Hello, and welcome to Personally Invested. I’m your host, Dave Richardson. This time we have our regular quarterly update from Chief Economist at RBC Global Asset Management, Eric Lascelles.
As always, it’s an energetic look at an extremely interesting quarter in the global economy, with implications that will play out throughout 2020 and beyond. We touch on the coronavirus, the impact that that has on the Chinese and global economy, and also look at some current events impacting the Canadian economy and, more broadly, the direction of global interest rates.
As always, Eric is enthusiastic in his love for economics and expressing in a way that is really approachable for anyone to understand and get a better grasp of what’s happening in the world economy, now and in the future. Enjoy.
Hey, Eric. Welcome back to Personally Invested. Great to have you here for your quarterly update, and an interesting quarter it’s been.
Boy, has it ever.
Has it ever, and we’ll get into that – and thus, the implications for looking forward. But I think it’s fair to say that this past quarter and the current quarter is dominated by news around the coronavirus.
And the impact on the Chinese economy, and thus the global economy. So what have we seen happen? And what are—what’s your latest thinking around what’s happening with the virus?
Right. So as with everyone, we’re washing our hands a fair bit. But more maybe importantly, in the context of being an economist and leading a team, we’re tracking the spread of this disease, considering some of the economic implications, and so on.
And I guess to start with, I mean, it is fairly clearly worse than SARS was 17 years ago, and so let’s start with that observation. There is more damage being done, and for that matter, maybe more specifically, it’s spread far more widely and there are more fatalities as well. So this is a very serious affair. When you dig into the technical elements of the illness, it seems as though it probably has a lower fatality rate, meaning—
—fewer people dying out of the total who get it. However, it seems to transmit fairly readily and so that’s why it’s now spread so significantly.
And so, nevertheless, as we look at some of the stats around this, we can see, at least within a Chinese context, it seems to be coming under control in the sense that the growth rate is shrinking. So still growing but growing at a diminished rate, both on a percentage basis and on an absolute number of cases basis, and so it is more that plausible to say that over time this should settle down. When we look at international cases, it’s maybe a little bit earlier going to the extent, of course, it struck China first.
But it’s also the case that we’re seeing slower spreading. So not an outright decline in the number of infected, but slower spreading. And so it is, again, more than plausible to say this should come under control over the coming months. That’s our working assumption. And for that matter, looking back, and of course SARS isn’t the only time we’ve had pandemics to deal with and—
—it depends quite how far back you’d like to go how serious they’ve affected the economy, but historically, they have had a very short-term effect on economies and markets. It’s something that’s been visible for a month or two, or at worst, a quarter or two, but usually unwinds fairly quickly. Usually, you even get back some of the output that was lost, and usually, you can’t really tell that it was even there a few years later, at worst from an economic perspective, and even sooner from a market perspective.
In fact, markets historically bottom out very early in the going of these events, and possibly that’s already happened here to the extent we’ve had happy markets.
And that’s because the bulk of the damage, so to speak, in the global economy isgoing to be isolated, assuming what you’re talking about—how you’ve been talking about plays out, it’ll be isolated in the first quarter numbers for the global economy.
Right. And so you’ve led me to the most important comment, then, which is, we are going to see quite visible damage to first quarter growth, particularly in China. It depends on, you know, how truthful their first quarter numbers end up being, and so there’s always some debate around how smooth those are, and so we will see. But it’s not impossible that their first quarter number is negative, at least on an annualized growth—
—so down relative to the quarter before. Not a familiar thing for China. Nevertheless, if we get something like that, unless this just runs far longer than anyone’s imagining, we should get quite a pop in the second quarter.
And when you stretch it out to the year—and that’s ultimately what we’re talking about, 2020 GDP for China—with all of that damage we’ve just talked about, still only chops 0.3, 0.4 off the total year’s output, because you’re losing only a portion of one quarter, you’re getting some of it back. And so palpable, visible, certainly a dimming effect on the global growth story. And we’ve seen some downgrades to expectations as a result, but not the kind of thing that creates a global recession as it stands right now, and a lesser effect, naturally, elsewhere to the extent it’s more almost psychological than physical in the rest of the world.
Sure. So as you say, China has—very large impact on China, the US economy impact. But we’re not going to see any negative growth prints inin the US; are we?
No. I’d be very surprised if we saw something like that. That’s right. I mean we do think there will be a little bit of—of dimming going on. It might be even to the tune of a 0.5 or 1 percent annualized off quarterly growth. And so it could be we get a 1.5 instead of a 2.5 temporarily, but then you get maybe a three the next quarter instead of a 2.5, and by the end of the year, it shouldn’t be all that visible. And so in the end, we think it’s a manageable thing in the aggregate.
And so if we look historically at the impact that this has on equity and bond markets, equities in particular, as you say, the bottom relative to the crisis—
—is fairly early on, and then markets tend to recover fairly well. In fact, I think what we’re looking at this time, again, because there’s so much more information—
—about previous instances of pandemics and global pandemics, the market just seems to be looking straight past it. It hasn’t even missed a beat.
Yeah. Seems to be looking beyond. And, you know, even historically, within, you know, 20 or so days, you would normally hit that bottom. And we are past that, strictly speaking. Obviously, every episode can be unique, but nevertheless, it seems fair to say markets are looking beyond this, recognizing inherently a temporary phenomenon. Not—we imagine going to dwell too much on some weaker figures in the first quarter, and maybe even celebrating looking a bit further out. And this is the economist putting an economic—
—tilt on things. But, you know, as it stands right now, markets think growth in 2021 will be faster than 2020, and so looking beyond, looking at the prospect of some acceleration, not just through the year, but maybe even into 2021.
Sure. And that’s almost what we would have expected out of 2020, but this has sort of slowed things down, or at least the projections for this year overall.
Yeah. I think that’s fair. And you know, we still very much believe in a growth stabilization story. That’s the narrative we’ve been telling for a while. And if that sounds underwhelming, let’s keep in mind it was a growth deceleration story for two years, so we will take it. We’re not going to ask for much more than that, but we’re happy that plausibly we’re getting some stabilization. I think the risk environment is maybe a little bit trickier than it was. So towards the end of last year, it was, you know, all these big risks were just fading beautifully. And so Brexit was sort of getting sorted out—
—and trade deals were being struck between the US and China, and that kind of thing. Those are broadly still holding. Still some risks there, but mostly in a better position. Obviously now, you’ve got this coronavirus, you’ve got maybe some far-left candidates surging in the US Democratic primary, you’ve got US/Iran. There are always new risks to deal with, obviously.
I don’t know that these ones are any worse than the ones we successfully grappled with last year. And this might be an overly optimistic perspective and I can’t claim it’s my default view, but let’s recognize the reason markets went up so enthusiastically in 2019. It wasn’t that growth was great or that earnings were surging. You had these big problems in the world and they didn’t fully manifest.
They got dodged to some extent. And so, again, to some extent, we sort of reset—here are new problems to deal with. Chances are we also manage to dodge those. And those are scenarios in which markets can go up fairly happily, presuming those things are indeed dodged, of course.
Sure. And so that’s equities, but now if we pull back and we take a look at fixed income and interest rates.
Interest rates have stayed very low. We continue to be in an environment where, you know, for the most part central banks are easing monetary policy. Is this something you expect to continue? Has what’s happened over the last quarter made it more likely that rates stay lower longer? Or does does the bounce-back in what you’re seeing in 2021—
—have the prospect for higher rates down the road somewhere?
Right. No, that’s a good question. I wouldn’t say the answer is all that clear, at least from the market’s own view. You know, yields have stayed low even as stocks have bounced. And so, I guess as we look at things, it’s less obvious that central banks have to cut this year than last. Of course, they did cut quite substantially—
—last year. We are penciling in a little bit of cutting this year. So we still think the Fed and maybe the Bank of Canada could do a cut, could do two cuts perhaps. It is in part based on some of these risks, though I think you would have to see them not improve to get those cuts delivered. It’s also, thought, based in part just on the idea that part of the story behind growth stabilization is that central banks lent a big helping hand last year. And just based on the lags involved, that actually boosts growth most obviously over the first half of this year. Now that’s getting complicated by these other things that are distorting the first and second quarter. But beneath the surface, there is a helping hand from monetary stimulus and inevitably, to the extent—
—central banks for the moment aren’t cutting, that starts to go away in the second half. And so it wouldn’t surprise us if central bank stepped back in, delivered another helping hand, plausibly a bit more fiscal stimulus as well, and just, you know, keep that growth story going through to the end of the year.
Sure. And at the same time, we’re taping just to let’s timestamp this recording, which is always important. The morning of February 19, 2020. And we saw an inflation report come out in Canada, one in the US, that suggests maybe there’s a sniff of inflation somewhere in the air. We’ve seen gold pop above $1,600 an ounce, and the gold bugs would say that that’s—they’re looking forward and seeing some potential inflation somewhere around the world.
As you look out from your seat today, is that something that you have any concern about at all?
Not really. And so, I mean, it’s a story of opposing forces right now. And so let’s acknowledge, economies are classically tight, unemployment rates are low, and wages have picked up to some extent. Those can create inflation pressures. Though let the record show we’re not getting as much wage growth as you might normally expect—
—given where unemployment rates are. Equally, though, don’t forget the other side of the equation. We’re actually working on a paper on this right now—the demographic side, which is aging population, slower population growth, fundamentally lower inflation from that. And it seems like those two opposing forces are battling to a draw, more or less. We’re not expecting excitement in either direction.
It seems like a pretty benign environment. I can’t deny, as you’ve just noted, we did see a higher annual inflation print in the US and Canada recently. The thing to appreciate about that, though, is that it’s not really that inflation is suddenly picking up now. It’s that we had some really weak inflation numbers a year ago fall out of the equation, just one of these sort of base effect-type things—
—in which you’re going from 2 to 2.5 percent and nothing happened in the last months; it all happened a year ago. And so we got rid of some deflation a year ago. And similarly, there was briefly a surge in energy prices late last year; since undone, I should note. And so, again, we think it’s more mechanical gremlins that anything else.
And you see, that’s why you have to tell your friends to listen to the podcast when we get the real economist on, because when you have these base effect things going on, you see the headline number, you think it’s a big deal, but the economists will set you straight. It’s not anything to be concerned about. And so, we talk about the Bank of Canada and potentially coming in with maybe even some rate cuts later this year. I’m making a lot of assumptions there.
We’ve got some news in Canada, you know, in the energy sector and some blockades of rail lines. Does this have any impact on the Canadian economy, along with the virus, which has an impact in Canada as well?
Right. Well, and the short is yes, indeed, it does. Obviously, a very complicated subject. I can’t hope to address it fully. But let’s acknowledge for the moment at least, as we record this, we have some rail lines that are down and some protests that are disrupting commerce in a variety of ways. And so chances are, there is going to be at least a mild hit to the Canadian economy also in that first quarter, so proving to be quite a gremlin-filled first quarter. I haven’t done the serious work on it. I will say RBC Economics has done some pretty good work on it, and I think their math is it chops 0.2, 0.3 off first quarter annualized GDP. So one of these things where growth might have been 2, maybe it’s going to be 1.5 or 1.75 instead.
And so not a killer blow, but nevertheless, you know, I think, you know, endemic to this idea that the resource sector is struggling to get things done, and big resource and, more broadly, big infrastructure projects in Canada not progressing as readily perhaps as they are in other countries or as they might have progressed in decades past, and that is a real concern. And we tend to lodge that really into two categories. One is an energy sector still struggling for transportation-related issues, but also, I should say just less cost competitive in a grander sense at these price levels. But nevertheless, an energy sector that continues to struggle. We’re assuming that persists, unfortunately. And then the other side is just Canada has lost some competitiveness. And often we talk about that in the context of marginally higher tax rates over the last few years versus lower rates in the US, and these sorts of things. But also from a regulatory perspective, it’s gotten more difficult as well. And so Canada is just not attracting a lot of inward investment right now. It’s still a fairly difficult place to do business, it would seem.
Yeah. So we’ve just blown past impeachment, which happened in the last quarter.
And has kind of come and gone. And perhaps we’ll leave this as a tease for your appearance next quarter, maybe there with a little bit more clarity of what’s going on on the Democratic side; we’ll get into a discussion about the election. We’ll kind of pass on that for now. But you’re always doing research, you’re always looking at things that are kind of beneath the surface or a little bit farther out. We’ve talked about a lot of the obvious headline news, which we need to pay attention to. That’s what our listeners are interested in and want to hear from you about. But what are the things that you’re looking at, just out of interest, as you look down the road? Maybe aren’t in the headlines right now, but you think are going to create noise—
—in the not-too-distant future.
Right. I mean, gosh, you could go in any number of directions, obviously. I mean, we just recently did a little project on US student loans, for instance.
And I must say, the conclusion was not likely to blow up the banks or blow up the world. And so as an economist, we walk away saying, oh, we feel okay about that. Though I must say, US student loans are now the second-biggest household debt category in the US.
There’s $1.4 trillion worth of them.
Twenty-five percent are in default. Now that’s not quite as exciting as it sounds, because you’re just not allowed to go bankrupt on student loans, and so these things just linger unresolved for decades and maybe inflate the figures. But, you know, there are some issues there. It’s not the sort of thing that blows up a bank because almost all the loans are owed to the federal government and—
—it’s the one entity that can handle $1 trillion of problems if there were to be. And from a student loan borrower perspective, you know, again, there is a lot of debt out there, and some people are very, very indebted. For the most part, though, you know, the average interest payment’s maybe $1,500 a year. Consequential; possibly limiting someone from doing something else. But what we found was, that isn’t the reason why Millennials aren’t buying homes and these sorts of things. So we walked away saying, we feel a bit less badly about that than we thought we might, though it is an issue for many. Demographics, obviously, an all-weather topic.
And so we’re presenting to an institutional client set on that soon and it’s motivated us to do a lot of research. And there will be a big paper coming out we hope in the not-too-distant future. And I think we all know the broad narrative of that, which is aging population, slower population growth equals slower growth, equals less inflation, equals maybe more muted equity returns and lower bond yields. And indeed, those are the broad conclusions, if I’m being honest. But there are some interesting takeaways as well. And so, you know, for instance, on the global level, India passes China in the not-too-distant future, however, more relevant as both are becoming less important as a share of the global population. So they’re losing clout to Africa.
So interesting global trends. But Canada is a fascinating one because we have so much immigration going on right now. Actually, we’re pretty much top of the charts when it comes to working-age—
—population growth. And so Canada, short term we’ve complained about it, but medium and long run, actually quite an important potential tailwind for Canada out there right now. And the other thought, not to ramble on too long related to demographics, is just that, you know, we all know demographics are less favourable, limiting economic growth, as an example. Most of the deceleration is done, though. So we’re still in the world of a slower speed limit than was the case 20 years ago.
But most of the active each year’s growth is less than the prior year’s growth, that was the 2005 to 2015 story. We’re just now in a world of slow growth but not decelerating growth. And so by some standards, we’re kind of through the worst of it in one way, if you think about it that way.
And so, always interesting to hear what you’re working on because you’re always working on something. As we’ve established in your previous visits, you’re the hardest-working economist in show business. So Eric has always got something coming out. Any of links to Eric’s article and writing and his Twitter feed and all the ways you can follow Eric and his current thinking, will be linked to the podcast link when it’s posted. Eric, always a pleasure to have you on and we look forward to hearing from you next quarter.
My pleasure as well. Thank you.
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