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by  Eric Lascelles Jul 14, 2020

RBC GAM Chief Economist Eric Lascelles sees cause for concern in rising COVID-19 infection rates in the U.S. and certain emerging markets. Even as the U.S. struggles, however, the global economic recovery remains intact. Are there also signs that infections may be about to peak in recent hot spots?

Watch time: 13 minutes 25 seconds

View transcript

Hello. My name is Eric Lascelles. I’m the Chief Economist at RBC Global Asset Management, and welcome to our weekly video MacroMemo.

And of course, much to cover these days, mostly of a COVID-19 variety. And I suppose, logically enough, starting with the latest infection numbers. And so as we track this pandemic globally, we are still seeing quite concerning numbers at that global stage. We’re seeing around 230,000 new infections per day. That’s more or less a record and trending higher still, and it’s now in a position in which we have seen more than 13 million total people infected in the world. And so no good news at all on that front. I will say, one silver lining in all of this remains that we’re not seeing the fatality figures rise quite as aggressively, nor are they setting outright records. April was still a notably worse month, whether you’re talking the world or whether you’re talking the U.S., which has been its own hot spot. And so on both counts, we can say that the fatality figures, again, not rising to the same extent, but they are rising at least a little bit. And of course, they’re much higher than we’d like them to be.

But it still bodes the question, how is it that there’s this disconnect between infections and fatalities? And I guess there are a few answers to be provided. One seems to be it’s younger people more getting sick now, and younger people just have a better prognosis with this virus. It seems to be the quality of medical care; the sorts of drugs and techniques being used has reduced perhaps the fatality rate as well.

There’s also more testing going on, and so that’s good in terms of identifying the virus, but arguably captures a bigger fraction than you would have caught as of a few months ago. And so maybe there aren’t actually that many more sick people today than several months ago, though I should say we do think there are still more. That’s an at-the-margin observation.

And then the other thought in terms of that gap between infections and fatalities is there’s a lag. We know that the fatalities trail the infections, and so we may yet see the fatality figures continuing to get worse, because we do have quite a challenging environment. I would say, most obviously, in two places.

One is in the U.S. where the majority of U.S. States are continuing to struggle with this virus, though I should say a slightly smaller majority than was the case a week ago. And then emerging marketing countries as well are running into significant trouble. Not every country but a nontrivial subset. I would say disproportionately Latin American, with Brazil top of the charts in terms of EM countries, but Mexico and Peru and Chile also notably affected.

Also seeing significant rise in case load in India as it stands right now. And also now South Africa becoming a hot spot as well, and Africa more generally. Not with a shocking number in any kind of per capita sense, but nevertheless a rising case load and maybe a more limited capacity to deal with this in a medical sense. And so some challenges there.

But pivoting back to the U.S. state situation. And so I think we’ve all been watching very closely, and the Texas numbers and the Florida numbers, and a handful of states most obviously having run into trouble.

I will say a few things. We remain, I would say, pleasantly surprised but also ultimately pleased that many of the states most adversely affected have been pivoting away from reopening. In fact, they have been to some extent re-shuttering, at least at the margin. And so many bars and indoor restaurants being closed or being used in a more restricted fashion, masks becoming more prevalent as well. There is a fighting chance this does get managed.

And I will say, one state of particular interest right now is Arizona. And we mention Arizona really for a few reasons. One is, as much as it doesn’t have the biggest infection rate out there—the state just isn’t as big from a population perspective as some of the others—it has been very much among the most adversely affected, though. And tentatively, it might be the case that we’re starting to see the infections fall in Arizona, hospitalizations may be starting to peak. And so we’ll see whether this is a false reading or whether it’s telling us the truth.

But the bottom line here is one in which, plausibly, the adjustments Arizona made a few weeks ago in terms of its rules could be translating into a lower virus count. And that’s an optimistic thought because we could well see a similar pattern playing out in the likes of Texas and Florida and Georgia and some of these other states over the subsequent weeks. And so we are looking quite closely and trying to gauge whether the virus will be tamed in the U.S. by the end of July. I should say, whether the peak might come by the end of July. There would be a great deal of hard work still to go thereafter. No guarantees. In fact, internal discussions here reveal all sorts of different views. And some people think we don’t see that peak until early next year and other people think not ‘til the fall. And some, including myself, think it could be a July or August proposition. But let’s watch very closely and let’s see whether Arizona does actually represent something of a bellwether, if that makes sense.

I should say, maybe unsurprisingly, and something I’ve highlighted in other video calls, that we do see some wobbling now in the U.S. economy. It looks as though the U.S. economy has been shrinking a little bit again over the last few weeks, and seems as though it’s related to the virus outbreak and related to some of the more cautious maneuvers made by governments recently. And so that’s something to be aware of, I think.

We have now adjusted, or at least we’re in the process of adjusting our U.S. growth forecast, and really doing so in response to that, in response to the idea that we might not be getting any growth out of the U.S. in the month of July, and maybe not even into part of August. Depends on when you think the virus gets tamed, I suppose. And so that’s very much a new headwind for the U.S.

Simultaneously, we just have more real-time data. We’ve got data through to July now. We’ve done a better job, we think, of integrating some of the real-time indicators into our modelling. But also, we’ve been thinking really for a few months now that probably the full recovery is going to take a bit longer than we previously imagined. And so we smoosh all those things together and we’re in a position in which previously we’d look for the U.S. economy to shrink 7 percent in 2020. We now think more like minus 8 percent.

So not a radical difference but nevertheless a downgrade, and a downgrade at a time that quite a number of other economies are looking fairly good and continuing their recoveries. And we haven’t quite formalized this, but we’re in the process potentially of upgrading some of those forecasts. And so that U.S. anticipated outperformance starting to fizzle here and the U.S. coming back to earth, arguably because it just hasn’t handled the virus as well.

I can mention the Canadian economic numbers at least for a moment. And so Canadian job figures for June look pretty good. Almost 1 million jobs created. That was an above-consensus number. You can now say 43 percent of the jobs lost due to the pandemic have since been recovered. And then simultaneously, using actually some internal RBC data that we’re allowed to share, I’m happy to report, looking at consumer credit and debit card usage, now actually 4 percent higher than a year ago. And so I would maybe stop short of saying, therefore, consumers are stronger than they were a year ago in the sense that there’s probably less spending with cash these days, so there’s a compositional effect and shifting to online spending and that sort of thing.

And of course, even to the extent the spending is legitimate, a lot of it is backed by government stimulus, not really organic jobs, and so maybe an artificiality to it from that perspective as well. But consumers have held together surprisingly well. Canadian economic data’s looked pretty darn good recently.

Now a couple of other things that I’d like to cover off here. So one question is just here we see other jurisdictions, outside of the U.S. for instance, now starting to open restaurants and bars and these sorts of things as well. And so one obvious question is whether other countries are now going to run into trouble to the extent those particular establishments were really flagged as sources of outbreaks, and in the parts of the world that have struggled recently.

And so I would say, that does leave me somewhat nervous. I am concerned we will start to see a rise in virus count, perhaps even in the likes of Canada, my home country.

I will say, though, that I’m not overly panicked in a broader sense just in that it seems to me, most of the rest of the developed world has the capacity to pivot fairly nimbly here. The virus hasn’t been overly politicized such that if we are going to see a rising infection rate—and I should say, we’re not seeing a falling one anymore, even in continental Europe and the UK and Canada. They’re looking good. They have low numbers, but it’s no longer actively falling, which again, makes me a bit nervous as we see bars and restaurants reopen because that could well tip things in the opposite direction.

But the point is, we think that there’s some capacity then to retreat if that’s needed. It would be quite a surprise if there was dithering for over a month, which is what happened in the U.S. and allowed this to get out of hand. So we think that there is some ability to calibrate there.

I do want to mention something else, which is, we tend to frame this debate in terms of saving human lives versus saving the economy and how to calibrate those two things. And that is very much part of the equation here and part of the judgment being rendered by governments.

But there is a third item maybe you could say as well in terms of maybe just socializing, or even fun, if you want to call it that. And so, for instance, the Brookings Institute, a big U.S. think tank, has recently done some work, and they found that, actually, you can approach this pandemic from a few different perspectives and solve it.

And so you can control the pandemic either by limiting the economy quite significantly, which has been the approach until recently. Or you can actually do as well—in fact, they think you can do better by allowing the economy to run pretty much completely free, with a few small exceptions, and very much limit the social side of things. And so you have to keep churches closed and camps closed and sporting and recreational activities closed, and you couldn’t have extended families meeting.

And so I don’t think that is a particularly appealing set of options, and the way that it’s being pursued is really balancing a partial economic revival and a partial socializing revival. But it’s just interesting to recognize there are paths in which you can control the virus and have a pretty much normal economy, but you would have to accept a very abnormal social life, if that makes sense, outside of the office or outside of the workspace.

I want to talk as well about bending the curve versus eradicating the virus. Now in a country like the U.S. where the numbers are somewhat out of control, you just got to get it down. And so there’s no real debate there.

But in much of Europe and the UK and Canada, we’re now in a position in which the virus numbers are pretty low and the debate is should we be trying to get those to zero? Or should we just be tolerating a low but steady set of figures. And you can go either way. It really does depend on the situation. But we did some math for Canada, and the result we got, maybe unsurprisingly, was it depends enormously on the value of a human life. And so we didn’t make any assumptions but there are some governmental agencies that say a human life is worth US$8 million and this kind of thing, so we used that kind of math.

But simultaneously, it really does come down to when you think the virus will be solved. And so if you think that there’ll be a vaccine and we’ll all be back to normal in less than a year, then arguably, it is better just to flatten that curve out. You don’t need to get rid of the virus right now. It’s already at a sufficiently limited level. That’s the winning strategy in terms of balancing the economy and human lives.

However, if you think it’s going to be multiple years, if we’re not back to normal for several more years, then that balance starts to tip and you can argue you’d be better off eradicating the virus, really driving it down over the next year, taking your economic lumps in doing so, and then having a really low count that’s under control from that point on.

So it depends on that. I’d like to think we will get to a pretty serious solution over the next year, and so maybe that tilts toward the flattening the curve solution. But I would say it’s pretty much a toss-up to my eye right now. And then the last thing I want to mention, very briefly, is just we’ve been doing work on the fiscal picture. And we all know it’s challenging. Big deficits, giant public debt loads. Canada got a debt downgrade not that long ago. None of these things are good at all.

However, the question is whether we’re going to see higher taxes emerge from this. And don’t get me wrong. There’s all sorts of other unrelated issues that say that could happen. Canada has a somewhat left-leaning government, for instance, and the U.S. has an election that could yet elect its own more left-leaning government. And that could easily yield higher taxes. But in terms of whether COVID-19 demands it, I would say, it’s not obvious to me that it’s absolutely necessary. I would only say higher taxes are necessary if one of the following four things are true.

One would be, if you think these big government spending programs are going to be permanent, and we’re not convinced they will be; if you think there’s going to be a serious effort to pay down the debt that’s been accumulated, and I’m profoundly skeptical of that. I doubt it. If you think interest rates are going to become a problem, making the servicing of the debt challenging. And it will be more costly to service this debt just because there’s more debt, but we think rates stay quite low and so we don’t think this is going to be a big problem.

And then lastly, if you think the economy underperforms. And maybe that’s the crux of the issue. If you think it’s going to take a decade for the economy to get back to normal, then you’re starting to make a pretty good argument there’s a structural deficit; someone’s got to do something about it.

But if you think it’s only a two- or three-year story—and I guess “only” in quotes in the sense that’s not exactly fast—but if you think if it’s more of a normal experience where the economy can work its way back to a more normal reading, in that case, there’s no structural deficit. You don’t need a permanent tax hike solution.

And so I’m not convinced we have to see higher taxes. Certainly, we’ll acknowledge there is a risk there and there have been some rumblings in that direction.

Well, on that not-so-cheery note, why don’t I say thank you very much for your time. I hope you found this interesting and I hope you consider tuning in again next week. Thank you.

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


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