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by  Eric Lascelles Sep 9, 2020

What's in this article:

  • Virus developments
  • Virus science
  • Economic developments
  • A new Fed mandate
  • Schools open
  • Brexit developments

September webcast

Our latest monthly economic webcast is now available: Making progress among new risks.


Overall, we are feeling somewhat more positive with regard to COVID-19, mainly because of ongoing scientific and medical advances. But the full set of considerations remains quite varied, as detailed below.


  • The number of new COVID-19 infections is no longer declining globally. In fact, it may be starting to rise again.
  • India is now suffering the most new daily infections of any nation, and rapidly rising.
  • Canada and the U.K. are both now clearly experiencing a rising number of new infections.
  • The start of school and colder weather may contribute to the spread of COVID-19.


  • Medical advances continue. Vaccines are progressing and new therapeutic drugs are being uncovered.
  • The fatality figures remain much tamer than the infection numbers.
  • The U.S. infection numbers have started to improve again after a recent wobble.
  • The Fed’s recent policy pivot should ensure considerable monetary stimulus for years to come.
  • Economic data remains consistent with an economic recovery, albeit a decelerating one.

Virus developments

Cumulative COVID-19 infections now exceed 25 million cases, an unfortunate milestone. And whereas the daily infection numbers had begun to trend down in August, it appears that the daily case load is again beginning to rise (see next chart).

Spread of COVID-19 globally, cases and deaths

Spread of COVID-19 globally, cases and deaths

Note: As of 09/08/2020. 7-day moving average of cases & deaths indexed to 100. Source: ECDC, Macrobond, RBC GAM

Accordingly, the global transmission rate has now edged back above the critical value of one, though not to the same extent as in May through July (see next chart).

Global transmission rate hovering around key threshold of one

Global transmission rate hovering around key threshold of one

Note: As of 09/08/2020. Transmission rate calculated as 7-day change of underlying 5-day moving average of new daily cases, smoothed with 7-day moving average. Source: ECDC, Macrobond, RBC GAM

Happily, the COVID-19 fatality numbers remain well short of their early April peak, and are perhaps even declining slightly (refer back to first chart).

Troubled nations

India is arguably the new epicenter of the disease as it now logs a startling 85,000 new infections per day and over 1,000 deaths per day. This easily surpasses the U.S. and Brazil’s daily figures, and the country’s trend remains powerfully upwards (see next chart).

COVID-19 cases and deaths in India

COVID-19 cases and deaths in India

Note: As of 09/08/2020. 7-day moving average of daily new cases and new deaths. Source: ECDC, Macrobond, RBC GAM

That said, India’s population is enormous, and as such its infections per capita remain quite tame compared to most. In fact, by that standard, Canada is technically more challenged than India. But the country’s transmission rate has been persistently above one virtually throughout the epidemic – even in earlier months when India was attempting a fairly aggressive quarantine, with the implication that the virus will likely continue to broaden its reach within India for the foreseeable future.

The other global epicenter is Europe. Spain in particular continues to struggle with nearly 9,000 new infections per day. That’s higher even than during its original bout with the virus in March and April (see next chart). However, after quite a number of policy adjustments, the country may now be starting to peak.

COVID-19 cases and deaths in Spain

COVID-19 cases and deaths in Spain

Note: As of 09/08/2020. 7-day moving average of daily new cases and new deaths. Source: ECDC, Macrobond, RBC GAM

France is next on the heat map, with around 7,000 new infections per day – well past its March peak. However, the fatality numbers tell a very different story (see next chart). They remain extremely low – in fact, more than 100 times lower than at their worst in April, despite a larger theoretical infection base today.

How is this possible? Testing is much more comprehensive this time, such that the original number of infections likely undercounted the true population of sick people to a massive degree. In turn, the latest wave probably isn’t actually worse than in the spring. Young people are being disproportionately infected this time, with understandably better outcomes. And the quality of medical care has improved. Superior treatment techniques and therapeutics have been developed. Hospitals are no longer so overrun.

COVID-19 cases and deaths in France

COVID-19 cases and deaths in France

Note: As of 09/08/2020. 7-day moving average of daily new cases and new deaths. Source: ECDC, Macrobond, RBC GAM

The U.K. is now running into fairly serious trouble itself, with around 3,000 new cases in each of two recent days. The country was already suffering a rising infection count, but this now constitutes an approximate tripling in just a few weeks (see next chart). This is not a sustainable trajectory, and the U.K. has among the highest transmission rates in the world right now.

Spread of COVID-19 in the U.K.

Spread of COVID-19 in the U.K.

Note: As of 09/08/2020. Source: ECDC, Macrobond, RBC GAM

European countries also continue to top our model of nations most at risk of suffering further COVID-19 problems (see next chart).

Likelihood of continued spread based on lockdown severity & current transmission rates of COVID-19

Likelihood of continued spread based on lockdown severity & current transmission rates of COVID-19

Note: As of 09/04/2020. Likelihood factors in lockdown severity and amount restrictions eased, transmission rate, and population adjusted prevalence of COVID-19. Source: Google, University of Oxford, Apple, ECDC, UN, Macrobond, RBC GAM

Canada is also now inching into trouble, with a 25% increase in daily infections over the past week alone. Its four most populous provinces are all experiencing greater community transmission than before. The shift isn’t as extreme as in the U.K., but the upward trend is undeniable. It is some consolation that the fatality numbers have continued to trend downward for the moment. This is likely for the same reasons discussed in the France section above, though perhaps also because the fatality numbers tend to follow with a lag.

COVID-19 cases and deaths in Canada

COVID-19 cases and deaths in Canada

Note: As of 09/08/2020. 7-day moving average of daily new cases and new deaths. Source: ECDC, Macrobond, RBC GAM


It takes no great leap of the imagination to conclude that the many countries encountering problems need to reduce the amount of close interactions occurring within their borders. Whether this involves wearing more masks, shuttering certain industries or making other adjustments is entirely up to policymakers and individuals. But the current trajectory is not sustainable. And it is hard to fathom the situation improving organically as schools now reopen and the weather grows colder and drier.

The most adversely affected nations, such as Spain, have already made a significant pivot, much as the U.S. did a few months before them. Here is hoping that the remaining countries – the U.K. and Canada among them – also make an adjustment. It is not enough simply to stop the process of further opening businesses. The current amount of opening is already seemingly too much and so some amount of reversal seems inevitable.


The U.S., conversely, continues to enjoy improving COVID-19 figures. It was unclear two weeks ago whether the daily infection improvements had stalled. But the data now argues that the decline has since resumed (see next chart). However, there is no guarantee the improvement will last as fewer states are now reporting improvements and some states seem anxious to reopen shuttered businesses. Schools have also reopened.

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

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

Note: As of 09/08/2020. 7-day moving average of daily new cases and new deaths. Source: ECDC, Macrobond, RBC GAM

Other developed countries look mostly good:

  • Japan’s infection count is clearly falling again after suffering its most serious wave.
  • South Korea is also on the mend, albeit from a fairly low peak.
  • Australia’s state of Victoria is also starting to ease restrictions, though only very slowly and with extremely stringent requirements. For example, the state must have fewer than five new COVID-19 cases per day before certain activities can resume.
  • Sweden is improving nicely.

Although India and Russia are both worsening, many emerging-market nations are now improving, including Brazil, Peru, Poland and South Africa. Our table of emerging-market countries provides an overview of more countries (see next chart).

COVID-19 transmission analysis in emerging market countries

COVID-19 transmission analysis in emerging market countries

Note: As of 09/08/2020. Transmission rate calculated as 7-day change (presented as ratio) of 5-day moving average of daily new cases. Source: ECDC, Macrobond, RBC GAM

Virus science

Developments related to the science of COVID-19 remain mostly quite positive.

Protective equipment

The importance of wearing a mask in social situations is generally well appreciated as a means of limiting transmission of the virus. Goldman Sachs recently put some math to this, estimating that a 16 percentage point rise in the fraction of the population wearing a mask in social settings would eliminate the need for other more damaging economic restrictions such that 5% of GDP could be recovered.

Put in plainer language, if an additional one in five people wore a mask, half of the remaining economic damage could be fixed. This would be a huge, fairly simple leap forward. Indeed, one might argue that the relative success that nations like China, Japan and South Korea have had with the disease is due in significant part to greater mask-wearing compliance.

Vaccine timing

Forecasters have become significantly more optimistic about the timing of a new vaccine, though opinions still vary significantly. Fully 68% of the mostly U.S. participants in the Good Judgement Open Project now anticipate that a vaccine will inoculate at least 25 million Americans by the end of the first quarter of 2021. This is up from 50% just a few weeks ago, and is far higher than the conventional wisdom just a few months ago.

A Deutsche Bank survey representing a more international audience is considerably more cautious. Just 38% expect a vaccine by February, but even this figure has more than tripled since July. Furthermore, 82% expect a vaccine within a year.

Seven vaccine candidates have now moved to Phase 3, the final phase before approval. For context, Phase 3 is mostly focused on ensuring that obscure side effects do not appear out of a giant pool of volunteers. The prior two phases already established that these vaccine candidates offer promising outcomes and do not have unacceptable side effects for most people. A further 23 vaccine candidates are in phase one testing, and another 14 are in phase two.

Most of the companies developing the seven vaccines in Phase 3 indicate they expect their product to be available for at least emergency use by this fall, with November most often cited. Pfizer has indicated its vaccine could be ready as soon as late October. The Oxford AstraZeneca group has occasionally even mentioned September.

In the U.S., the White House has indicated it expects a vaccine this fall, with the Center for Disease Control telling state health officials to be ready to distribute a vaccine by November 1 to at-risk individuals. However, there are concerns this timeline is too optimistic, and equally that political pressures to get a vaccine delivered before the November 3 election could result in a subpar or even dangerous vaccine.

Providing more cautious views, Dr. Fauci – the director of the National Institute of Allergy and Infectious Diseases – says a vaccine is unlikely to be widely available before the end of 2020, and the World Health Organization has indicated it doesn’t expect widespread vaccination against COVID-19 until the middle of next year.

Many of these contradictions can be resolved via the view that a vaccine may be introduced sometime between now and very early 2021, but widespread vaccination is likely to be a major effort conducted over the first half of 2021, and realistically beyond.

Vaccine duration

Many vaccines only protect the recipient for a limited period of time. This potential timespan is still under investigation. It has generally been promising that few people have been re-infected with the virus, suggesting that most should enjoy immunity lasting at least five or six months. However, a recent study confirmed that at least one person has now been officially re-infected, suggesting there is likely some decay in immunity over time. But whether boosters might be required twice a year (problematic) or once every few years (more manageable) is still unclear.

Vaccine efficacy

How effective can we expect the COVID-19 vaccines to be? Most childhood vaccines work for 85-95% of the recipients – a good number, but nevertheless meaning that 5% to 15% of the population is left unprotected and thus that these people must rely on herd immunity to protect themselves. The flu vaccine is regularly below 50% efficacy, which is why herd immunity has not managed to tame the flu.

The U.S. Food and Drug Administration is indicating it will require an efficacy of 50% or greater for approval. This seems quite reasonable, but is nevertheless somewhat concerning to the extent that the World Health Organization has indicated that – in its estimation – none of the leading vaccine candidates have proven an efficacy of greater than 50% yet. It is hard to reconcile this comment with the promising claims of vaccine makers.

Nevertheless, historically, vaccine candidates that reach Phase 3 have had an 85% chance of being approved. From this it is not quite so simple as to conclude that there is therefore a 99.999% chance that one of the seven vaccine candidates will be approved. Many of the vaccine candidates pursue similar strategies such that many will succeed or fail together. But the odds are nevertheless fairly good if history provides any guide.

The vaccine developers themselves seem fairly optimistic. They report the generation of significant antibodies and also good T-cell responses.

That said, the Russian vaccine that appeared like a lightning bolt in August continues to elicit concern. The vaccine was seemingly tested on very few candidates, the immune response was apparently underwhelming according to Russian experts and the production rate would require years just to inoculate Russia, let alone the world.

Vaccine take-up

Twinned with the question of vaccine efficacy is the matter of vaccine take-up. Estimates vary.

ZeroHedge figures that 61% to 78% of people will ultimately choose to be vaccinated with a COVID-19 vaccine. A Deutsche Bank survey reaches a similar conclusion, with 79% of respondents (all financial market professionals, it should be noted) indicating that they plan to get a vaccine.

One complication is that only 14% would want to get the vaccine in the first month, suggesting uptake may not be immediate. But this is unlikely to be a problem as the initial supply of vaccines is not likely to be sufficient to immunize more than 14% of the population in the first month anyhow.

Interestingly, and contrary to the popular imagination, Americans may not be less inclined to get the vaccine than Europeans. Americans already get the flu shot to a much greater degree than do Europeans, and the Deutsche Bank survey finds that 75% of American respondents plan to be vaccinated – higher than the norm. Lest there be concern that the average American might feel differently, a USA Today poll finds that while two-thirds of Americans say they won’t get a COVID-19 vaccine right away, only a quarter indicate they don’t ever want to get it. Implicitly, then, around three-quarters will.

For context, a Statistics Canada survey finds that a large 76% of Canadians say they would get vaccinated.

A bit of important math

If we presume perhaps 60% vaccine efficacy and that 75% of populations ultimately get the vaccine, this suggests that the vaccination process will be able to protect just 45% of the overall population. This likely understates the true protection provided to the extent that one might imagine the infirm, elderly and front-line workers would be more likely to get the vaccine. But at the same time we might be overly optimistic on our efficacy and take-up estimates.

In any event, if, say, 45% of the population is rendered immune by the vaccine and another 10% is immune due to prior COVID-19 infections, 55% of the population might realistically be immune. This falls short of the 60% to 70% of the population that would need to be infected to create a herd immunity that vanquishes the virus altogether.

What that means is that some small amount of social distancing precautions will likely have to persist to reduce the natural transmission rate of the disease – that last little bit needed to maintain a version of herd immunity. It seems reasonable to imagine that this might happen naturally. For example:

  • Masks will likely remain somewhat more common after COVID-19 for years to come.
  • People will be more inclined to stay home while sick.
  • Working from home should remain more popular than before.
  • Handshakes are likely to be somewhat reduced in the new world.

Any number of other small adjustments – lingering habits from the pandemic – should naturally eliminate the need for any lingering formal restrictions on activity. Much as the Great Depression generation was known for its frugality, it is conceivable that the current generation might become known for the habit of diminished close physical contact.

Vaccine manufacturing

Producing billions of doses of a vaccine to inoculate the world will also be a herculean task. Governments, companies and other parties are busily preparing for this, but it will nevertheless be challenging.

Fortunately, new messenger RNA-based vaccines such as those from Moderna and Pfizer can be created on a much larger scale than more traditional formulations – about 50 times more production for the same sized bioreactor.

Meanwhile, others such as Oxford AstraZeneca have indicated they believe they can manufacture on the scale of billions of doses.

As such, it does not seem impossible that a sufficient number of vaccines will become available over the coming year to treat much of the world.

Vaccine prioritization

As countries strike procurement deals with different vaccine manufacturers, it seems fairly likely that some countries will enjoy a considerable advantage in achieving immunity relative to others. Relevant considerations include the following:

  • Countries with a large number of vaccines under development within their borders, like the U.S. and China, seem particularly well positioned.
  • Others, such as the U.K. and Germany, have a particularly promising vaccine candidate being developed at least partially internally and so could be well positioned.
  • Still other countries have been busy negotiating deals with foreign producers, to the extent they should be fairly early on the list.
  • The world’s poorest countries may be late in receiving vaccines to the extent their large populations and relatively more meagre fiscal coffers may limit acquisition without international help.
  • But, ultimately, much depends on which vaccines prove most effective, when they are released, who developed them, where they are manufactured, and what countries have already struck deals with the suppliers.

Therapeutic drugs

A number of drugs have now been found to significantly reduce the severity of COVID-19 infections, including the probability of death. Prominently, the drugs remdesivir and dexamethasone have been found to be quite effective in reducing deaths. Similarly, the use of blood thinners and of oxygen preferentially over ventilators have reportedly improved outcomes.

A recent meta-analysis argues that steroids may help with those struggling to breathe due to COVID-19, in contrast to initial expectations. Survival prospects improve by around a third across the studies.

Among the hundreds of other compounds being investigated, a drug used to treat a form of coronavirus that is deadly in domestic cats has enjoyed early success limiting the replication of COVID-19 in a laboratory setting. But there is a long road ahead for such drugs before they receive permission for clinical trials, let alone approval for widespread use on humans.

Is COVID-19 now less deadly?

Is COVID-19 now less deadly than it once was? After all, we have a number of therapeutic drugs coming into widespread use that substantially reduce the probability of death, medical practices more broadly have improved, and – perhaps reflecting this – the fatality numbers have remained surprisingly tame even as the infection numbers have soared.

In the U.K., the fraction of those admitted to hospitals who have died has steadily declined. The hospital fatality rate declined by a factor of four from early April to mid-June, and has likely continued to decline since. If one imagines that the level of sickness of the average person who has been admitted is little changed, this suggests a genuinely lower fatality rate.

Gleaning the new true fatality rate is not quite as simple as dividing the number of people who have died by the number of reported infections. This yields the case fatality rate, but not the true fatality rate. The many people who are asymptomatic – conceivably the vast majority, based on some studies – are missed in this analysis.

We have generally operated on the assumption that the initial underlying fatality rate for COVID-19 was 0.5% to 1.0%. This is much lower than the case fatality rate, but arguably only because so many people were not being identified as ill. The infamous Diamond Princess cruise ship provided a closed experiment in which everyone was closely monitored, and had a 0.8% fatality rate.

What has gone less discussed is what the new fatality rate might be after all of the aforementioned medical innovations. This is hard to say. Do not forget that, to the extent that old age care facilities are now under careful protection, the demographic profile of the people being infected has itself changed substantially. As such, a comparison is arguably apples and oranges.

But to the extent that hospital fatality rates have declined so substantially and several individual drugs have reported 33% and even 50% declines in the likelihood of death, it seems probable that the new fatality rate might be several times lower, perhaps in the range of 0.1% to 0.5%. This is entirely speculative. But, if true, it would then raise an interesting discussion as to whether economic and lifestyle restrictions are now too great, given a virus that might now be much less deadly than before (perhaps even, at the most optimistic end of the spectrum, not enormously more deadly than the flu).

The proper answer is probably “no” to this question, in that COVID-19 isn’t just a problem because it kills so many people, but also because it is so easily transmitted. That is, not everyone gets the flu every year whereas most people would likely get COVID-19 absent special precautions. It is also so problematic because it can be most unpleasant for those who do survive. And, it increasingly appears to do lasting damage to a wide variety of bodily systems. As such, the policy response is arguably appropriate even if the fatality rate is several times lower than before. But these numbers are important to continue monitoring to ensure the conclusion does not change.

Where are the antibody winners?

In the early stages of the pandemic, we speculated that people who had been infected by COVID-19 and subsequently recovered might be in a position to benefit themselves and perhaps also society in a number of ways. They wouldn’t need to wear a mask, avoid crowds, work from home, or live in fear. They would be extremely attractive candidates for companies seeking front-line workers, and also particularly well positioned to help treat the sick.

But this hasn’t obviously come to pass. Why not? It is likely a combination of factors:

  • insufficient antibody testing to identify who enjoys this enviable passport
  • worry on the part of policymakers that this would create a two-tier society (and also encourage fraud)
  • lingering fear that some of these individuals might still be infected at a low level
  • too much uncertainty around the duration of immunity, and
  • labour laws precluding discrimination on the basis of one’s personal health.

Economic developments

PMI data remains consistent with recovery

Purchasing Manager Index (PMI) data remains mostly consistent with a continuation of the economic recovery through August. The Chinese official composite PMI advanced from 54.1 to 54.5 – its highest reading in more than two years. The U.S. manufacturing index rose from 54.2 to 56.0, while the U.S. services index fell from 58.1 to 56.9. The Eurozone manufacturing measure was somewhat lower than the others, but nevertheless steady at 51.7.

The common element is that most countries continue to sport readings in the range of 50-60 – classically, an indication of solid economic growth.

Q2 GDP data confirms spectrum of national troughs

While some countries have had their second-quarter GDP data available for over a month, others have only just released their numbers. As such, it is worth looking back at this admittedly stale data to see how well it squares with our initial impressions when we were scrambling through the early stages of the pandemic and relying upon untested mobility data and an assortment of novel real-time feeds.

Happily, our initial rough-hewn assessments proved fairly prescient. Australia and Japan shrank the least on an annualized basis (-25%, -28%), thanks to their relatively milder first encounters with the virus and greater success in taming it without having to resort to extreme economic lockdowns. That said, it is still shocking that the best-performing countries contracted so much.

Sweden famously went its own way, accepting additional infections and also likely fatalities in exchange for greater personal freedoms and less economic damage than its peers, and indeed the Swedish economy “only” shrank by 29% annualized in the second quarter.

The U.S. then arrived next, down 32% annualized – a superior performance relative to Canada, the Eurozone and the U.K. – in large part because it did not impose as restrictive social distancing protocols. As with the other countries, this difference was mostly visible in the mobility and real-time data.

Canada and the Eurozone then landed identically at -39% annualized for the second quarter, consistent with their fairly aggressive quarantines.

Lastly, the U.K. collapsed by an unfathomable -60% annualized. This is truly hard to comprehend. Yes, the U.K. was late to shut down its economy, requiring even more extreme measures to control the virus. True, the U.K. is simultaneously grappling with Brexit and has an economy that is more oriented toward personal interaction than most. But it still a shockingly worse outcome than the rest. That said, the U.K. economy today looks to have recovered to the extent that it is no longer obviously lagging so badly.

Employment update

The U.S. August employment report was strong but nevertheless tricky to interpret properly. It certainly confirmed the continuation of economic growth, with 1.4 million new jobs created. This was a deceleration from the prior month, but heroic by any standard other than the post-pandemic recovery.

Where jaws dropped was when the U.S. unemployment number was released, falling from 10.2% to 8.4%. This huge leap was completely inconsistent with the rate of hiring. How was it possible? Because the unemployment rate is constructed from an entirely different survey (a survey that polls households) than the headline employment figure (which comes from a survey that polls business establishments). Normally, the job number embedded within the household survey is fairly similar to its more famous counterpart, but that was not at all the case in August. The household employment report enjoyed a gigantic 3.8 million job gain, or nearly three times more than the official figure.

Efforts to reconcile the two include the observation that the household survey captures self-employed workers, farm workers and a handful of other groups. But those groups were unlikely to have experienced a big leap forward in August. As such, the gap between the two is likely temporary. But before we completely discount the household survey number and its impressive unemployment rate, one thing does strike us. Before this survey, Canada was reported to have recovered a much larger fraction of its job losses than the U.S., despite a fairly similar economic recovery. It is possible that the payroll survey has been inadvertently sand-bagging the U.S. employment recovery, and that the household survey provides a more accurate reflection of the overall labour market environment (as much as we doubt hiring actually accelerated in August).

It would appear that U.S. hiring has continued since the survey was taken. Initial jobless claims reached a new low in the latest week, at an admittedly still lofty 881K new unemployed people.

The Canadian job numbers were more pedestrian, though also good. Canada added 246K new jobs – on a population-adjusted basis, better than the U.S. payroll survey but worse than the U.S. household survey. In turn, Canada has now recovered 64% of its jobs lost to the pandemic. The details were strong, representing primarily full-time hiring. But Canada’s unemployment rate now lags the U.S., at 10.2%.

Of course, Canada’s labour market is generally thought to operate with an unemployment rate that is structurally around 2 percentage points higher than the U.S. (for a mix of definitional differences, more seasonal industries in Canada and less labour market flexibility in Canada). So perhaps the gap is exactly where it should be.

Turning to Europe, the story there has been somewhat different. By virtue of a very different set of government policy supports, the unemployment rates in the Eurozone and the U.K. never spiked in the spring since workers were largely kept on payrolls and subsidized by governments there. This had advantages and disadvantages. The advantages are that workers retain a connection to their employer, permitting a smoother economic recovery, and that no surplus workers are paid more than they originally earned, as per the North American experience. The disadvantages are twofold:

  • It can be hard to ween companies off the support.
  • The unemployment rate rises with a lag as this support gradually comes off.

Indeed, the Eurozone unemployment rate is now actively rising, to 7.9% at the latest reading and is expected to rise further toward the end of 2020 as furlough programs expire. In the U.K., the unemployment rate at the end of June was just 3.9%. But government wage support is already starting to fade and is scheduled to expire completely at the end of October. British companies have now begun major layoffs, with the Bank of England predicting an unemployment rate that rises to 7.5% and the Office for Budget Responsibility predicting a 12% peak. This could create a more severe economic headwind for the Eurozone and the U.K. over the coming months than that experienced in North America.

Businesses and consumers

U.S. businesses have pleasantly surprised recently, with core capital goods orders in July already rebounding to just 0.5% below their February level. We had imagined it would take considerably longer for appetite to revive for major new capital outlays. In comparison, it took the equivalent measure nearly four years to fully recover after the global financial crisis.

Conversely, as much as U.S. consumers have generally been quite enthusiastic and have enjoyed an unprecedented boost to household income from government stimulus – to the point that retail sales now run notably higher than a year ago – motor vehicle sales have as yet failed to fully rebound. They remained 11% below normal through August. One supposes that some unemployed people are flush with hundreds of dollars of extra money, but not tens of thousands. All the same, one might have imagined stronger structural demand given what is likely to be an enduring pivot away from public transportation.

Watching for weaker spending

Now that the U.S. program supporting unemployed people has shrunk in value and narrowed in availability, a key question is the extent to which previously enthusiastic consumer activity must cool. We may be starting to see evidence of this in real-time U.S. credit and debit card data, which shows a slight retreat in spending activity between late July and late August. For what it’s worth, we continue to believe the recovery can persist, but this is one of several major headwinds that should keep the rate of recovery in check.

Hurricane damage

It is still early in U.S. hurricane season, but Hurricane Laura – one of the most powerful storms ever to hit the U.S. gulf coast – managed to avoid major cities. As a result, it did not substantially interfere with economic activity, even as it inflicted between $8 billion and $20 billion of destruction to smaller locales.

Canada business closings

Cumulatively, an extra 94,305 Canadian businesses closed between March and May. This represents approximately 14% of the Canadian businesses that had been operating at the time. As such, the COVID-19 damage has been very real.

However, some context is useful. It is normal to have 30,000 to 40,000 businesses shut each month in Canada, so considerable turnover is the norm. As such, only about half of the companies that have shut since the arrival of the virus were likely the result of the virus. The other half represent normal business failures. And, the vast majority of the newly shuttered businesses are quite small – there have been few major companies that have failed.

Reviving sectors

Government support to date has mostly ignored sectoral differences – supporting all workers or all businesses, within certain parameters. The U.K. recently deviated from this by experimenting with more targeted sector-level help. A prominent example is the “Eat Out To Help Out” campaign, which furnished British diners in August with a 50% off coupon (to a maximum value of 10 pounds) for restaurant meals between Mondays and Wednesdays. This resulted in a burst of U.K. restaurant activity, with the intent of getting people back into the habit of eating in restaurants. OpenTable data now shows U.K. restaurant reservations have soared, running around 50% higher than the prior August.

The U.K. also eliminated its stamp duty – a home transaction tax – for properties under 500,000 pounds starting in July. This induced a surge in property market activity and has returned home prices to record highs.

Future gains

As we celebrate the extent to which economies have already revived – by more than half of their initial descent, in most cases – it is worth recognizing that further advances will be more challenging in a variety of ways. Not only are there new headwinds related to fiscal cliffs, delayed debt payments and the like. At the same time, much of the recovery so far has been the simple result of governments opening up ever-more sectors of the economy.

We are arguably bumping into the limits of that approach as virus numbers again rise across much of the world. Future gains will not only have to be slower, but cleverer as people and businesses discover smarter and safer ways of doing things rather than the brute force approach of simply opening another sector.

A new Fed mandate

After long rumblings, the U.S. Federal Reserve has now formally embraced a new mandate. It will no longer blindly pursue a 2% inflation target at all times, but instead take into account where inflation has been. This is technically called price-level targeting, but the Fed refers to it as average inflation targeting.

The approach is somewhat more casual than usually envisioned. Rather than insist that the country aim for 3% inflation in the next year after underperforming with 1% inflation in the year before, the notion is that the target deviates from 2% only qualitatively. Furthermore, it does so only after an extended period of missing the target. As such, it is like a weak form of price-level targeting.

There are several attractions to the Fed:

  1. The Fed can (hopefully) balance out its persistent misses below the inflation target.
  1. The very commitment of aiming for a higher inflation rate makes it more likely that inflation will rise, since expectations are an important driver of prices. Thus, whether the Fed actually succeeds in achieving above 2% inflation, it is likely to achieve inflation that is higher than before.
  1. At least theoretically, price-level targeting helps to deliver more monetary stimulus during a recession in a structurally low interest rate environment. The idea is that once the nominal central bank rate gets stuck at 0%, instead of inflation expectations falling while the economy is in recession, they should actively rise. The low inflation during the recession means inflation will have to be higher later to compensate. In turn, the inflation-adjusted interest rate actively falls rather than rises. This surmounts the key problem of the nominal zero lower bound for interest rates.

For the moment, all of this amounts to the conclusion that the Fed funds rate and other policy supports will likely remain in place for even longer, not just over the next year or two, but potentially even for a few years after that.

Connected to the decision, the Fed emphasized that it will no longer assume that a tight labour market must necessarily translate into higher inflation. The past decade has demonstrated the flatness of the Phillips curve and the ability for the unemployment rate to plumb nearly unprecedented lows without inducing significant inflation. In the future, the Fed will wait until it can see the whites of inflation’s eyes before raising interest rates. By definition, this means the Fed will be slightly late in addressing an outburst of inflation given the lags involved in the monetary response function. This is now acceptable given the new tolerance for a period of slightly higher inflation.

Lastly, what does this mean for inflation? It provides a further incremental argument in favour of additional inflation in a few years' time. Inflation for the moment is still quite low, but the combination of high public debt loads, large central bank balance sheets, onshoring supply chains and now a new inflation mandate collectively argue there should be somewhat more inflation in the outer years.

However, let us emphasize that, if anything, price-level targeting provides a stronger anchor for inflation than the prior approach. Previously, inflation could drift persistently higher or lower than 2% and the central bank wouldn’t try to undo the deviation. In the future, it will. As such, although there will be a tolerance for more inflation over perhaps the next five years, the probability of persistent drift thereafter is arguably diminished. This is not a mandate for permanently higher inflation.

Schools open

Northern Hemisphere schools are now starting to re-open for a new school year. Wisely, many parts of the U.S. are beginning the school year virtually given the recent intensity of the virus there. But what about other jurisdictions where the outbreak is less severe?

The goal of restarting physical schools is certainly understandable: it not only helps children develop their full potential, but allows parents to go to work themselves. Furthermore, children are generally less severely affected by COVID-19 than adults, and it is unclear whether they are prime transmitters.

However, it is not a risk-free proposition. Schools have already been found to be sources of transmission of the virus (as have these other activities), to varying extents. Opening schools opens up a new vector for transmission, with the important caveat that many children were already interacting with one another to at least a limited extent via daycares, summer camps, playdates, sports teams and other activities.

It is impossible to speak in absolutes as to whether opening physical schools is wise or not. The situation differs significantly seemingly everywhere – not just in terms of the pervasiveness of COVID-19, but also the sorts of measures being deployed to minimize school risk, ranging from mandating masks to securing more space per student to combining virtual with physical instruction. Abbott Labs now offers an affordable and fast coronavirus test, and the U.S. has ordered several hundred million doses. Deploying these to schools seems an obvious option. Suffice it to say that some school plans seem sufficient while others do not.

Fortunately, we are not operating completely blind. We can turn to southern hemisphere schools that were open over the summer, and to a variety of other school boards that reopened before the summer began. What do they tell us?

Alas, the evidence is quite mixed.

Germany reopened its schools in mid-August. While the country’s virus numbers subsequently increased for several weeks, they were already rising before the schools reopened, and the infection rate has more recently started to edge back down. Some localized school closures were necessary in Berlin, where 41 of the city’s 825 schools experienced a COVID-19 infection within a few weeks of reopening. Targeted responses at the school-by-school level are key.

Sweden opened its schools for the month of June, coinciding with its most intense period of virus transmission. As such, this appears to be a negative, though a complicating factor is that policymakers have rarely opened and closed schools in isolation. Usually – particularly last spring – multiple sectors were being reopened at the same time. As such, while this is not a promising finding, it is not conclusive that schools were the main culprit. Promisingly, Sweden reopened its schools in mid-August and is continuing to enjoy a declining daily infection rate through today. As per the country’s unconventional approach, masks are not required.

Japan provides another mixed set of examples. The country reopened its schools in early June, and kept them open until late July. This time period coincided with a steadily rising virus count. However, as with Sweden, there were other restrictions that were simultaneously being lifted, blurring the interpretation. The schools then reopened at the end of August, with Japan’s daily infection rate continuing to decline since then (though there may not be enough subsequent data to comment definitively). Japan also appears to be reducing its class sizes – an ideal approach where feasible.

As mentioned earlier, many U.S. schools have reopened, but most major school boards are functioning virtually. Still, a non-trivial number have been live for several weeks now, and yet the U.S. daily infection numbers have remained tame, for the moment.

Australia had its schools open over the month of June, a period of time associated with quite low virus transmission on an absolute basis, though the numbers did start to edge higher over the period and then skyrocketed over the subsequent month. Whether this is unrelated to schools (many other sectors were in flux) or is a lagged effect is not clear. The country then partially reopened its schools in late July – mostly outside of the state of Victoria – and has nevertheless managed to substantially reduce its infection numbers. Students are no longer even required to socially distance, though adults are.

Israel reopened its schools between mid-May and late June, and this coincided with the beginning of the country’s worst outbreak. That said, and in something of a common refrain, other sectors were also being reopened at the time, and the COVID-19 numbers continued to deteriorate badly over the month after schools had closed. This might conceivably be a lagged effect from schools. But it should be noted that the numbers have remained just as bad over the subsequent few months, even though schools were closed over the period.

There aren’t any precise conclusions from this. The leads and lags and contamination from other sectors opening and closing are such that no definitive conclusion can be reached. It appears, unsurprisingly, that school openings can contribute to virus transmission. But there are equally examples of countries and regions with open schools that have not suffered uncontrollable spread.

Brexit developments

Brexit developments have been almost uniformly negative since we last updated on the subject.

The European Commission has accused the U.K. of wasting its time over the summer, and has issued something of an ultimatum. Meanwhile, the U.K. has indicated it will “move on” if a deal is not struck by October 15.

More recently, the U.K. appears to be trying to reverse certain earlier commitments it had been made to the European Union (EU), including promises relating to how it would implement a customs arrangement between Ireland and Northern Ireland. This is likely a negotiating tactic to put pressure on the EU as opposed to an unalterable position, but it has resulted in further EU fury. The fisheries sector, competition matters and the subject of state aid are further points of controversy.

For all of this, both parties would still like a deal. The problem is the extent of the divide on certain issues and the ticking clock. We continue to flag the very real risk of a “No Deal” Brexit, assigning a 55% chance that there won’t be a significant new economic arrangement between the two parties. A shallow free trade agreement is a 40% chance, and there is a 5% probability of a deeper economic arrangement.

-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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