Hello and welcome to The Download. I’m your host, Dave Richardson, and I am really excited to be joined early in the New Year by the Chief Economist at RBC Global Asset Management, Eric Lascelles. Eric, happy New Year and welcome back.
Same to you. Same to your listeners. And thanks for having me.
Now, of course, on so many fronts, we’re hoping that 2021 is a better year than 2020. Although when we look back at investment returns for 2020, it ended up being a very good year if we put that very narrow focus and lens on the year. But of course, at the start of a new year, everyone’s thinking about what is to come. And so, Eric, when you look at the global economy in 2021, what do you think are some of the things that investors and individuals should be thinking about?
You know Dave, there’s certainly risk and of course, there’s always uncertainty, but I would say our base case forecast is for a pretty good year from a growth perspective. One of the things that happens after a deep recession is there are lots of runway for rapid growth. And so to some extent, that does define 2021. We think real GDP growth numbers will be 4 and 5 and 6%. The kind of numbers you do not normally speak of, maybe two or three times what might be considered normal. Of course, coming off an extremely low base; that’s the whole story here. When I think about the broader story, I view the US finally got its fiscal stimulus. So this is a positive that helps certainly over the next several months. UK got its Brexit, but also got at least a small Brexit deal. And so, diminishing the damage there, you could say. We think this is the year of the recovery. We think maybe even more centrally, this is a year of vaccine and vaccination.We’ve got vaccines now. They’re starting to be distributed. I’m sure we could both do a laundry list of all the failings and underwhelming rate of inoculation and so on. But the bottom line is, we’ve got these vaccines going. It is credible to say that quite a lot of vaccination should be happening over the span of the next several months and certainly over the span of the next year. And I would just maybe flag the idea that we should start to see visible effects from that quite quickly.For instance, to the extent that the most vulnerable people get vaccinated first, as they should. So that’s the group that’s dying disproportionately. If we can get that group, the people who are 65 plus, people with high risk, vaccinated over the next couple of months, which is an achievable task. In theory, the fatality rate goes down by a factor of five as of a couple of months from now. And so then you pivot to the high contact people, people working in jobs that don’t allow proper distancing or living in settings that don’t allow that. That takes a few more months to get through, I think. But that’s the group that’s transmitting it. Conceivably the transmission rate goes down a lot at that point. Maybe that leaves you and I and other remote workers waiting for the vaccine. And to some extent, that is a key consideration for the economy and allowing everything to open back up. But I think we’re going to see some pretty big dividends fairly quickly from the vaccination even before we hit that herd immunity that we’re all hoping for.
So that paints a fairly positive picture. But what would you highlight as some of the key risks? You talked about the virus and the vaccine. Of course, we’re taping this on the morning of January 7th. Yesterday, January 6th, we saw what happened, just the stunning scenes coming from Washington in the US around transition and still the carryover from the election. Are there anything people should be looking out for from an economic perspective in terms of risk going into 2021 and beyond?
Sure. A number of things to think about, I guess, starting with the events of yesterday as we record this. That was a surprise to see people entering the Capitol building as they did. We know there’s an enormous amount of political divide in the US. So that element is not a surprise. It doesn’t look as though the transition of power is realistically going to be impeded in any way. Joe Biden is set to be the president on January 20th. Maybe the bigger news of economic relevance yesterday to me was less what happened at the Capital but more what happened in Georgia and the idea that the Democrats now appear very likely to control the Senate. And granted, it’s a razor thin amount of control they have and the checks and balances are such that it’s far from an unlimited menu of options for Democrats. But nevertheless, I think that’s the thing we think a little bit more about. You can really debate either way whether that’s good for the economy or bad. I mean, checks and balances and a divided Congress often are a good thing. So to some extent, that’s been lost. Democrats probably, though, do more fiscal stimulus. And so that will be welcome. And it’s purely an economic positive. On the other hand, some more regulation. Tech companies are a little concerned about antitrust efforts as an example and conceivably higher taxes, so it cuts both ways. I would say maybe that’s a mild negative net for market for when you get right down to it. But not a shocking outcome and something that was actually expected before the November election. And then just to broaden it out, in terms of other risks, certainly this new variant out of the UK seems to be spreading quite quickly and making controlling the virus in the short term more challenging. That doesn’t necessarily map directly onto GDP. It’s more what the restrictions are. You can certainly imagine that presenting a problem and maybe there could be a spring wave as there was with the Spanish flu. That’s an issue. And then just with vaccinations, we feel fairly optimistic and we think that’s a reasonable expectation based on the efficacy rates and all the things that we’ve seen. However, let’s recognize expectations are sky high. What would be an upside surprise for vaccination? We expected 95% and it was 96%! What would be a downside surprise? We expected 95% and hey, it doesn’t work on the new variant, and it’s actually only going to protect 50% of the people. So there are some ways in which vaccines could prove less powerful or more challenging to distribute as an example. So there are some ways this could go wrong, but we feel pretty confident that should be a fairly rapid growth. And even if a few of these things get in the way, maybe they change the timeline a little bit, but they probably don’t stop that narrative altogether. As an example, with the second wave, we’ve seen countries shutting things down and that does some economic damage. And we look to Europe, particularly since they’ve done the most shutting down and there was economic damage there. We do need to brace ourselves for a little bit of extremely near-term economic damage, but it’s literally an order of magnitude of less damage than what we saw last spring. There are just far fewer sectors getting closed, and businesses and people are much better at handling that kind of thing. Even if we are in for a bigger second wave or a third wave later, these aren’t things I think that ultimately interfere with that broader narrative.
You mentioned Europe specifically and where it could struggle for a number of reasons. But as you look around the world, are there any parts of the world that you expect to lead in a sense, or show particularly strong signs of economic growth?
I think there are two elements to that answer. One is really just rubber ball economics, which is what goes down and kind of bounces back. And whoever fell the furthest bounces the highest, just in terms of reclaiming what was lost. So actually, by that measure, we do expect the fastest sheer numerical GDP growth numbers out of Europe and the UK because they fell so far in 2020. That’s one answer; a perfectly reasonable answer, I think. And you might make some similar claims from a financial market perspective, but I’ll stick to my knitting and stick to the economic side. I guess the other answer is just recognizing that the Covid-19 pandemic seemingly hasn’t hit emerging market countries as heavily in terms of the actual toll and the economic impact. And among all it may be of relevance as China becomes ever more central, both from an economic and geopolitical perspective, but also from a MSCI composition perspective you could say. China has dealt with all this. It has virtually eradicated the virus. It’s got its own vaccines. It plans on vaccinating 50 million people over the next month. Its economy, I wouldn’t say is quite completely normalized, but it is very significantly normalized. There’s a big economic engine in the world that’s looking quite normal right now. And I suppose from that perspective, it’s good for global growth, but it’s also interesting for investors who maybe don’t necessarily want to deal with Will the vaccine be great or not great? or Will there be a second or third wave? But there are parts of the world that are not actually playing that game right now.
Well, I think if we learned anything in 2020, it is to expect the unexpected. I never, ever envy your role in terms of trying to pull this all together and make sense of it. Very few do it better, if anyone. So, Eric, thank you for that outlook for 2021 and a highlight of some of the areas of strength and the areas of risk. And we really look forward to having you on several times through the year. So thank you very much.
Thanks so much.