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by  Eric Lascelles Nov 10, 2020

In an eventful week for stock markets, vaccine developments around the world enter their phase 3 trials and Biden is announced the President-elect. Chief Economist Eric Lascelles shares his thoughts on the consequent stock rally and policy implications on economic growth, as well as provides an updated fiscal outlook.

Watch time: 12 minutes 55 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 MacroMemo covering a range of subjects, including the latest vaccine news, including the fact there has been quite a breakthrough. The U.S. election, of course. The latest COVID-19 numbers, in terms of its spread around the world. Some economic developments as well, and also some fiscal thoughts in terms of the multiyear outlook for public debt levels and that kind of thing.

Let’s jump right in and indeed focus to begin with on the two big positives that have sent the stock market rallying quite significantly. And the first is the vaccine. And so there are any number of vaccines under trial right now. And indeed many of them have advanced to Phase 3 trials, which is the last stage before approval.

But one of the key metrics that wasn’t well-known was the extent to which these vaccines would actually be effective. And so there was a minimum bar they would have to protect at least half the people, at least 50% of the people who were inoculated. But it wasn’t clear whether these would ultimately protect 50%, or 60%, or maybe 70% was one of the more optimistic expectations.

And the Pfizer vaccine has now come out and announced that they are achieving greater than 90% efficacy. So more than 90% of the people inoculated would be protected for a period of time from the virus. And this is a big deal.

I mean it’s a big deal in a sense that it means the vaccine is quite effective, but actually it’s quite a big deal in a mathematical sense as well, because really what’s being sought is herd immunity. If you can get a big enough fraction of the population to be immune to the virus, it actually finds itself unable to continue spreading. There just aren’t enough viable candidates to infect. And so the virus can actually go away or be very significantly limited. And if you would achieve an efficacy rate of perhaps 70%, it would be quite hard to get there. You’d need practically every human on the planet to get inoculated to achieve herd immunity, which probably was overly optimistic. If the success rate, if the efficacy rate is actually north of 90%, you only need maybe 70% of a country, or 70% of the world to get inoculated to achieve something approximating herd immunity. And that’s probably a more viable aspiration, particularly if you think that governments might try to incent people to get the vaccine, if you think the employers might ask their employees to get the vaccine, that probably is achievable.

Now don’t get me wrong, there’s no guarantee all of the other vaccines are equally successful, though it does hint that the success could be fairly good for the others as well. Let’s acknowledge that there are still all sorts of production bottlenecks.

It’s unlikely that everyone can get the vaccine in 2021 as an example. Though we suspect there will be significant availability in the second and third quarter of next year for much of the developed world, including the U.S. and Canada.

Let’s also recognize there are distribution challenges. This particular type of vaccine is quite novel and requires that it be refrigerated to a temperature of negative 80 degrees Celsius, and so this is not exactly easy to transport around in a backpack, as an example. And so there are challenges here, but we think they’re surmountable.

And so this is enormously positive news, and really it’s positive in a sense that, again, herd immunity becomes possible, and indeed we can talk about a return to economic normality, or life normality perhaps occurring more thoroughly and maybe even a little bit sooner than previously anticipated. So quite positive there.

They do need to continue with the testing, though all looks quite good. That should wrap up toward the end of November. There should be emergency availability shortly thereafter. And we do expect to hear from some of the other vaccines in the next several weeks to months, and let’s see whether they achieve similar efficacy rates or at least higher than the minimum threshold of a 50% efficacy rate.

And so that’s really the big positive and, to my eye, the big reason that risk assets like stocks have been rallying. The second reason though, and certainly no small item by itself, is the U.S. election.

And so it does appear that Biden is the president-elect, the Democratic party candidate. The race was considerably closer than expected, and swung back and forth on election night. And so it was rather uncertain for a period, but it now looks to be largely settled. And indeed it’s been called by all of the major media outlets at a minimum.

There is still room for some challenges around along the way in terms of requests for recounts, and legal battles, and this kind of thing, but it’s hard to find a path by which President Trump could secure a second term. And so we think it’s nearly certain that Biden will be the new president as of January 20th.

It’s fair to say the Senate race is not quite done. It looks quite likely to remain in Republican hands, I should say contrary to pre-election expectations. But as we stand right now, there is set to be two perhaps runoff elections and they could yet make for a closer race, but it does look still with about an 80% chance that Republicans hang onto the Senate.

And so really what that means is that a divided Congress is set to be the order of the day. And actually that’s part of the charm from the stock market’s perspective. The stock market likes the idea that there’s a new president who perhaps is going to focus on controlling the virus and on stimulating the economy, but equally they like that Congress is divided, which would limit the more extreme tendencies of either party, whoever would be elected as president.

And so this has been viewed again as a market positive. I suspect a big part of the market’s enthusiasm though is just getting rid of all the uncertainty that existed leading up to the election. And so arguably, regardless of the outcome, there might’ve been something of a relief rally.

In terms of policy implications, well we’ve tended to think that a Biden presidency should bring with it some fiscal stimulus, though certainly not as much as if there had been a blue wave. We can say that probably somewhat better immigration policy, in terms of accepting more immigrants. That’s a driver of economic growth. Perhaps slightly improved trade policy, in terms of allowing a little bit more trade, which is also a growth positive item.

We’re not convinced there will be tax hikes, despite those being proposed by the Democrats, just because the Republican Senate probably will not acquiesce to that. And then realistically there will be some additional regulations, which businesses don’t love, but nevertheless are on their way. And so we judge is a net modest economic positive. Certainly the stock market views it as a positive as well.

And I will say, from a Canadian perspective, not that this is central but it is certainly a consideration for Canadians at a minimum, probably a modestly good thing economically as well. And so the main reason being that what’s good for the U.S. economy is usually good for the Canadian economy. But you might also expect somewhat better relations, perhaps slightly fewer tariffs.

And then weighing against that would be the possibility that tighter environmental rules in the U.S. might hurt demand for Canadian oil, and a weaker U.S. dollar, which has really shown up with a great deal of enthusiasm, could be challenging for Canadian competitiveness. But on the balance, we think perhaps more positive than negative, even from a Canadian standpoint.

On the subject of the virus itself, and so let me start by saying it’s somewhat delightful that we’re turning to this third in our major set of topics. And so it’s not capturing the headlines for the briefest of moments at least.

And so unfortunately the virus numbers are still challenging. And so the world is recording 500,000 plus infections per day. There are 8,000 plus deaths per day. And so these are not cheery figures, and they are actively getting worse. It is still the developed world where the focus needs to lie, and Europe above all else has been the most challenged, with France now over 50,000 infections per day.

I will say though that many European countries are now proving quite aggressive in terms of locking down, and so we suspect we will start to see better numbers in those countries over the next few weeks. So we could start to see better European news from a virus perspective, maybe at the expense though of worse news from an economic standpoint, since those new measures do economic damage.

Unsurprisingly the U.S. figures are getting a lot worse, and so are now at 100,000 infections a day and rising. Unsurprising in the sense that if anything the U.S. has been opening its economy more than closing in recent months, even as its infections were rising. And so our suspicion is this continues to get quite a lot worse before it gets better. We’re only now starting to see some slight tightening of measures in a handful of jurisdictions.

And then for Canada, the Canadian numbers had been rising less aggressively, unfortunately they seem to be rising with enthusiasm again. And so not good. Quebec in particular is breaking hearts in a sense that it had spent several weeks on a happy downward trajectory, and it seems to be rising again.

And so unfortunately blurring the interpretation of just what constitutes a sufficient amount of social distancing, since Quebec had been raised as an example of a jurisdiction that had done more social distancing than most, and was seemingly reaping the dividends. And so that’s gotten awfully blurry. But the bottom line is the Canadian numbers are still challenging, particularly in the West of Canada where they’re rising quite, quite quickly. And then pivoting from there to the economic file. Well, we are seeing evidence of lower mobility in Europe, and so a hint that there is some economic damage being done by the severity of this second wave. And indeed when we look at European economic data, it continues to suggest that October might have been flattish from an economic standpoint, and we’re budgeting for an outright decline in November and December. And so we think the fourth quarter will probably see a drop of activity in Europe unfortunately.

For the rest of the world, well the U.S. economy looks like it kept growing fairly enthusiastically through October. So we didn’t see that kind of damage happening in the U.S. And in Canada, still growth certainly through October, however maybe slowing growth. We saw notably less hiring. We have seen one particularly prominent leading indicator retreat to some extent, though still be consistent with growth. And so maybe more of a deceleration in Canada, but certainly not to the extent as in Europe.

And then let me finish with just a quick comment on the fiscal story. And so this is mostly crib from the International Monetary Fund’s recent work. And so to begin with, the IMF estimates $12 trillion of stimulus was delivered since the beginning of the pandemic. And so this is mind-boggling. It’s an enormous amount. Far more than was delivered during the global financial crisis, just to set the stage. It equals 12% of global GDP, which is quite large.

And unsurprisingly, the great bulk of that is just showing up as bigger deficits, and ultimately then bigger debt. And so for instance, in the developed world, the IMF says they expect public debt to GDP ratios to jump from an already high 105% to a really enormously high 126% of GDP. And so leaping ever higher. Tolerable only because interest rates are so low, though we do expect them to remain low for the foreseeable future.

When you look at the U.S. fiscal cliff, the idea that U.S. stimulus has been fading, well one comment is that it may fade less going forward now that Biden’s in place, and perhaps looking to deliver stimulus in early 2021. But equally we can say, Americans saved a lot of the stimulus that was delivered in the spring and in the summer. In fact they were saving more than a $100 billion a month above normal at the household level. And so that does put them in somewhat better shape to handle this period of less fiscal support through the fall. And so we’re not too, too concerned, as much as it does represent a potential drag.

And then from a Canadian perspective, Canada is certainly similar to other countries. The same contours of big deficits, and stimulus, and this kind of thing. But actually, among major developed countries, Canada is on track to have the biggest deficit in 2020.

That is a roundabout way of saying it delivered the biggest stimulus in 2020. And indeed there are some benefits that accrue from that. And so looking forward to 2022, 2023, the IMF expects Canada to have the smallest output gap. It’s economy to be closest to its potential because of that fiscal largess. But let’s recognize it’s not a cost-free excursion. And so, for instance, Canada also expected to see the biggest jump in public debt. And so Canada in a fortunate position in a sense that having started all of this in good fiscal health, with room to accumulate extra deficits, and to hold additional debt, but it still needs to be careful. You don’t want to do that indefinitely. And to the extent there’s no real plausible timeline for paying back the extra debt that accumulates, this is going to have to serviced forever. And so it’s cheap to service now on a very low interest rate environment, but who’s to say what the interest rate environment might look like in 10 or 20 years? Or 50 years? And if it ever proves to be somewhat less low, that then becomes a rather more significant burden.

Okay. I’ll stop there and say thank you so much for tuning in. I hope you found this interesting, and please consider following along in future #MacroMemos.



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

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Publication date: November 10, 2020

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