives a 92% likelihood of victory.

Indeed, Biden is leading in 7 out of the 9 most closely contested states (see next chart). This is a retreat from 8 out of 9 last week. Another source argues that only 5 of the 9 may ultimately go to Biden. But it is crucial to understand that the winner will not necessarily be he who garners more of these close states. Biden is already well ahead and so Trump needs to win most of these close states. In an extreme example, as noted earlier, if Trump cannot win Florida, he probably cannot win the election barring big surprises elsewhere. Conversely, Biden would only need to win Wisconsin and Pennsylvania (or a myriad of other workable permutations) to secure the Oval Office.

U.S. presidential election Trump vs. Biden

U.S. presidential election Trump vs. Biden

As of 10/21/2020. Source: Real Clear Politics, Macrobond, RBC GAM

Looking beyond the White House, the odds-on bet continues to be a Democratic Party sweep of Congress. The Good Judgment Open estimates a 77% chance of this outcome. We are slightly less confident given that the Democrat Senate win is expected to be by just a single seat. We figure the odds of this outcome are more like 55%. PredictIt identifies a 60% chance of a Democrat Senate win. While this must be combined with a win in the House of Representatives as well, it is practically unfathomable that the Democrats would win the Senate while losing the House – these items are strongly positively correlated with one another (see next chart).

A probable Democratic sweep

A probable Democratic sweep

As of 10/22/2020. Source: PredictIt, RBC GAM

As such, while there are theoretically 2x2x2=8 different permutations for the election, there are really only three probable outcomes: A Democratic Party sweep (we assign a 55% likelihood), Biden wins with a Republican Senate and Democrat House (20% chance), or Trump wins with a similarly split Congress (25% chance).

Financial markets seem fairly calm about a Biden presidency, and we have previously detailed the likely economic, bond market and stock market consequences in that event (refer to main considerations in the following table).

Biden platform relative to Trump and implications

Biden platform relative to Trump and implications

As of 10/15/2020. Source: RBC GAM

In other political news, Supreme Court nominee Amy Coney Barrett is on the cusp of being confirmed to the Senate at the time of writing. This tilts the Supreme Court further to the right for the foreseeable future. It is frankly hard to say how this might alter the economic outlook. A greater deference to business interests is one possible outcome, but there are any number of other cross-currents that could emerge over the decades that she could potentially serve.

-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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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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