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by  Eric Lascelles May 5, 2020

This week, RBC Global Asset Management’s Chief Economist Eric Lascelles shares his outlook as global economies start to reopen. He makes a below-consensus growth forecast, using an expenditure-based GDP approach to estimate the peak-to-trough decline. In his review of different countries and regions, he notes:

  • China shows slow growth in consumer spending and economic recovery is unlikely to be fast or complete until a vaccine is available or herd immunity takes effect.
  • In the U.S., economic activity remains low, with a sharp decline in sales and hours worked for hourly workers.
  • In North America and the UK, health risks appear high in reopening the economy given slower declines in transmission rates compared to the rest of Europe.
  • Canada’s growth forecast shows a larger drop in GDP than in the U.S. given the significant hit COVID-19 has made on the energy sector.

Watch time: 9 minutes 48 seconds

View transcript

Hello. My name is Eric Lascelles. I’m the Chief Economist for RBC Global Asset Management. Thank you so much for your time, and welcome to my glamorous home office. I’m here to talk to you today about COVID-19, unsurprisingly. That’s the subject that’s dominating not just the headlines, but the thinking of economists and certainly investment strategists as well. And so why don’t we jump in and talk a little bit about the virus itself and talk about some of the economic analysis we’ve recently been doing.

And so, to begin with, COVID-19, still experiencing roughly 80,000 new cases per day, up to roughly 3.5 million total cases around the world. Though I should say, the number of new infections per day does seem to be starting to decline slightly. And so this is a welcome development, and it’s actually matched by a decline in fatality rate as well. And so there is certainly some good news here in terms of the general trend.

We can say that Europe remains the star in the sense that many of the major European countries are managing significant declines in their rate of infection and the number of deaths as well, down sharply by virtually every metric and across all of the major countries. And so that’s where I would say most of the virus specific good news is coming from.

The U.S., the UK, and Canada, a little bit less keen. And so, still seeing roughly stable numbers, and in some cases slight declines, particularly on the fatality figures. However, not as enthusiastic a decline, arguably because the quarantining hasn’t been as aggressive. And, if anything, Canada has been the laggard among the three, managing the least enthusiastic of the declines. And so the story, to some degree, is still pending there. Certainly an effect from quarantines, but maybe not as enthusiastic a response in terms of improving virus statistics.

But I am not an epidemiologist. I’m an economist. And so why don’t I talk a little bit about the economic story as well?

And so, to start with, as we track the data around the world, obviously, incredible drops in economic activity. That’s been the constant theme ever since this began. Unsurprisingly, economic surprises are profoundly negative. That is to say, numbers have come in well below the consensus forecasts set by economists. That was obviously the case in the early going, since no one really anticipated a pandemic, let alone a global quarantine. But it’s remained the case. And so we know, even as new data comes out now, it’s tending to arrive below consensus as opposed to above. That doesn’t please me. But I should say we have below consensus growth forecasts. And so it aligns fairly well with our views right now. When we look at some of the latest data, for instance, we now have U.S. first-quarter GDP that has come out. It was down 4.8 percent annualized, below consensus, unsurprisingly, although not quite as weak as we had thought. And I should admit, Q1 really doesn’t capture the full story here to the extent of January and February were mostly normal. We’re just picking up probably 10 days of—of real quarantining in that quarter. And so we’ll have to wait for new data.

But the good news is we have all sorts of evidence to work with now, and real-time indicators have been built and quasi-real-time surveys have been conducted. And so we can now say fairly profound things about the way economies are responding.

And so, for instance, in the U.S., business sales reported down something like 40 percent. Big decline in sales. Hours worked, of hourly workers, not everyone, but of hourly workers, down as much as 60 percent. So massive declines here, and consistent with our view that there is a very big economic hit underway right now. You’ve probably been tracking jobless claims figures as much as I have. And in the U.S. now, 30 million people have filed for new jobless claims over the last month and a half. And so massive figures, by that perspective. And we’re going to learn a lot more in the next several days because at the end of this week we will get the official U.S. payrolls print for the month of April. And the consensus thinks 21 million jobs will be lost; the consensus thinks the unemployment rate goes to 16 percent. My fear is it might actually be worse on both counts.

One thing we’ve done in the latest week is to use an expenditure-based GDP approach. And so we’ve already made all sorts of economic estimates, we’ve already talked in the past about how we think the peak-to-trough decline in U.S. economic output will be something like 22.5 percent. And so that’s our assumption. But we wanted to approach it from a different perspective. And so we’ve approached it from a classic expenditure-based GDP perspective, saying, okay. What’s happening to consumption? What’s happening to business investment? Throw in government spending and trade, and you have an estimate from GDP that’s a different way of looking at things than just how different industries are responding, which is an industry-based GDP approach. And when we do that, we arrive at a very similar conclusion.

And so we see measures of consumer spending that are down, gosh, you can find numbers anywhere from about 20 percent to 60 percent down. But for the most part, we see a lot of estimates of credit card data and this sort of thing down around down around 30 percent. We think the actual decline will be a little bit less, just because those measures tend to miss nondiscretionary spending like mortgage payments and the like. And so we’re calling the consumer spending drop maybe a 25 to 30 percent peak-to-trough decline. Business investment probably doesn’t fall quite as much. We have quite a nice model we’ve built that argues for a 25 percent decline there. We’ve seen some other things arguing for 20 percent declines. So call that a 20 to 25 percent drop in business investment. Government spending goes up. This is all the stimulus and hard work at play, though not as much as you’d think because much of that money is just a transfer to households and businesses not actually counting as government spending. But still we think that there’s a 5 percent pop there, perhaps. And then trade, we think is roughly neutral. Everyone’s in this approximately together. And when we combine that, it more or less confirms our prior thinking. It argues for something like a 22.5 percent peak-to-trough decline.

I should emphasize, that’s the worst of it. You then start to see a gradual economic recovery. We’re in fact starting to get that. And as a result, the 2020 U.S. GDP forecast isn’t that negative. It’s minus 10.6 percent. Still a—a hugely problematic number, but not 20-something percent.

A quick word on Canada, if I can. And so, to begin with, similar sort of quasi real-time measures in Canada, making similar sorts of conclusions. One survey from Stats Canada says business revenue is down 29 percent. Another says that employees—number of employees reportedly down 27 percent, which is a massive drop. And in fact, when we look forward to Canada’s equivalent employment numbers, we can see, for instance, that the consensus, looking for more than 4 million jobs lost, this coming Friday, and that’s a big problem in the sense that it’s actually proportionally worse than the U.S. on a per capita basis. And it makes sense to us just given Canada’s bigger hit in the energy sector, given Canada has had a more aggressive quarantine, these sorts of things unfortunately do add up. And when we tally that up into a GDP equivalent implication, we’re looking for more of a 12 percent drop in Canada in 2020, whereas the U.S. we were talking about a number in the 10 percent range.

But I want to finish with a conversation about the economic recovery. And so we can look to China. It’s the bellwether. It’s where the virus started. It’s where the quarantine first began, and it’s now where the recovery has most obviously taken hold. And the good news is there has been a substantial recovery. That is absolutely valid. The bad news is, it’s not quite been complete. And so industrial production is mostly up to where it was, if not quite fully. Consumer spending isn’t, though. And so we see measures of consumer spending in China that are still arguably about 20 percent short of where they would normally be. That’s not a huge surprise. People quite logically don’t feel like going to movie theatres or restaurants right after a pandemic, and so some of these numbers are still down.

Nevertheless, worth highlighting the economic recovery is unlikely to be especially fast, unlikely to be complete, particularly until you get things like vaccines or therapeutics or herd immunity, or significant technological leaps in terms of testing and tracing.

And so as we turn then toward the developed world and other countries now beginning to reopen. And that very much is a theme, and we’re seeing quite a lot of it in Europe, but also in parts of the U.S., like the states of Georgia and South Carolina; to some extent in Canada, incrementally here and there, but perhaps most enthusiastically in the province of Quebec, we can say there is a risk here. And so the risk is when we calculate transmission rates and the degree to which the virus is fading or is growing, in Europe, they’re in a position where the virus is disappearing fast enough that you almost certainly can loosen the social isolation measures and still be on a trajectory towards fully controlling and ultimately eliminating the virus.

I’m not sure I can say that in a North American or in a UK context, and so the transmission rate figures we see are still right around the magic number of one, meaning each sick person infects one other person and the virus just keeps on going. And so I guess one risk, one concern to flag—and I suppose to end on a somewhat more pessimistic note—is just to say that I am nervous that as some of these social distancing measures lighten in North America we could see a further resurgence of the virus. It may not be the final word. I’m hopeful I’m wrong, and I certainly don’t have a monopoly on the right answer for these sorts of things, but there are some risks associated with that. And I suppose it leaves me reasonably comfortable with the below-consensus growth forecasts that we’re currently maintaining.

And so with that, why don’t I say thank you very much for your time again, and look forward to talking with you again in the future.



For more information, read this week's #MacroMemo.

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