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by  Eric Lascelles Jan 26, 2021

The latest COVID-19 variant poses challenges as governments continue to distribute the vaccine. In this video, Chief Economist Eric Lascelles shares his thoughts on when Canada's economy can be expected to reopen amidst these difficulties. He also reviews positive economic progress in China, and political and fiscal updates in the U.S.

Watch time: 13 minutes 37 seconds

View transcript

Hello and welcome. Eric Lascelles here.

I’m the Chief Economist for RBC Global Asset Management, and here to share with you our latest video #MacroMemo.

And in this particular edition, we’ll talk about the latest COVID variant, a more pernicious one in several regards. We’ll acknowledge improving COVID infection numbers, on the positive side. We’ll talk about vaccinations and troubles with those, but also I think some important progress.

Of course, as an economist, I’d be remiss not to talk about the economy itself. And so we’ll discuss a little bit about when it might start to reopen, but also some downgraded economic forecasts that we’re currently working on. We’ll talk about the Chinese economy, which has been a source of considerable brightness. And then also the U.S. political and fiscal story remains one in considerable flux and so worth watching.

And we’ll finish, actually, with some thoughts on anti-trust efforts. Big tech companies getting some focus here, and we have a few thoughts on that as well.

Okay. Overall, I guess I would say, a lot happening out there. I don’t know that I could say that the net set of events are clearly positive or negative. Actually, if anything, it feels to me like we have a series of almost matching negatives and positives.

And so for instance, specifically with regard to COVID-19, you’ve got a negative in the new virus variant is continuing to spread. It’s 56% more transmissible, or thereabouts, which is certainly a frightening proposition. And recent research is now arguing it might actually be more fatal as well, perhaps 30% more fatal. And so not desirable on either front. We’ve said in the past, we assume this new variant becomes the dominant version. And so that is our working assumption and does certainly inflict some economic damage.

But at the same time, we can say, despite that—and maybe we should really say until that becomes the dominant strain—we are beginning to see improving COVID numbers. And so whereas it’s been almost an uninterrupted journey of rising infection rates between late last summer and quite recently, we saw some stabilization in recent weeks. And then quite recently, we’ve begun to see some improvement in terms of the latest COVID numbers.

And so globally, there has been a slight decline. I can say in the U.S. and Canada, we’ve noticed a persistent decline over the recent week or two. Even in the UK and South Africa. And I use the word “even” simply because that’s where the new, more pernicious variants were originally based. And so they seem to be pulling down their infection numbers quite significantly as well, albeit at an economic cost. The European numbers still fairly low compared to what they were.

And so the point is, we have seen a real improvement here. This isn’t the first time we’ve had some false dawns and some small improvements, but this one does seem to be a bigger improvement. It seems to be more smoothly achieved. The improvement is greater than we’ve had before. And so this might be real, and so let’s keep watching.

And obviously, all sorts of complications coming down the pipe on the negative side. The new variant could well unwind these gains. On the other hand, we’re not that far removed from spring for some jurisdictions, so that could make, from a seasonal perspective, the virus less easily transmissible. And so we’ll see how this plays out, but for the moment there has been some genuine improvement.

Now maybe I’ve buried the lead here in the sense that the new focus, probably even more so than the infection numbers, is vaccinations and the idea that we are now getting significant vaccinations occurring across much of the developed world. A few thoughts on that front.

I think on the negative side, we have to acknowledge there have been some supply issues. And so Pfizer is retooling a plant in Belgium; that’s creating delays for Europe and even more so for Canada. AstraZeneca sharply cutting back its planned shipments to Europe based on some production challenges there as well. In general, we haven’t seen the rate of vaccination in the early going be as high as governments had hoped that would be. So that’s certainly a challenge.

Nevertheless, I guess I can say a few things, which is that the rate of vaccination is nevertheless accelerating in most jurisdictions. And so, we have Israel easily in the lead; nearly 30% of its population has now been vaccinated. That’s well ahead of others. You have the UK at around 7% and the U.S. at 5%; Canada just 2%.

But in all cases, moving forward fairly significantly. In most cases accelerating. As I record this, awaiting news from Johnson & Johnson, hoping perhaps that they will also have some positive vaccine news, and they can in theory create 1 billion doses as well over the coming year. And so that would be quite significant as well.

And indeed, still hearing governments speak reasonably confidently about achieving pretty significant numbers of inoculations. Maybe not over the next month or so, but over the span of the next six months to a year. And so, for instance, if anything, Canada has become a little bit more optimistic in terms of its own claims. It’s now predicting that 23 million Canadians will be inoculated by the end of June. The prior prediction as of just a few weeks ago had been 20 million. So despite the initial hiccups and the challenges, it isn’t necessarily changing the medium-term plan for inoculations.

And of course, the inoculations are such a big deal. We all think a lot about herd immunity and the idea that the world can significantly normalize at that point. But we should say fatality numbers falling well before herd immunity is achieved, given how the most vulnerable people are being targeted first. And in terms of when economies can perhaps start to reopen, let’s think about hospitalizations perhaps as being the key gauge. After all, governments were very reluctant to shut down their economies, and many ultimately did that only when their hospitals were approaching capacity. That seems to be an important trigger for policy decision-making.

In turn, to the extent that we might see hospitalization numbers starting to come down within the next month or so, that could well be a trigger for seeing some economic reopening, as much as I suspect it will be an incremental process that plays out over most of the first half of this year. Still, we could see some reopening in the not too, too distant future, at least for the countries further along in terms of their vaccinations.

In terms of economic data, I guess the main comment I should make is that we are in the midst of downgrading our economic forecasts. I should emphasize, we’re not alone in doing that; the consensus numbers have also been coming down. And in terms of the logic, well, some of it is just this new variant does present some challenges. Some does relate to the slower initial vaccination, as much as perhaps there will be some catch-up later. And some relates looking backwards to the damage from the second wave. There wasn’t a huge amount of economic damage from that second wave, but there was some, and maybe even a little bit more than was budgeted for recently.

We still forecast, by the way, good growth. We’re still talking about 2021 being the year of unusually fast growth almost everywhere. I should also emphasize, we expect to result in an above-consensus forecast when we’re done this updating process. And so in the end, it’s still an optimistic forecast, but a little bit shaved off in recognition of some of these new challenges. One exception in all of that, by the way, is the U.S. And so the U.S. forecast is actually in the midst of being upgraded a little bit for 2021. And that’s for a few reasons, but a significant one is that it appears that a lot of fiscal stimulus is now on the table for the U.S. There was already a $900 billion package approved on December 27th. It looks like this new Biden presidency may approve another $1 trillion. And so this is big money and this has a significant effect, particularly given a lot of it is just front-loaded cheques going out the door. And so as a result, we’ve actually been upgrading our U.S. forecast as opposed to downgrading it.

And when you think about vaccinations, the U.S. is running a little quicker than most. And when you think about what country is going to reopen most enthusiastically and wait the least long in terms of starting to go in that direction, you might imagine the U.S. will be that country as well.

In fact, continuing on the U.S. front, I can say from a political and fiscal perspective, since we last recorded one of these, that Joe Biden has been inaugurated. He is now not just President-elect but now President of the United States, and of course, a new administration surrounds him.

I guess a few implications of economic relevance. One is perhaps greater political stability or less policy uncertainty, as economists like to call it. And probably more fiscal stimulus, as we just discussed. He’s talked about a $1.9 trillion additional stimulus plan. We’re budgeting for more like $1 trillion. We don’t think it will all happen. And keep in mind that the majority in the Senate is razor thin.

He’s also been busy with executive orders, rejoining the Paris Environmental Agreement, reengaging with the World Trade Organization, cancelling the Keystone XL, to the disadvantage of Canadian oil producers. And also, implementing a new Buy American program. And I should say, we’ve seen so many of these over the last 20 years, it’s genuinely hard to say whether this is really all that different than before. But at the margin, I suppose, unfriendly toward Canada from that perspective.

The impeachment efforts, by the way, I suppose succeeded, in the sense that Donald Trump was impeached before he left. But the conviction effort will be ongoing, in fact over the coming month. And it looks quite unlikely that Trump will be convicted. It requires really too many votes in the Senate to get that done. But there is a chance he will be banned from holding future office, though some debate about the legality of that, if he isn’t first impeached.

In terms of other economic news, I do want to flag one thing, which is just that Chinese economic data has been so extraordinarily strong. And so I think we appreciate they got the virus first. They more or less vanquished the virus first. And their economy is therefore staged an enthusiastic recovery. It’s not a perfect parallel for the rest of the world, which has had a different experience, but nevertheless, it’s quite extraordinary.

The Chinese economy at the end of last year was 6.5% bigger than it was the year before. It actually grew more quickly across 2020 than it grew in the average year, which is just a stunning achievement. And again, not something I think that others can necessarily aspire to emulate, but it’s good for China. It’s good for the world.

Keep in mind, China drives global growth to a significant extent, and China does buy things from the rest of the world. And it also supports something we’ve said for some time, which is, we don’t expect that much permanent scarring from all of this. And there’s really not that much evidence of scarring in the Chinese economy.

Another quick economic note is just that, in this world and environment in which inflation has become a concern, people worried about rising inflation, let the record show we actually haven’t really had that so far. Inflation numbers continue to be mostly benign, but there are some upside risks.

I do want to flag one thing which is going to look like an upside risk but probably not actually be one. And that is just, to the extent that oil prices collapsed last spring and have since partially recovered, we’re going to lose the collapsing part of that experience out of the annual inflation rate over the next few months. And so we’re likely going to go from a situation in which the inflation number in the U.S., as an example, is currently sitting just above 1% year over year, all the way up to potentially 3% to 3.5% year over year as of April and May. And that’s going to get tongues wagging and perhaps create some concern. After all, the Fed is targeting 2% inflation. We might see nearly double that for a brief period of time.

But I just want to emphasize, it really is base effects. It’s because oil prices went up a lot earlier. They went down even more just before that. This isn’t really brand-new inflation; it’s just the way the numbers show up. And we should see beyond the April/May time frame, we should see those inflation numbers then retreat back towards a more normal 2%-type reading. And so I would say, don’t get too carried away when you see that spike. It should be temporary. We understand where it’s coming from, and it’s actually not new inflation. It’s just what we’re picking up inflation that maybe didn’t get so easily revealed up until recently.

And then a last word from me, which is just anti-trust. And so, over the last few decades, we’ve seen the concentration of big companies growing, and they occupy a bigger share of many sectors in the economy, perhaps most obviously tech sectors. Some of these tech companies are fairly monopolistic. They don’t have any major competitors. But so far, U.S. regulators haven’t done that much. European ones have levied fines. U.S. ones haven’t all that much.

And it’s a tricky issue, because historically you think monopolies are bad because monopolies result in unfairly high prices and less innovation. But actually, these tech companies often charge nothing, it would seem, for their products, and are among the most innovative companies. And so the U.S. has not been sure quite what to do with this.

It does seem, though, that the U.S. is now starting to pursue a more aggressive policy. And that started under Trump; it may well continue under Biden. I don’t think it’s to the point of tearing these companies significantly apart, but imposing some restrictions, and so making it much harder for them to engage in mergers and acquisitions, particularly of small competitors that might ultimately be big competitors. I suspect many of these companies will be made to pay more taxes, make it a little harder to dodge that. Privacy issues will likely be taken more seriously. Companies may be prevented from highlighting their own products more over the competition. And so I think we will see some changes. Some of those may be challenging to those tech companies, but probably ultimately a good thing from a long-run growth and innovation perspective.

And so just to conclude, then, I’ll say there’s a lot happening out there. And certainly, we’re worried about the new variant. We’re worried about vaccination hiccups. Our forecasts are a little lower. However, fundamentally, the COVID numbers are getting better, not worse; that matters a lot. We do think still that vaccinations are a game changer, even if coming a little more slowly than desired in the near term. And ultimately, our forecasts, even as they are somewhat reduced, are above consensus. And so we’re still very content with 2021 as a year of recovery, the year of the vaccine, a year in which there should be more good news than bad, but undeniably, a few hiccups to start the year.

Thanks very much. I hope you found all of this interesting, and please consider tuning in again next time.



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

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Publication date: January 26, 2021



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