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President Trump’s announcement that he will pause stimulus negotiations until ‘after the election’ has caused a stir in markets. What could this mean from an economic standpoint? RBC GAM’s Chief Economist Eric Lascelles discusses the role relief measures have played in the U.S. economic recovery thus far. Eric also breaks down the key differences in Canada’s stimulus story. [7 minutes, 56 seconds] (Recorded October 8, 2020)


Hello and welcome to The Download. I’m your host, Dave Richardson, and we are joined today by Chief Economist at RBC Global Asset Management, Eric Lascelles. Eric, welcome back.

Thank you for having me.

So, Eric. I’m watching -- as I watch a lot of times, BNN or CNBC in the background, when I’m working at home every day -- and things are just chugging along Tuesday in markets. And all of a sudden in the middle of the afternoon, apparently somebody tweeted something about cutting off negotiations for fiscal stimulus in the U.S. and the market just drops off a cliff. It gets me thinking about stimulus itself, the recovery process that we’re going through with the pandemic and what looks like — and you’ve talked a lot about this in your materials recently — a second wave. And the stimulus and just how important it is or how critical it is to maintain the positive economic momentum we’ve had over the last few months. The markets were clearly saying that this is going to be really important. What’s your perspective on this?

I think it is important, and markets weren’t wrong in that regard. But I will say this: I was frankly skeptical we were going to get a fiscal deal before the election anyhow. We’ve heard rumors of deals just about every week over the last few months, and they’ve never come to fruition. It seems to me as you get ever closer to the election and as the Supreme Court battle becomes more contentious, the odds of a deal between Republicans and Democrats didn’t seem that great to me to begin with. And so to my eye, the world isn’t radically altered after that tweet compared to before. But nevertheless, it does come pretty close to locking down the conclusion that there will not be fiscal stimulus in the next little while. So there was a negative in there. I suppose we’ve held out a bit of hope, as much as it wasn’t our default assumption. As to whether fiscal stimulus or fiscal support in general is needed, I think it is. And so I’ll qualify that by saying that the U.S. has already pulled off a lot of its fiscal support. Relative to the month of April, which was the absolute, the high watermark or low watermark, depending on what particular item you’re choosing to reference. It was awful from a virus and an economic perspective. It was the high watermark from a fiscal support perspective. We’ve already seen about 200 billion dollars a month of fiscal support removed compared to April. There was a $1000 check that went to all Americans in April. There wasn’t another $1000 check in May. That was already the beginning of a fiscal withdrawal, and unemployment insurance benefits became less generous at the end of July. So things have been bleeding off here, and in turn, there’s less fiscal support. So far I’ve been, I would say, pleasantly surprised that there hasn’t been more economic damage from the extent to which that support has been withdrawn, but it hasn’t been completely invisible. So, for instance, we saw personal incomes in the U.S. shrink 2.7% in August. That was 100% a function of less generous government checks. However, personal spending still went up by 1% in August, which is quite good. And so the conclusion was we had households in some cases awash in cash earlier in the year. The U.S. savings rate went to almost 40% in April. It’s fallen, but it’s only fallen to about 14% today. And so it’s still a position in which the average American — though, of course, some are doing much better than normal, some are still doing much worse, so this misses the nuance — but the average American has a personal savings rate that is still notably higher than what they would have had before the crisis. So we’re not in a position where we’ve got big problems as the fiscal support comes off, but nevertheless, as it continues to come off, that will perhaps become a little bit more challenging. And so I would say, to me, maybe the important message here is I do expect more fiscal support in the U.S. I just expect it after the election. It will depend on who gets elected. We’ve generally said that if it’s a Biden presidency, as it seems more likely right now, and if it were a Democrat sweep, moreover, in Congress -- that’s a scenario which you could get big fiscal stimulus and big support. And that’s been one of the big economic positives we’ve talked about potentially over the next year or two. If there’s a Trump presidency again, we’ll get fiscal support there as well. It might be tilted in a different direction. It might be ultimately smaller, but nevertheless, we should get something one way or the other. So I tend to view this recent tweet as more of a delay as opposed to a complete cancellation. But the bottom line is, there is going to have to continue to be support over the next few years for fundamental reasons. Unemployment is still high, businesses are still suffering, economies are still smaller than they should be. But then simultaneously, just the tricky math the fiscal support is: if you’re going to spend a couple trillion dollars in 2020, you cannot go cold turkey in 2021. The withdrawal of that much money is a massive economic drag that could plunge you back into recession. So we do need something. There is something, by the way. Some of the spending is still continuing, but arguably some holes need to be filled. I think they ultimately will be.

So, Eric, a lot of the audience for this podcast are Canadian investors, or at the very least people tuning in from other parts of the world, but interested for a Canadian perspective. Or, an interest in the Canadian economy and what’s going on here. A different set of circumstances around stimulus and government policy in Canada relative to what’s going on in the U.S…

I think that’s fair. And so initially, a broadly similar set of fiscal supports, an enhanced unemployment insurance, programs to defer mortgages and programs to help particular businesses. So similarities, in fact, quite close ones to the U.S. The difference, though, is that Canada has not been all that profoundly withdrawing that fiscal support. And so don’t get me wrong, there are some things that did expire in September. But broadly speaking, there have been some other programs that have supplanted them. And so the rate of withdrawal of support has been much milder in Canada. So we’re less worried in the near term about any kind of economic problems emerging. We’re not seeing Canadian personal incomes falling in any significant way right now, just as an example. And then keep in mind, Canada has a different political backdrop as well. There isn’t an election on November 3rd in Canada. We’ve got a sense for what the government is. Canada has a government with a centre-left party in charge and with an informal coalition with some further left parties. And so it’s a position where it can expand government just in a more fundamental philosophical way. And so I would argue we are seeing that. The throne speech did detail plans for more generous pharma care and more generous childcare and indeed perhaps a permanently more generous unemployment insurance program. And so it seems to me that Canada could end up with a permanently bigger government emerging from this. The word permanent, by the way, is itself impermanent because, of course, you get future governments and they can always reverse some of these things. But nevertheless, I would say the risk from a fiscal cliff perspective is quite limited in Canada. If anything, we’re seeing plans for a bigger government over the longer term. Maybe the thing that you would then fret about, at least in an economic standpoint, is that Canada’s deficit remains bigger for longer. Canada’s public debt continues to go up for the foreseeable future, and we’re lucky enough to be starting from a pretty good starting point. But nevertheless, there’s less of a stability story from a debt perspective later, just given some of the promises that are now being made.

Well, Eric, that’s a great synopsis. Regardless of your political persuasion, that election in the U.S. just can’t take place soon enough in terms of removing some of the uncertainty around numerous issues and discussions. Particularly, as it relates to the economy. So, as always, thanks for checking in. We’ll look forward to talking to you again soon.

My pleasure.


Recorded October 8, 2020

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