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by  Eric Lascelles Dec 15, 2020

In his final update for 2020, Chief Economist Eric Lascelles shares an upgraded economic forecast for 2021 and the related potential risks to that forecast. With the economic damage from the virus now about 70% recovered in developed countries and the number of cases showing signs of peaking in Canada, he anticipates moderate growth for 2021.

Watch time: 14 minutes 29 seconds

View transcript

Hello. My name is Eric Lascelles. I’m the Chief Economist for RBC Global Asset Management, and welcome to our final video MacroMemo of 2020.

And in this edition we’ll discuss a range of things. We’ll do a little year in review, and a little year in preview as well with regard to 2020 and 2021. We’ll talk certainly the latest COVID-19 infection numbers, some vaccine news as well, and then we’ll work our way into the economic developments. And within that I could say I’ll share some updated economic forecasts. We’ll talk a little bit about downside risks as well. And we’ll finish with just a quick look at Brexit and the U.S. fiscal situation, which both come to a head at the very end of 2020.

Let’s start with that year in review, and normally I do this sort of thing at the end of the year, logically enough. And it’s fairly hard to encapsulate a year into one dominant theme, and it’s usually a bit of this, and a bit of that. But of course that wasn’t the story for 2020. It’s quite clear what the theme was, and that was pandemic.

Indeed it’s a fair chance that the pandemic will ultimately prove to be the story of the decade, of the 2020s. And when I say that I should emphasize, I’m not predicting COVID-19 as lingering in 2029. It really is just an observation that to the extent this is a multiyear shock. You don’t always get multiyear shocks within the span of the decade. This could be the one of relevance. I hope it is the one of relevance for the 2020s. And so certainly that’s the dominant issue.

The year was characterized by the deepest recession since the Great Depression. It was characterized by the fastest decline in modern history. It didn’t go that fast during the Great Depression that’s for sure. And then ultimately as well by the greatest government intervention that we’ve ever since, in a number of ways. One would be in the sense of limiting our ability to go about our lives normally, and shutting down sectors, and banning certain activities. And that was maybe not unprecedented but quite unusual. The other side though was truly unprecedented, and so the sheer amount of stimulus being delivered. And so record amounts of money being printed, record amounts of money being borrowed. And indeed, by definition, record amounts of money being spent as well.

And all of that was in the first four months of the year. That left another eight months to deal with and fortunately there was a pretty remarkable recovery from May on. And we’re now in a position, which we can say for many developed economies, they have since unwound about 70% of the damage that was done in the late winter and in the spring. And so 70% of the way back to normal. And indeed, one of the defining characteristics of the year was that the recovery was notably more vigorous than expected. And I’ll return to that a little bit later when I talk about our new forecasts. When I think about the year ahead, well unfortunately COVID-19 likely still going to be the dominant theme. It may well be for several more years at this point in time, but I think in a very different context. And so in the context of recovery as opposed to the context of decline. And so don’t get me wrong, we do think there may well be a small blip in growth in early 2021 as the second wave is dealt with, and so it may not be perfectly smooth sailing. But predominantly a recovery year as opposed to a decline year.

And actually we have the U.S. and Canada back to their prior economic peaks by the fall of 2021. So getting back to that new record territory before the end of the coming year. I think you might also describe the year ahead as year of the vaccine. And so, of course, we’ll already getting some limited vaccination happening, but most people, particularly in the developed world, probably get vaccinated in 2021. And that in turn informs the year of normalization as we increasingly get to go back to more normal lives, particularly I think over the second half of the year.

And I should say one other thought with regard to 2021. And again through a purely economic lens of course, is that increasingly we will have the luxury of thinking about non-pandemic themes and risks, if that makes sense. And so it will become increasingly relevant this political transition underway in the U.S. The UK economy post-Brexit. The geopolitical environment, with Iran, and China, and the U.S. being perhaps the most interesting players at this juncture.

And also thinking about things that are incredibly powerful forces, and long-term forces, and they just really weren’t relevant in 2020. And so demographics come to mind as well. That’s a powerful driver, and we’re going to start to think a little more and care a bit more about that once again in 2021.

Okay. There was my review of the year and look ahead. Let’s move into more regular fare. And so we’ll start by just talking about the latest virus numbers. And so the COVID-19 figures still quite challenging, setting records or in the vicinity both in terms of global cases and global fatalities right now. More than 11,000 deaths per day, which is a pretty mind-boggling number.

Europe of course had a very tough second wave, and then was on a happy trajectory up until quite recently. And what we’re seeing right now is an interesting divergence going on. And so you continue to have the likes of Spain and Italy getting actively better.

You have the opposite extreme, to an extent. Germany not having improved at all and actually deteriorating again, though they’re numbers have never been too, too bad. But deteriorating, nevertheless. They’re tightening up their rules very shortly after I speak this. And so hopefully that deals with the issue for them. And they’ve done a fairly good job overall.

But then you have France and the UK. And these are countries that improved a lot over the span of November. And now they’re starting to deteriorate a little bit again. And it makes sense, we’ve seen them ease some of their rules and so inevitably the virus begins to circulate again. But that is a concerning thing. It suggests you can’t ease your rules all that much, and indeed they need to do a little bit more work as opposed to a little bit less.

And one concern in Europe is that many of the countries have instituted some special rules around Christmas. And so they’ve opened up and allowed more interactions in the days before and the days after, and while that’s of course warmhearted and perhaps reflective of the spirit of the season, in the end you have to think it’s going to result in more spread. And so we’re going to have to watch that quite closely in the weeks after the holiday season. And so Europe not fully resolved yet and seemingly not able to take its foot all that much off the brakes right now in terms of the economic ramifications.

For Canada, maybe now starting to see a peak. I’ve given up on getting this precisely right, but nevertheless we can say Canada seems perhaps to be peaking after having instituted fairly strict rules across a range of countries. And the U.S. not yet obviously peaking, and that makes sense. As much as some states are now getting fairly serious and implementing stricter rules, many really have not. And so it would make sense if they continue to rise for the moment, and the U.S. is in pretty dangerous territory with around 200,000 infections a day and around 3,500 deaths per day. So really quite high numbers there, and maybe not turning just yet.

In terms of vaccines, and so vaccines being potentially the saviour for us all here, vaccine rollout now underway. And so the UK gave its first inoculation last week, and Canada and the U.S. doing so this week. We are seeing additional approvals expected over the coming week or two. We also see fairly high efficacy rates claimed for some other vaccines. A Chinese vaccine, a Russian vaccine claiming 85% to 95% efficacy rates as well, which would be quite good. And so broadly a positive story and we are optimistic in the context of vaccines. But, it’s fair to say we have had a few speed bumps as well. And so one prominent one would be the Pfizer vaccine, which is the one that’s already out there and beginning to be used for inoculations. It is not being recommended in the UK any longer for those with severe allergies. So there were some allergic reactions. And so I guess it does go to show that we are going to see again some speed bumps as we go through this process. But still, for the most part, fairly successful so far. Let’s pivot to the economic situation. So finally my forte I suppose. And I’ll just start by saying, we have upgraded and updated, I suppose, our forecasts. And so every quarter we go through the process of revisiting assumptions, and the trend over the last quarter has been that stronger 2021 forecasts are arguably appropriate.

And indeed, as we’ve done that we’ve ended up with forecasts that are at or even above the consensus as opposed to below. And so that does mean we are technically optimists, and indeed that’s consistent with our asset allocation positioning in terms of preferring risk assets like equities over safer things like fixed income.

And so we’ve upgraded again those forecasts. We now have the U.S. economy growing 4% in 2021. We have Canada growing 5%. We have the UK growing 6.6%. If those numbers sound big, and they should—normal might be 2% growth—it’s of course because this is a recovery year. We’re clawing up and making up for lost ground.

And if you’re wondering, why is the UK set to grow so much faster for instance than the U.S.? The answer is because the UK did so much worse in 2020. It’s catching up, if that makes sense. I think the ultimate measure of success isn’t really what you’re GDP growth rate is in 2021, it’s when your economy gets back to its prior peak.

And by that measure, as I mentioned earlier, we have the U.S. and Canada back to their prior peak by the late fall of 2021. We think it takes until the middle of 2022 for the UK and the Eurozone to get to the same kind of place. And so still certainly work to be done. The U.S. and Canada arguably leading the way from an economic standpoint. And good-looking growth numbers likely, particularly once we get past some of the maybe slightly weak numbers that might be in the offing in the near term.

In fact, let me talk about that right now and say, some weakening in the U.S. economy is visible now. We can say that some of the real-time data is a bit softer. Hours worked data seemingly ebbing over the last month. We have a composite real-time indicator that’s also getting a little bit softer. And then in terms of more conventional indicators, we did just get jobless claims. And this is a weekly measure and it just jumped quite badly. And so it jumped, unwinding essentially three months’ worth of progress.

And caveats abound. You tend to see very choppy numbers between U.S. Thanksgiving and Christmas. And so it may well be that’s exactly what we have here and could well be unwound the next week. But equally we do see signs of a bit of softness elsewhere. And indeed within our own forecasts, including that pretty good-looking U.S. GDP number. We have budgeted for a month or two of modest economic decline as the second wave—or I guess the U.S. third wave in this context—does its damage. And so let’s acknowledge a little bit of economic pain here. We think the November economies grew in North America. We’re less convinced we’re going to see growth in the month of December.

Let me highlight some risks here. And so I’ve just given you a summary of our base case forecasts but, of course, there are always risks to that outlook. It so happens right now arguably they skew a little bit more downward than upward. And three items in particular come to mind.

And so the first one would be let’s recognize the virus is not yet under control. There are record numbers of infections happening. There is a very real second wave. There could be a third wave in the spring; that was the experience with the 1918-1919 flu. And so it’s certainly conceivable the virus remains quite a thorn in the economy’s side going forward. And so that is a risk. We’re budgeting very much for the second wave, but less so for future waves.

Second risk would be vaccine optimism is extremely high. I happen to think it’s broadly appropriate and our base case forecast indeed prices that in, but there are risks here. There are risks the real-world efficacy rate isn’t as good. There are risks that the uptake isn’t as good. People don’t want to get it. There are risks of side effects. Any number of risks. Risks around production and this sort of thing as well. And so it could well be we see some issues on the vaccine side. Not our base case forecast, that’s what risks are for, but there are ways in which that could go worse and fewer ways in which could go massively better than we’re expecting.

And then the third risk relates to inflation. And so I should say, I happen to think the risks to our forecast are fairly symmetrical there. Inflation could be higher than we’re assuming, but could be lower as well. However, I would say the consequences of those two divergences are different. And so if inflation were to come in lower than we expect, probably doesn’t change the world all that much. If it were to come in materially higher than we expect, that could be problematic in a sense that it would increase borrowing costs and that’s a problem for governments, and not ideal for bond investors, and so on. And so there are a number of ways in which higher inflation could prove more problematic than lower inflation.

And so again there are risks. The risks do skew somewhat downward relative to the base case forecast I shared. I guess I’ll just say, it is normal for risks to skew somewhat downward. There are always more bad things that can happen than good things. You get occasional recessions, there’s no real inverse of a recession in which the economy is massively better than expected, just to encapsulate that idea in one little thought.

And then to conclude, let’s talk just about some fiscal issues. And so in the UK, Brexit negotiations continue. In fact a deadline has come and gone, and it’s been extended. And so the meetings continue. The UK made a concession just over a week ago in terms of abandoning certain internal legislation that would’ve been in violation of prior agreements with the EU. And so we continue to think a slightly greater than 50% chance of a Brexit trade deal by the end of the year, when indeed Brexit finally genuinely activates.

And then in the U.S., a hope of fiscal stimulus. And so there’s been an extension, another week of time has been bought. The deadline was meant to be last week and now in theory it is again this week. There are bipartisan efforts to get a fiscal package together, and there is even a plan to cut out the most contentious elements and deal with that later and do what is less contentious right now. And so it’s certainly possible some fiscal stimulus happens.

I have to say I give it less than a 50% chance. I think it’s more likely the fiscal stimulus happens in 2021. So less than 50% that it happens in 2020, but it’s conceivable. Certainly would be welcome. I think it eventually happens, and I’m not too, too concerned about a government shutdown. It seems likely at a minimum politicians in the U.S. can figure out a way to fund the government through the holiday season.

And so with that, why don’t I say, wishing you a very happy holiday season yourself. And also a healthy, fulfilling, and prosperous 2021. Thanks so much for tuning in across this year and, again, wishing you all the best. Thank you.



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

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Publication date: December 15, 2020

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