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 video #MacroMemo.

And we’ll be covering off a range of subjects this week. Of course, COVID-centric for the most part, and we will talk about the latest infection numbers and the problems there. We’ll acknowledge that new, more contagious strain and just what that might mean in the coming months. We’ll revisit COVID fatalities in the context of broader fatalities and other ways that people die and just putting that into perspective and how relevant then COVID-19 is. We’ll also talk about vaccinations and that urgent effort to vaccinate as many people as possible.

We’ll of course wade our way into the latest economic numbers, including a little bit of weakness that’s been visible in recent job figures. We’ll talk about inflation fears because that is a new upside risk that people are increasingly focusing on. A nod to U.S. politics, of course. And we’ll also discuss whether pent-up demand and super-charged demand might be a real thing when the pandemic is done. I’m suspicious or skeptical, but we’ll get into that in more detail in a moment.

Starting, though, with the COVID infection numbers, we can say, unfortunately, we are seeing clear deterioration again. There had been a period of stability across the holidays. We had expressed some skepticism that it was probably at least in part under-counting and under-testing. And alas, for instance, when we look at the U.S. and Canada, it appears that the infection numbers are indeed rising again, and fairly significantly.

And so COVID-19 still very much a problem globally, an accelerating one in a North American context. And the UK arguably the worst of the bunch with this new variant that’s much more contagious, and so suffering really spiking numbers and quite concerning there as well. And so the infection numbers not good. Still very, very serious, and indeed getting worse, if anything.

One of the reasons we think they are getting worse, clearly in the UK and at least a risk elsewhere, is that there is this new, more contagious variant, a mutation of the virus appears to allow it to transmit something like 56% more easily. And it now represents the dominant strain in the UK, and arguably explains why the UK is having such difficulty controlling the virus, even as it incrementally locks down ever more.

And at this point in time we have to concede, it looks as though that could become the dominant strain globally. It transmits so easily, it would easily go in that direction. Simultaneously, it is now being picked up, at least individual cases, in many different countries. And so we’re assuming it does become the dominant strain. It means that, effectively, COVID-19 is somewhat more contagious.

And in terms of its implications and our forecast, what that essentially means, that you have to acknowledge probably a little bit more on the infection side; probably simultaneously somewhat more restrictions to limit the infections. And really what it is, is it’s a tug-of-war between a more contagious variant, which is clearly the big, bad thing going on right now, versus the vaccination process, which is the big, good thing. And we do believe the vaccinations win out and will out-muscle the new variant over the span of the next several months. But in the very near term, over the next month or so, we could see some challenging COVID numbers as the other process plays out.

Let’s talk about fatalities for a moment. Not a fun subject, I’m afraid, and of course, it’s a very sad affair. The U.S., roughly speaking, has been suffering about 20,000 COVID deaths per week, and so enormous numbers. But one thing that struck us recently was, we didn’t really have a great handle on how big that was versus the normal rate at which people die. And so in the U.S. context, that represents about a quarter of all deaths. And so that might come as a surprise that COVID isn’t the main source of death. In fact, there are many other sources that are much greater. And so it does present at least an interesting question, which is, why does COVID-19 deserve so much attention, why does it deserve so much policy focus, why do we allow it to do so much economic damage when it’s actually not the primary source of deaths.

And I think there are a few answers for that. One would just be we’re not used to this kind of death, and it happens to be particularly sudden and particularly unpredictable, and so less tolerated. Let’s recognize that people do die eventually, and so you could solve all of the illnesses and diseases in the world, but you would still have a significant number of people dying of old age. And so there is that underlying baseline that’s hard to budge.

And moreover, when we talk about why are we shutting down the economy for this but we don’t shut down the economy for other things, well, the other things wouldn’t benefit from the economy shutting down. You don’t stop cancer or heart disease by shutting down the economy. And maybe the most compelling reason and the reason that COVID-19 is attracting so much attention is the 20,000 deaths per week, as tragic as they are, is but a drop in the bucket compared to what the fatality rate might have been without all of these efforts. And so it could easily be several times higher. It could easily be the dominant source of deaths within countries, if they didn’t choose to try to control it. And so it is a very serious thing, as much as it’s not the main source of death at this juncture.

Let me talk about vaccinations now and recognize that is the story for 2021. The vaccination process began at the very end of last year and is now underway. Not without hiccups to be sure, but nevertheless it’s proceeding and it seems to be accelerating. And as we’ve talked about in the past, the thing to be aware of here is as much as the end goal is herd immunity, getting to that 60% to 70% of the population being immune such that the virus really just struggles to transmit even among people who don’t have it, there are several important milestones that are achieved well before that herd immunity that might happen perhaps over the second half of this year. And so for instance, the fatality numbers should fall quite dramatically over the next few months. And so for instance, most countries are prioritizing older people, vulnerable people, in the first round of inoculations. That is the group that has been dying. To the extent you can inoculate that 15% or maybe even 25% of the population, you should see fatality rates that fall by something like a factor of 5. It should have quite a profound effect on the pandemic. And if fatality is your measure of the pandemic, then by that measure the pandemic will be greatly diminished.

The next set of people being inoculated should be the high transmission people, people working in manufacturing jobs and frontline nonmedical capacity and distribution, and food processing, and these sorts of things, and that’s the group that’s broadly spreading it. And so once that group gets inoculated and that’s now working our way into the spring, that’s the point at which transmission should then fall quite sharply. That still leaves a lot of people, the majority of populations not inoculated until later, but that big last group isn’t the group that’s necessarily dying from it. It’s also not the group necessarily transmitting it. Still useful to do and unleash people and allow them to live normal lives and let the economy fully normalize and so on, but we’re going to see some important and very useful things happening well before everyone has been inoculated;, well before herd immunity has been met.

The one thing we’ve been thinking about is whether it’s realistic to expect most developed countries to have a similar timeline in terms of achieving these outcomes. And it’s notable that, for instance, Israel seems to be way ahead of everyone and the U.S. is somewhat ahead of Canada in terms of the rate of inoculation as a fraction of the population. For the moment, our suspicion is that countries will look more similar than different. Or at least developed countries should look more similar than different. It seems like many poorer countries are going to be forced to wait. So let’s not pretend there’s a justice or a fairness to this but nevertheless, based on the orders we see, based on the distributions happening, it’s likely that countries hit the finish line in roughly similar time frames. You could talk maybe about the UK being a month or two ahead and maybe Canada and Europe being a month behind or something but within the span of a few months. And so we don’t think there are going to be great differences there.

Let’s talk about the economy now for a moment and maybe the big headline recently has been that both U.S. and Canadian job numbers for the month of December were negative. Jobs were lost and that’s the first time we’ve seen jobs lost since last spring, and so very much unwelcome. I can’t say I’m overly surprised though. We have been budgeting for economic damage in the late fall and early 2021 as a function of this latest wave of the virus and some of the lockdown rules that have been implemented. When I look and dig into the numbers, I can say they’re not quite as bad as they first looked. For instance, in Canada, full-time jobs actually grew. It was lower quality part-time jobs that were lost. In the U.S., we can say their main survey did show job losses but there’s a secondary survey they conducted that didn’t and there were upward revisions. And so the numbers aren’t as bad as they first looked, but even if you took them at face value you would say maybe the U.S. economy shrank by 0.2% in December which certainly worse than growing and not to be desired, but pretty mild hit.

The Canadian hit might be a little more. Maybe a minus 0.5% but this is in the realm of what we’ve been budgeting for in our forecast if not better than what we’ve assumed, and so we feel pretty comfortable with these numbers we’re seeing. And actually when we dig into the Purchasing Manager Index data we see, and our models claim, that the outcomes could actually be even better than what the job numbers are presently saying, including for Europe. And so our European PMIs only pointing to the slightest of declines there in the fourth quarter. We budget for a little bit more than that but the main point is just that the damage from this latest wave should be, as we’ve said many times, an order of magnitude less than it was last spring. And so markets seem to be capable of looking through that. We think that there is growth on the horizon as well.

Let me speak about inflation for a moment, or maybe more precisely inflation concerns. And so we’ve been in actually a low inflation environment for most of the pandemic period. But inflation’s rising a little bit and inflation expectations in the bond market have risen notably and gold prices are up significantly over the last year. Bitcoin prices are up a lot in recent months. Base metals prices are up. So there’s a bit of an inflation thought that’s brewing in the air, and certainly we acknowledge upside risks and actually we do forecast rising inflation. It just happens to be we think it stays pretty tame over the next year. But nevertheless, we agree. Inflation probably does rise and there are some upside risks to this, but I would emphasize when we work our way through the laundry list of upside risks and we look at onshoring and maybe carbon taxes and big central bank balance sheets and big public debt loads and these kinds of things, it seems to us that most of the upward pressures are pretty limited in terms of the impact they can have. A few tenths here, a few tenths there. Really, the one scenario where you could envision lots of inflation would be if all that money printing by central banks was somehow fully unleashed into the economy, but central banks do have a mandate. They don’t want too much inflation and they are more than capable of unwinding that. And so the one that could create a lot of inflation is a self-correcting mechanism. And so in the end, acknowledge the upside risks, inflation is rising, but not fully subscribing to the idea that we have an inflation problem. And actually, if anything, right now central banks feel pretty good about the rising inflation, and moreover the rising inflation expectations they’re seeing because in the bond market it’s actually allowing the real yield, the inflation-adjusted yield to fall. It was bumping up against zero, you couldn’t get much below, and now actually they’re generating more stimulus via this. So for the moment, even central banks are quite happy with what’s going on.

A word on U.S. politics, and so really two elements here. One would be the Senate has now gone Democrat and so there is a blue wave afoot. And so that means that with a Democratic president and a Democratic Congress there is some work that could be done here. And so we should expect further fiscal stimulus; the capacity exists to do that. Some tax hikes, some spending increases, some antitrust efforts focused at tech companies. Some other regulatory changes, not always business friendly, but equally, as we’ve talked about before. More immigration likely, friendlier trade relations likely. We do think that it’s at a least a modest economic positive. It’s a bit murkier though from a stock market perspective in that they have to grapple with some of these regulatory concerns and perhaps higher corporate taxes as well. Some analysis says that corporations still end better off, thanks to the fiscal stimulus. For the moment, the stock market seems pretty content with this and so I have no reason to think that changes, but nevertheless that blue wave, which was expected on November 3rd and then not delivered has been delivered belatedly as a result of the run-off elections that just occurred in Georgia.

The other subject of political interest of course, protestors invading the U.S. Capitol, and so a shocking event, an unexpected one, but in the end didn’t stop the confirmation process of Biden from proceeding. A And so he has been confirmed as the President-elect. Let’s recognize as well that it seems as though it is going to contribute to a further impeachment effort against President Donald Trump. That doesn’t remove him from office, by the way. It’s almost impossible for the Senate to convict, but it could actually block him from running for future election. And he has talked about 2024. And so that would certainly be an interesting outcome. Let’s see if that happens over the coming week. And then my last subject is the subject of pent-up demand. And so here we are with a recovery underway. Here we are with vaccinations occurring and maybe the prospect of normality not being that far away. The question is, could we see just super-charged demand materialize when herd immunity has been achieved. Everyone’s been saving—not everyone, but society as a whole on average has experienced high savings rates, so there’s a lot of money sloshing around that could be put to work. People might be very keen to go on vacation or go to restaurants and spend money. Could there be a period in which the economy actually overheats? Maybe even creating that inflation that I suggested isn’t all that problematic.

I’m skeptical. I would say, you know, let’s recognize even when herd immunity is achieved, the virus won’t be completely gone. People will still have some fears to that effect. Let’s keep in mind people will be out of the habit of spending; some might even like this more austere, simple lifestyle. Don’t forget international borders might well still be closed for a period of time, and that limits at least some vacation travel and that kind of spending. And indeed we found better ways to do some things that might actually result in less economic activity. For instance, less business travel.

In any event, we expect a good recovery. We think that economies can even return to their prior peak toward the end of this year. I would stop short of saying that we expect a period of super-charged, overheated demand in which you could get problematic inflation or things like this.

Okay. I’ll stop there. Thanks for sticking with me. Hope you found some of this interesting, and please consider tuning in again next week.