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by  Eric Lascelles Oct 20, 2020

Chief Economist Eric Lascelles provides an overview of the latest virus data, comparing the situation in emerging markets to developed markets. He looks at the best practices of Germany and France in containing the virus, and shares his thoughts on the feasibility of The Great Barrington Declaration.

Watch time: 10 minutes 45 seconds

View transcript

Hello. My name is Eric Lascelles. I’m the Chief Economist for RBC Global Asset Management.

And here to share with you our weekly #MacroMemo. And just to give you a highlight of the key items we’ll be covering: virus numbers, of course, some German best practices as compared to their neighbour in France. We’ll take a look at some of the other options that are out there as well, and also work our way through the Great Barrington Declaration, which has attracted a lot of attention recently in proposing a pretty radically different way of handling COVID-19. We’ll also take a look at how schools are dealing with the virus. We’ll of course update on the economy, flag a little bit of a risk as it pertains to the recovery continuing in the coming months, and we’ll also look at the U.S. election, what with that election now just a few weeks away. And so let’s jump in, and we’ll start, as usual, with the virus numbers themselves, and so, unfortunately, the COVID figures are setting records yet again, at least at the global level. Still, a silver lining that the fatality numbers are not as high, and that’s been a fairly constant refrain, but nevertheless, we can’t say the virus itself is particularly under control. When we look at it from an emerging market versus a developed market perspective, it is notable that while there are still more emerging market daily cases—of course, emerging markets having a much larger part of the population—the developed countries are the ones that are really starting to struggle right now, and so that’s where we seeing a big increase in the number of cases. And actually, if the current trend were to persist, just for a few more weeks, arguably, developed countries could be ultimately be recording more new cases than emerging market countries.

And within the developed market world, we can say Europe still suffering the worst of the second wave. In fact, France very much the worst in Europe with now more than 25,000 new infections per day, and so that’s five times more than they ever recorded last spring. If we’re looking for silver linings there, we can say Spain, which had been the unfortunate leader, is now seemingly starting to tame the virus, and we’ve actually seen a few weeks of subtle or tentative decline. And so conceivably, Europe isn’t that far from figuring out how to get this second wave under control, but it’s still a very challenging situation.

In Canada, we can say that the Canadian numbers still continuing to deteriorate, not quite with the ferocity of some of these other countries, nor at the absolute level of new cases, but nevertheless, on a deteriorating trend. I will say, when I look at the sorts of policies measures and economic restrictions that have recently been introduced, it seems to me there’s a decent chance that Canada actually starts to control this in the coming several weeks. But let’s see, I suppose, if that assertion ultimately proves correct.

And in the U.S., the U.S. numbers are edging higher, but ultimately, the U.S. looks fairly good compared to a lot of countries, just in the sense that it’s not setting records in terms of its daily infections, and the rate of deterioration isn’t all that bad. I think maybe the risk in the U.S. is that we see a number of states actually actively reopening their economies again in a way that could well unleash the virus yet again. And so it could easily get worse, as much as it’s not deteriorating too quickly right now.

And so broadly speaking, again, COVID-19 still very much circulating around the world.

As we look for best practices and ideas for how best to tackle this pandemic, one interesting point of comparison is France versus Germany. Germany’s not a perfect exemplar right now, simply because it’s also suffering rising cases, but it continues to significantly outperform France for a second straight wave, and so it’s worth asking why that is. And so we spent some time on that and you can really boil it down to a variety of key differences between the two countries. One key difference is simply that Germany has been doing more testing. And so more testing, better tracing, better isolating, and so some of the foundational blocks of handling COVID-19. They also seem to have put a priority on protecting the vulnerable from the very beginning. They created special groups to deal with the elderly, and indeed they were able to protect those groups to a greater extent. It seems like in Germany scientists are taking more of a lead, as opposed to politicians, and so that’s been a best practice as well. And it just so happens that German trust in government is notably higher than it is in France, and arguably that translates into better compliance when rules are introduced. And so that makes a difference, though it’s not an easy one to change overnight. Germany does have more medical capacity, more hospital beds per capita, as an example. And also, Germany, although not engaging in as strict social distancing in the spring, it didn’t ease its social distancing rules nearly as much as France did over the summer, and so it’s avoided a second wave of the same magnitude. And so certainly, some lessons embedded in there, I think.

Let’s turn now to the Great Barrington Declaration. So this was a proposal put forward by a number of scientists recently, arguing that we should protect the most vulnerable people, let everyone else get infected, get to herd immunity quite quickly, let the economy move on and frankly, sounds attractive, at least on the surface.

But I will say, at least in my view, I don’t think it’s a particularly realistic aspiration for a variety of reasons. And really, the two big ones: one is simply that we don’t actually have a good way of separating those who would deal well with COVID-19 from those who wouldn’t. And so some people simply don’t know that they would be vulnerable to the virus, some people aren’t willing to isolate, even if they are vulnerable. And while that might be a foolish thing, ultimately, the punishment for foolishness probably shouldn’t be death, and so there’s a challenge there. Some people who are healthy and maybe would, in that scenario, ideally be circulating and getting the virus and working toward herd immunity, probably wouldn’t want to, and so it might be hard to get to that herd immunity number among the healthy. And we can also say it’s very difficult to separate the two groups, just in the sense that older people, vulnerable people, have caregivers, live in multigenerational families, hold down jobs. It’s not quite so neat and tidy as to break society temporarily into two as herd immunity is pursued. And so that’s the one big objection.

And the other one is we just don’t know how long immunity lasts, and so it could be the case that herd immunity is achieved, and it needs to happen all over again a year later because herd immunity is lost over the subsequent year. And so would you want people getting sick every single year in pursuit of this? And the answer is probably not, particularly as a vaccine seems to be coming along within the next several months for emergency usage, and over the next year for broader usage.

And so in the end, the current course of action probably closer to the ideal. We’ve certainly been paying close attention to schools, as the northern hemisphere school season has gotten underway. And as much as, clearly, there has been some transmission in a school context, and it is a new vector potentially for transmission, we can say it’s gone fairly well, and at least is going better than it was in some cases. And so there has been a major study of U.S. schools, of 230,000 students, and it looks like the odds of those students being infected with COVID-19 is actually a little lower than it is for someone in society at large. And so the risks aren’t massively higher, and so that’s a good thing.

And similarly, when we look at U.S. university transmission, which was a big problem initially, those numbers have improved quite significantly; transmission down around a third, relative to the start of September. And similarly, when you look at the fatality rate for that group of people who were infected at university, it’s 0.04%. It’s about 10 times lower than the societal figure. And so, again, not quite as bad as initially feared. Let me pivot to economic-type matters, and so looking at the U.S. and Canada, it appears both economies have continued to grow through the month of September. U.S. retail sales were good for that month, Canada’s job numbers were quite good for that month, and so it does, again, appear that growth continued. We can say that China seems to be doing very well indeed, and so its economy is now almost 5% bigger than it was a year ago. In fairness, absent COVID we might have expected it to be 6% bigger, so a little bit has been lost, but really, not a lot in the grand scheme. And so it remains very much a gold standard for how to recover from this pandemic. And we can say, as well, that when we look at some of the consensus numbers out there, the consensus growth forecasts, the IMF’s latest growth forecasts have all been revising upwards their 2020 outlook, as opposed to downwards. And you may recall, we did something very similar a few weeks ago.

Let me flag one economic risk, though, which is just that as this second wave plays out, inevitably it does do some damage to economic growth. The experience in the U.S. in the summer was it didn’t do enough to absolutely halt growth, and so ultimately we’re not fully expecting it to halt right now, but there is a risk of that, particularly in places with lower inherent speed limits, like in Europe. And so we are flagging the possibility there could be a month or two, perhaps October or November, in which economic growth proves hard to come by. I don’t think it should be viewed as a distinct recession or as something that’s overly problematic, but there could be a period of rougher growth in the very near term, as much as we expect the recovery to continue beyond that.

And let me finish just with a comment on the U.S. election, which is, at least as I record this, is just two weeks away. And so as it stands right now, Joe Biden, the Democrat candidate has a 10-point lead in the polls, and so you would need a huge surprise to disrupt that. In fact, there’s no precedent, going back to World War II for an election result being sufficiently divergent from the polls to result in anything other than a Biden win. And so when we look at betting markets, they give a Biden-win likelihood of around 65%. When we look at some of the models out there, they give a Biden-win likelihood of as much as 90%. We think maybe 75 is a reasonable estimate at this juncture. So quite likely, if not quite assured.

And interestingly, financial markets, particularly the stock market, don’t seem to mind a Biden win quite as much anymore. We were revisiting our own models, and over the summer, whenever Biden’s polls went, the market was a little bit unhappy. Since September, though, as Biden’s polls have gone up, the stock market has generally been more happy than unhappy. And so you could debate exactly why that is and whether it’s because they like Biden’s policies, or they just want a clear, neat, outcome to the election, or maybe because they would like a party sweep because that maximizes the chances of fiscal stimulus, so there is some debate around that. But in the end, it doesn’t seem as though the market is going to be overly devastated if it is, indeed, a Biden win and a Democrat sweep, and so we’ll be watching very closely over the next several weeks.

And so with that, I’ll say thank you so much for your time. I hope you found some of this interesting, and please consider tuning in again next time.

Thanks so much.

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


Date de publication: 20 octobre 2020

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