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by  Eric Lascelles Nov 24, 2020

As Canada and other parts of the world enter lockdown, new November data reveals the economic damage from the second viral wave. In this video, Chief Economist Eric Lascelles speculates how long it may take to contain the second wave, and shares the latest vaccine news and infection numbers. He also sheds some light on Canada's public debt.

Watch time: 12 minutes 58 seconds

View transcript

Hello and welcome. My name is Eric Lascelles. I’m the Chief Economist for RBC Global Asset Management and very pleased to share with you our latest weekly video MacroMemo.

And let’s cover off a number of subjects. We’ll start with the latest vaccine news and some positive developments there. We’ll run our way through the latest infection numbers, including some improvement in Europe, though less so on other fronts. We’ll take a look at second-wave economic damage and how large that might be compared to the first wave. And also how long it might take to tame the second wave.

Of course, as an economist, we’ll also work our way into the economic numbers and we can share some new November data that actually starts to convey some of that second wave damage. And we’ll also look into geopolitics. Some positive news there. And we’ll also address whether Canada’s public debt situation is as troubling as some fear that it might be. Let’s jump right in. Just to begin with, we have yet again for the third time in, I think it’s four weeks, enjoyed some very positive vaccine news. And so whereas we had seen Pfizer and Moderna report that their vaccine candidates had enjoyed 90%-plus efficacy rates in earlier weeks, we now have a third vaccine candidate that’s looking fairly good. This one from AstraZeneca at Oxford University. The efficacy rate, in theory, a little bit lower, 70% being cited, though it does depend on what permutation of inoculations were used. And indeed they did get to 90% for some, so good but not obviously better than the others.

You might say well, that’s disappointing. How does that help us? Actually, it’s still very useful. And so, for instance, three vaccines are certainly better than two as a general comment, but specific to this one we can say this vaccine can be produced at higher volumes than the other ones, and so more of the world can be inoculated quickly. It’s much cheaper. In fact, it’s 5 to 12 times cheaper than the other candidates. Doesn’t need to be kept as cold, it can be stored effectively at room temperature. And there are plans to distribute it more broadly in poorer countries which don’t seem to have as good access to many of the other vaccines.

And I should also add, the technologies and techniques used to produce this vaccine are much more familiar. They’ve been used before and so the risk of problems or unknown surprises arising later is arguably much less. So this is a welcome positive development and risk assets and the stock market have felt, rightly, quite good about this. And we continue to think vaccines will play a very important role in 2021 in terms of returning the world towards some approximation of normality.

Turning from there to the latest virus numbers, we can say Europe, which had been the epicentre, had been seeing the worst of the second wave, now continuing to improve quite nicely for a second straight week. France is reporting half as many new daily infections, improvements to some extent in Germany, Italy, and Spain as well. And we’re also beginning to see the fatality number stabilize or even, in some cases, come down. And that usually takes time since it operates with a lag.

It should be noted though for all of this good news, the numbers aren’t yet low. So more decline is needed and is likely. And it should also be noted there’s a considerable economic cost to this. Europe locked down quite aggressively and that lockdown will do some economic damage that we talk about in a moment.

Quick word about the Canadian infection numbers. Not rising as aggressively as before, maybe even getting close to stability, but that masks varying trends beneath the surface. And so we can say Ontario and Quebec, the biggest provinces, the ones that had been the most adversely affected seemed to be starting to stabilize. And that makes sense. They’ve been pretty aggressive in terms of the social distancing measures. And Ontario, in fact, has now implemented even stricter ones that I would say give a high chance that Ontario’s numbers start to fall over the next few weeks.

Conversely, the prairies are struggling more. Alberta, in particular, seeing high numbers of cases and a rapid increase. And so that’s where the trouble currently is focused. Likely we will see some tighter measures there, as well, but it’s come somewhat more reluctantly. And so Canada not yet sorted but some provinces perhaps stabilizing.

And then turning to the U.S. and acknowledging the U.S. seeing some pretty grim figures here. And so getting closer to 200,000 infections per day, a record high. They haven’t done all that many aggressive things to contain the virus, and so for the moment it probably just keeps going up. We don’t have a peak particularly in sight yet for the U.S.

Now a big question in all of this is as we see this second wave unfold, what kind of economic damage should we expect? And to begin with, let’s acknowledge the damage is less from the virus, more from the rules that limit the economy to control the virus. So that’s where the damage comes from. Europe has been most aggressive about this, but Canada’s starting to do some things and I think the US, inevitably, will have to do some things as well at some point.

And let me just start by saying we do not expect economic damage to look anything like what it looked like last spring. Last spring, countries shrank by 10% to 25%. It should be literally an order of magnitude less than that this time round. And so some of it is just businesses are getting better at operating when people can’t physically move around. The second wave isn’t as shocking or as surprising to people, and so people aren’t bunkering down and stopping their spending or stopping their working or selling quite to the same extent.

And it should be emphasized the social distancing rules in place, as a general rule, aren’t quite as strict this time round. And so certainly many sectors are adversely affected, and so travel is very limited, and arts, entertainment, recreation, restaurants, bars, hotels, are all enormously restricted at this point in time. And of course, it’s an immense tragedy for the people working in and owning and, in fact, using those sectors, however, collectively those sectors are only 3% of the economy.

And we can say that many other much bigger sectors are being allowed to continue operating this time that were stopped last spring. And so that includes the manufacturing sector, construction, real estate. Just those three alone are 10 times bigger collectively than all those other sectors I mentioned. We also have mining and education operating roughly normally, whereas they weren’t in the first wave.

And of course, it’s worth remembering you also have this other big set of sectors that weren’t hurt all that badly by the first wave and are unlikely to be hurt all that badly by the second wave, such as finance, government services, health care, utilities, agriculture demand held up fairly steadily throughout for those things. And so I guess the point again being, some economic damage is likely, most visibly in Europe, less so, we think, in North America, but literally an order of magnitude less damage than in the spring.

Now how long will it take to tame this second wave? Well, you know, that’s an open question for places like the U.S. where a peak isn’t even in sight. But if we look at Europe which is clearly getting better, one of the rule of thumbs we’ve developed since the beginning of this pandemic is that it seems to take about twice as long to fix the problem as it does to let the problem get worse. And so for every day that the pandemic numbers are deteriorating, it takes about two days on average to get them back to where you started.

And so, for instance, the fact Europe did let this run for a good three months suggests that it could take six months to get back to the sort of happy numbers they were enjoying as of July and August. And so it’s a lengthy process. No guarantees that’s exactly how it works, and in fact, Europe, in particular, has been a bit more aggressive in terms of its lockdown such that maybe it comes together more quickly. But let’s recognize normalization doesn’t happen overnight.

As an economist, I would be remiss if I didn’t make a couple of economic comments. And so let’s do that now. I mentioned earlier, Purchasing Manager Indices out for the month of November in some countries. And indeed we’re seeing the pattern we expected to see. In the US, it’s quite clear the economy kept growing in November. We don’t really have such data for Canada yet, by the way, however, in Europe it’s clear that the European economy started to shrink in November and indeed that’s when many of these restrictions were put in place.

And so, for instance, the Eurozone composite PMI fell from a pretty mediocre 50 to 45.1. That’s consistent with a moderate decline. In France, the services sector which, France was the most affected country, services, the most COVID-sensitive part of the economy, fell from 46 to 38. So 38 consistent with a pretty sharp decline. And so we are seeing evidence of economic damage to be sure. The UK as well. However, note that this damage isn’t as big as it was in the spring as per the prior conversation. For context, the French numbers fall into 38. It was 10 in the spring, 50 being a level of flatness. And so nothing like that right now.

Let’s talk for a brief moment geopolitics. And so I can say the geopolitical story over the last several years has generally been fairly bad. It’s been about the U.S. and China having difficult relations, it’s been about tariffs being applied, it’s been about the UK trying to leave the European Union. It’s been pretty rotten as opposed to good. I can say, at least in the last month or so, we’ve had some more positive than negative news, so let’s celebrate that. One would be, it seems like those Brexit negotiations are going a little bit better. I would continue to ratchet slightly higher the odds that there is a deal between the EU and the UK before the end of this year when Brexit formally happens. We do expect a mild trade deal.

Let the record also show, the UK has been busy striking deals elsewhere. It reached a deal with Japan not that long ago. Has now reached a deal with Canada, in fact. And it should be noted that really this just replaces deals the UK is already part of that it will just lose access to when it leaves the European Union. But nevertheless, it’s positive and the UK is trying to do the same with several other countries, including the US, Australia, and New Zealand. So some deals being struck there to limit Brexit damage.

And then maybe the other item from a geopolitical perspective is a big new Asian trade deal. It’s been 14 years in the making and China is the hub of this deal, including many other Asian nations, though not India. India dropped out along the way. This will facilitate more trade there. And I guess in some sense is a competitor to the CPTPP deal which includes a lot of Asian nations and Canada and doesn’t include China. So China’s at the heart of one, you might say Japan’s at the heart of the other. It’s fine to have multiple trade deals, in fact, ultimately it’s good to have more as opposed to fewer. But let’s recognize that the U.S. and Canada on the outside looking into this new Asian trade deal.

And then lastly, just a quick word on Canadian public debt. And indeed, this is applicable mostly to almost all developed world countries, but let’s acknowledge public debt loads were not low going into this pandemic. Certainly, debt loads have risen quite aggressively. In fact, in Canada more than any other country. Canada’s deficit is on the order of 20% of GDP this year. This is completely unprecedented, including by World War II standards. And so the debt load is going up a lot. Canada is going from a debt load of the high-80s in terms of percent as a share of GDP to 115% of GDP, which is not a small number.

Let the record show that there’s an economic benefit to this, that’s why the IMF thinks the Canadian economy does better than most over the next few years, but that extra debt will stick with us and we’re not optimistic it gets paid down anytime soon. For all of that, though, we do not think a debt crisis is likely in a Canadian context or for most developed countries. And so, for instance, in Canada, when you map out the debt trajectory over the next 80 years, which no doubt sounds absurd, and of course does require all sorts of assumptions, actually, if politicians didn’t do anything the debt load would start to fall in about five years and you’d actually have no debt by the mid-2080s.

That’s not likely. Politicians will spend more money and cut taxes and do things that change that dynamic, but nevertheless, the point being there isn’t some urgent action that needs to be taken. It’s more a matter of maybe limiting enthusiasm for more actions going forward. And so in the end, really, it depends what the Canadian government initiates. And if they do add big, new, expensive programs, then you might need higher taxes or you might be on an unsustainable trajectory, but COVID by itself has not created a debt spiral or anything quite like that as much as there’s more debt as result.

I should note, if you want to worry about debt in Canada, it’s fair to say some of the provinces, mostly the smaller provinces are not themselves on a sustainable trajectory. So some belt-tightening is needed in many of those provinces. And similarly, of course, private debt, particularly household debt, is quite high in Canada. And so I would say if we want to fret over debt in a Canadian context, maybe households number one, provinces number two, federal debt probably comes in a pretty distant third.

Okay. I’ll leave it there and say thanks very much for your time. I hope you found some of that interesting. And please consider tuning in again in the future. Thanks so much.

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


Publication date: November 24, 2020

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