Overview

Overall, the past week has brought a neutral to slightly improved set of macro-relevant developments.

Positives include:

• The COVID-19 infection numbers are now improving in many parts of the world.
• The pace of vaccinations continues to accelerate.
• The new U.S. administration should offer greater political stability and probably more fiscal stimulus.
• Chinese economic data has been very strong.

Conversely, negatives include:

• The new virus variant continues to spread, and may be more fatal than first thought.
• Evidence of vaccine nationalism continues to mount, suggesting an inconsistent pace of inoculation across developed countries.
• We are in the midst of downgrading our economic forecasts for many countries, albeit the forecasts should remain above the consensus in most cases.

Virus figures

The global pace of COVID-19 infections has slowed palpably over the past few weeks – an enormously welcome development (see next chart). While there have been several false dawns since the summer, the latest improvement is both the steadiest and the most sustained.

Global COVID-19 cases and deaths

As of 01/24/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

To the extent that the improvement is broadly based – encompassing both developed and emerging nations – and also coming on the heels of aggressive lockdowns, it is plausible that the infection numbers will continue to improve from here (see next chart).

COVID-19 emerging market versus developed market infections

As of 01/24/2021. Calculated as the 7-day moving average of daily infections. Source: WHO, Macrobond, RBC GAM

However, we reserve our final judgement on whether this improvement will prove decisive given that the new, more contagious variant is continuing to broaden its reach. It could yet push the infection numbers higher again in countries that have not yet encountered it.

Focus on U.K., South Africa, Israel

It is nevertheless very promising news that the two countries so far most affected by more contagious variants are now both managing to push their infection figures significantly lower. The U.K. daily infection rate has fallen by half in just three weeks (see next chart). Fatalities will presumably follow with a lag. Of course, this has only been achieved at considerable economic cost – the U.K. economic outlook is being revised down more than any other for 2021.

COVID-19 cases and deaths in the U.K.

As of 01/24/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

Meanwhile, South Africa is also now managing to push down its latest wave (see next chart).

COVID-19 cases and deaths in South Africa

As of 01/24/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

Israel is another key country, not because of any virus variant, but because the country continues to sprint ahead of the pack in its delivery of vaccines. As such, Israel is now the bellwether for how vaccinations can tame the virus. While we cannot say with certainty that the country’s tentative recent improvement is purely a function of a rising immune population, it may be a factor (see next chart). The country merits very close examination over the coming weeks.

COVID-19 cases and deaths in Israel

As of 01/21/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

North America improves

In North America, both the U.S. and Canada have now begun a moderate improvement. The U.S. has reduced its infection rate from around 250,000 people per day to roughly 175,000 per day, and continues to decline (see next chart). The improvement has been extremely broadly based. The vast majority of states have pivoted from a deteriorating trend to an ameliorating one, seemingly overnight (see subsequent chart).

COVID-19 cases and deaths in the U.S.

As of 01/24/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

Number of U.S. states with transmission rate above key threshold of one

As of 01/24/2021. Transmission rate calculated as 7-day change of underlying 5-day moving average of new daily cases, smoothed with 7-day moving average. Transmission rate above one suggests increasing new daily cases. Includes Washington, D.C.  Source: The COVID Tracking Project, Macrobond, RBC GAM

The Canadian story is similar to the U.S. The rate of infection has now improved substantially, descending from around 8,000 infections per day to roughly 6,000 (see next chart). The pivot is also broadly based across the country’s most populous provinces. Ontario and Quebec have now joined British Columbia and Alberta with declining caseloads (see subsequent chart).

COVID-19 cases and deaths in Canada

As of 01/24/2021. 7-day moving average of daily new cases and new deaths. Source: WHO, Macrobond, RBC GAM

Spread of COVID-19 in Ontario

As of 01/24/2021. Calculated as 7-day moving average of daily cases and total cases. Source: Government of Canada, Macrobond, RBC GAM

A thought on seasonality

While it is now the very heart of the northern hemisphere winter, some lucky parts of the world will begin to encounter signs of spring within the next several weeks. Even the coldest climes should be somewhat less frigid within the next few months. To the extent that the transmission of COVID-19 appears to be significantly aided by cold and dry weather, this should introduce a further ameliorating force against the pandemic. This force could well prove as powerfully helpful as the new virus variant is set to prove negative over a similar timeframe.

New variant

The COVID-19 virus has undergone repeated mutations ever since it first appeared in humans in late 2019. Most of these mutations did not significantly change the nature of the virus. But at least two independent mutations in late 2020 – in the U.K. and South Africa – have now created virus variants that are approximately 56% more transmissible.

As we detailed in an earlier note, the only reasonable conclusion is that this variant will become the global norm, much as it quickly became dominant in the U.K. To the extent that epidemiologists say such a takeover should take three to four months, this argues that it could be globally dominant by perhaps March. There is already evidence of its widening footprint in many other developed countries, including Canada.

In a surprise twist, a recent research study now claims that the new variant may also be around 30% more deadly than the prior version. This assertion is contrary to earlier research, and much could yet change as research continues. Nevertheless, this would be another unwelcome development. Normally, viruses become more transmissible but less deadly over time. However, it doesn’t always work this way. The huge number of infected people in the world can be thought of as representing many millions of petri dishes, each capable of generating random mutations.

A new study finds that people who were previously infected with COVID-19 may still be susceptible to the new variant. However, researchers have concluded that the existing Pfizer and Moderna vaccines should provide protection against both strains.

Among the many implications of the new variant, a subtle one is that the definition of herd immunity has arguably changed. Previously the natural transmission rate of the virus was sufficiently low that “only” 60% to 70% of a population would need to be immune to halt the spread of the virus. The new, more contagious variant may ultimately need more like 75% of the population to be immune. This is a high bar to clear, such that the virus may not be completely eradicated.

It is still up for debate how much economic damage the new variant will do. The main channel of damage is via the need for additional economic restrictions to limit a more transmissible virus.

At the optimistic end of the spectrum, one large-scale econometric model argues that global growth may only lose 0.2 percentage points in 2021 due to the spread of the new variant. But the damage is set to be perhaps double this in developed countries.

We suspect this underestimates the full scale of the damage. Effectively, countries won’t be able to reopen quite as substantially as otherwise over the next few months. The U.K. economic outlook has now been scaled back by multiple percentage points, and the country is undeniably the test case for the new variant. But let us not forget that the U.K. was also suffering among the worst economic shocks from COVID-19 even before the new variant. The country is also grappling with Brexit ramifications. Not all of its economic travails can be traced to the new variant.

Vaccination developments

Who’s leading the way?

Israel continues to lead the way in the global effort to vaccinate people against COVID-19. It has now inoculated more than a quarter of its population with at least one dose (see next chart). The U.K. is well behind that pace, but nevertheless leads major developed countries with around 7% of the population inoculated. The U.S. sits at around 5% – also well ahead of most countries. Canada lags significantly with just 2% of its population inoculated. Continental European countries are in a similar position.

Share of people receiving at least one dose of the vaccine

As of 01/24/2021. Share of people who have received at least one dose of the COVID-19 vaccine calculated as a percent of the population. Source: Our World in Data, Macrobond, RBC GAM

Fortunately, the pace of inoculations continues to accelerate in most countries, as demonstrated by the rising lines in the chart, below. Canada is an exception as it encounters a vaccine shortage, discussed shortly.

Coronavirus vaccine doses administered

As of 01/24/2021. 7-day moving average number of new daily coronavirus vaccine doses administered per million. Source: Our World in Data, Macrobond, RBC GAM

Bottlenecks

Public demand for vaccines greatly outpaces supply. As such, the bottleneck preventing the inoculation of more people lies somewhere on the supply side of the equation.

The rate at which countries could inoculate their populations was initially the main supply-side bottleneck over the second half of December and the first few weeks of January. However, this exercise in logistics has become more efficient such that the current supply restraint is the sheer supply of vaccines from manufacturers.

This is likely to remain the primary constraint for the next several months. By the summer, the supply clip will conceivably catch up to (potentially waning) organic demand. At that point governments may need to begin actively marketing vaccines to the most reluctant share of their population.

Vaccine production continues to undershoot initial expectations. This is perhaps inevitable. Rarely is an enormous new undertaking achieved on budget and on time. While the exact supply schedule of the vaccine makers is only known to themselves and political leaders, the U.S. had initially anticipated 50 million inoculations by the end of January, whereas it is on track for fewer than 30 million.

Of consequence to Europe and Canada, Pfizer’s Belgium plant is now being retooled. While this should ultimately yield a faster rate of production, it has resulted in short-term supply disruptions.

It was recently reported that Europe would only receive 30 million doses from AstraZeneca by March. This is in contrast to the prior expectation of 80 million doses.

As such, the rate of vaccination is undershooting initial expectations. Much of this can be thought of as growing pains and may well be offset by faster production later. However, the Good Judgement betting market has nevertheless pivoted from around 60% of respondents in mid-December expecting two-thirds of Americans to be inoculated by the second quarter of 2021, to just 32% today. Now, 64% expect this to be achieved in the third quarter – between July and September.

Vaccine development news

The long-awaited results of the Johnson & Johnson Phase Three trial is expected imminently. This vaccine candidate has many potentially attractive features. These include:

• It will require only one dose rather than two.
• It lacks the extreme storage temperature requirements of some of the others.
• It should be cheaper.
• The company expects to be able to produce a billion doses by the end of the year.

The U.S. has pre-ordered 100 million doses. Canada has ordered 38 million.

On the negative side, pharmaceutical giant Merck has cancelled its two vaccine candidates after both delivered an underwhelming immune response in Phase One trials. This is too bad in that it would have been useful to have another major drug company’s manufacturing capacity delivering vaccines. However, no country was counting on these vaccines. They were not among the vaccines pre-ordered by nations, and the candidates never advanced to Phase Two, let alone Phase Three trials.

There is some concern that a major Chinese vaccine – Sinovac – was only reported to have secured a 50% efficacy rate in Brazilian trials. This is the bare minimum for a vaccine to be considered viable. But there is some uncertainty around this number, with criticism that Brazil’s trial results may have been interpreted overly harshly. Furthermore the vaccine was reported to have enjoyed a more respectable 78% efficacy rate in China.

With regard to non-vaccine treatments:

• Canadian researchers find that the use of colchicine tablets reduces COVID-19 hospitalizations by a quarter, the need for ventilators by half, and the likelihood of death by a big 44%.
• Eli Lilly’s antibody-based drug is reported to have reduced the risk of contracting COVID-19 by about 57%, with assisted-living residents enjoying an 80% reduction.
• These are both big steps forward if successfully replicated. And – depending on their scalability – they may significantly offset such pernicious developments as the new more transmissible virus strain.

Vaccine uptake news

As we had long predicted, companies and governments are not leaving vaccine uptake to chance. While there is more than enough demand currently, that won’t be the case forever. Furthermore, it is quite important that some groups be inoculated early. This includes those in situations where the risk of transmission to others is high.

On the corporate side, at least three companies have now said they will pay their workers to be vaccinated – or at least pay them as though they were working while they get inoculated. Meanwhile, the Hong Kong government is paying people to be inoculated and one northern community in Canada is incentivizing people to be inoculated via raffle prizes. There will likely be much more of this sort of thing over the coming year.

Inoculation strategy

Initial reports from Israel find that the vaccines are working, with high antibody levels and a 60% decline in infections among those aged 60-plus who received a vaccine. Presumably more refined data will become available over time. One would ideally expect a 95% decline in infections if the genuine efficacy rate of the Pfizer vaccine is as high as reported during Phase Three trials. It is unclear whether the 60% decline includes people who have only been inoculated once rather than twice.

There were initially headlines highlighting a surprisingly large number of Israelis who were testing positive after having been inoculated. However, it appears that the great majority were already infected before their jab.

One development that has gone under-reported is that some countries are apparently stretching their vaccine supply in an unconventional manner. Pfizer sold vials of its vaccine with the presumption that each would be split into five doses. Yet many countries have decided to extract six doses from each vial. This is mainly because each vial was found to contain surplus fluid that was previously going to waste.

As such, most people will not actually receive less of the vaccine. Nevertheless, a special kind of needle is needed to extract the remaining drops of liquid, and this is expected to be in very short supply – a new bottleneck.

In the scramble to protect as many people as possible, different countries are pursuing different strategies. The conventional approach is to inoculate a person and to set aside a second dose for their follow-up dose several weeks later.

However, some countries have opted to use all of their available doses as they arrive, trusting that additional supply shipments will arrive to keep the second doses on schedule. There is some risk to this given recent supply hiccups. However, in theory it is a sound strategy since supply is expected to ramp up over time.

Most notably, other countries are opting to inoculate as many people as possible with a single dose, delaying the second inoculation for up to several times longer than recommended by the vaccine makers. Is this a sound strategy? The math is surprisingly murky. It mainly comes down to two things:

1. How much protection is lost when the second dose is delayed? Does the 95% efficacy rate merely fall to 94%? Or all the way to 60%? This isn’t known.

2. You wouldn’t want to pursue a first-dose strategy unless the first-dose efficacy was at least 47.5% (half of 95%). Based on what Pfizer says, the efficacy rate for the first dose is 50% after two weeks, then rising to 89% after three weeks. As such, the second dose only theoretically increases protection from 89% to 95%. However, so far, Israeli studies have found the first dose only has an efficacy of between 33% and 60%. This could yet change as time passes and as more studies are conducted.

In theory, the first dose strategy may make sense if a single dose genuinely provides 89% protection. However, in practice thus far, it isn’t clear that the first dose concentration strategy makes sense even after setting aside the possibility of diminished efficacy from delayed second doses.

More on vaccine nationalism

Vaccines continue to be distributed in a highly varied way across developed countries. Is this fair? Fair doesn’t really apply given that so many developing countries have virtually no access to vaccines. Nevertheless, the distribution pattern doesn’t appear to be easily explained by which countries have the largest populations, which ordered the most doses, which ordered their supply first, or even which physically manufactures the vaccines.

Certainly, some of these variables help to explain the distribution pattern. For instance, distribution appears to be significantly influenced by population and the number of doses ordered, and slightly influenced by manufacturing location. But Israel has received 10 times more vaccines on a per capita basis than the average developed nation, and three times more than the next best large nation, all without having any domestic manufacturing capacity.

Anecdotes of the political considerations used when France distributed its H1N1 vaccine in the late 2000s point to the potential for political calculus.

The retooling of the Belgian plant producing Pfizer’s vaccine for Europe and Canada has seemingly resulted in a three-week disruption to Canada’s supply versus a mere one-week disruption to the supply of European nations. And, as mentioned earlier, AstraZeneca has sharply cut its expected supply to Europe without a similar reported reduction elsewhere.

All of this is to say that we no longer believe developed countries will reach the herd immunity finish line at nearly the same time. There will likely be multi-month gaps, with the U.S. and U.K. likely somewhat ahead, and the Eurozone, Canada and Japan somewhat behind.

Surprisingly, and despite Canada seemingly lagging others, the federal government has just updated its vaccination goals. It seeks to inoculate just three million people by March, but then 23 million people by June and everyone in Canada by the end of September. This first goal seems slow relative to the progress already achieved in some other countries. But the 23 million goal seems bold to the extent it represents 60% of the population at a time when betting markets think the U.S. will have to wait until the third quarter to hit that approximate threshold.

The government actually advanced its expectations over the past few weeks. The forecast had previously been for 20 million Canadians by June. It would appear that the Canadian government believes these vaccine production and procurement issues are just growing pains. It is undeniable that Canada has ordered more vaccines per capita than any other country, but equally it seems likely that manufacturers will ration Canada’s supply accordingly, such that the surplus supply arrives once more urgent needs in other countries have been fulfilled.

Global vaccine supply in 2021

As of early January, The Economist magazine forecast the production of 12.4 billion inoculations across 2021. While this exceeds the global population of 7.7 billion people, note that most of the vaccines require two doses. As such, the entire world won’t realistically be inoculated this year, even setting aside logistical issues of reaching the poorest and most remote regions.

When do economies reopen?

As vaccines come online, a burning question is when economies will be significantly re-opened? There is no definitive answer. A nearly complete economic normalization will probably have to wait until herd immunity is achieved, if it is achieved at all – a second-half of 2021 proposition.

But, as we have detailed in recent weeks, the fatality figures should begin to improve sharply over the next few months. The infection numbers will follow, improving significantly thereafter as the second round of inoculations reach people in high-contact settings.

While fatalities and infections will certainly be relevant considerations, policymakers arguably cued their economic lockdowns most closely to the rate of hospitalization. As hospitals hit capacity, governments reluctantly closed their economies out of necessity. By extension, as hospitalizations begin to abate, it seems reasonable to expect governments to loosen some of their rules. In practice, the peak in hospitalizations comes only slightly after the peak in new infections – by just five days as per our study of U.S. states (see next graphic).

Understanding the relationship between new infections, total hospitalizations and new fatalities

As of 12/10/2020. Calculated using first and second-wave peaks from four U.S. states. Curves are stylized. Source: RBC GAM

It is foolhardy to provide a precise date as to when infections and thus hospitalizations might start to decline. After all, infections are already in decline for reasons arguably unrelated to the vaccine in many jurisdictions. There will be many other factors to consider going forward, including not just the rate of vaccination but also the amelioration of weather conditions and the progress of the new virus variant.

But, all else being equal, one might expect hospitalizations to begin falling for vaccine-related reasons within the next month and to decline steadily across the spring. In turn, it would not be a surprise for some economies to begin tentatively reopening within the month, though their complete revival is still some distance off.

It seems reasonable to expect the U.S. to be bolder than most in reopening its economy, given its greater tolerance for loss of human life and lesser tolerance for economic damage demonstrated over the past year. While President Biden is taking a more proactive approach to COVID-19 than his predecessor, he does not ultimately exert much control over the opening and closing of individual economic sectors.

Economic developments

China’s economic recovery

China’s economic recovery is virtually complete. Its economy in the fourth quarter of 2020 was a remarkable 6.5% larger than the year before. Somehow, this is a faster growth rate than the country was managing before the pandemic struck (see next chart). China is the only major economy not to have shrunk in 2020.

Chinese economy recovering rapidly

As of Q4 2020. Source: China National Bureau of Statistics, Macrobond, RBC GAM

This is particularly amazing for a country that is significantly reliant on foreign demand to drive its economy. In fact, rather than representing a weak spot for the economy, Chinese exports in December were a huge 18% higher than the year before. This was in part because of higher-than-normal demand for medical equipment and lockdown-related products.

It is good news in several regards. It certainly reflects well on China, and China’s growth has also been massively helpful to the global economy. During normal times, China is responsible for a third of global growth. Its contribution was significantly greater in 2020.

China’s performance also argues that there may be limited scarring when other countries emerge from the pandemic. In fairness, though, the duration of the economic restrictions has been enormously longer outside of China, raising the risk of a different outcome.

U.S. data

U.S. economic data for December was mixed – industrial production and housing starts up versus retail sales and small business optimism down. We assume the country’s economy actually shrank slightly in the month as stricter COVID-19 restrictions were implemented.

Interestingly, the nascent January data paints a slightly better picture. The U.S. Markit Manufacturing PMI (Purchasing Managers’ Index) rose from 57.1 to a strong 59.1 in January. The COVID-relevant Services PMI increased from 54.8 to a good 57.5. This hints at a return to economic growth. However, the U.S. jobless claims numbers have risen further in January, making the opposite claim. Yet some of the deterioration in jobless claims may be artificial. It may be attributed to delayed filings by workers over the holidays and the allure of an extra $300 in jobless benefits introduced at the start of 2021.

An inflation warning

Although many proxies for inflation have been rising in recent months, inflation itself has remained fairly tame. U.S. and Canadian core inflation are at just 1.6% each. U.S. headline inflation is just 1.4% year over year. Canada’s is even less.

We expect inflation to rise over time, but not to the point of problems.

However, inflation-watchers should be aware of one potential distraction: because of the way that oil prices collapsed last spring and then partially rebounded, the year-over-year CPI (Consumer Price Index) readings are going to look temporarily and artificially high this spring as the earlier declines fall out of the equation. U.S. CPI may well rise to the 3.0% to 3.5% range in April and May, with the Canadian equivalent up to 2.5% to 3.0%. But these should recede again thereafter, returning to just over 2% by the end of 2021. It is not a sign of a sudden explosion of inflation.

Bank of Canada decision

Despite some signaling by Bank of Canada speakers late last year, Canada’s central bank opted not to deliver a micro cut at its January meeting. Instead, the overnight rate remains unchanged at 0.25%, with the economic recovery described as “well underway.” Among the notable contents of the accompanying Monetary Policy Report, the Bank trimmed its 2021 GDP forecast slightly from 4.2% to a still-good 4.0%. This was largely due to the fresh expectation that the economy would decline at a 2.5% annualized pace in the first quarter of the year. As we revise our own forecasts, we concur that a decline is probable in the first quarter, though we expect it to be less substantial than this.

European rebound overstated

In December, we were surprised that the European services PMI had begun to rebound already. The January figure has now been released and retreated again slightly. As such, it appears that the European economic malaise continues due to the severe restrictions implemented in response to the second viral wave (see next chart). The situation is even more extreme in the U.K., where the services PMI plummeted from a weak 49.4 to an awful 38.8 in January. The U.K. economy is undeniably suffering greatly.

Services sector activity in Eurozone fell again due to restriction tightening

As of Jan 2021. Source: HIS Markit, Haver Analytics, RBC GAM

Forecast revisions

A number of developments demand revisions to our economic forecasts.

Among them, several of the downside risks we had cited in our last quarterly outlook have come to pass:

• The rate of infection has proven surprisingly pernicious, and could well remain problematic given the arrival of the new variant. This has been particularly problematic from an economic standpoint in Europe and the U.K., but dims the early-2021 economic trajectory for nearly everyone.
• Expectations for vaccines were indeed a bit too optimistic. New concerns have emerged about the pace of inoculation, the criteria for how vaccines are being distributed internationally, and the real-world efficacy rate.
• There are undeniably greater concerns about inflation than there were a few months ago (albeit not that much extra inflation itself).

Conversely, on the positive side:

• The U.S. is likely to deliver a second round of fiscal stimulus in short succession.
• Countries may opt to revive their economies surprisingly quickly once vaccines start to take effect.

All told, the consensus economic outlook has fallen in markets including the U.K., Eurozone and Canada. Conversely, the consensus has actually risen in the U.S. given its fiscal plans, good vaccine trajectory and the likelihood that it is among the first countries to reopen as the pandemic cools (see next chart).

2021 GDP forecasts

As of Dec 2020. Source: Consensus Economics, RBC GAM

Our own forecasts are still being refined, but the tentative adjustments so far bear considerable resemblance to how the consensus has evolved. We are on track to subtract around 2 percentage points from U.K. 2021 GDP growth, to take roughly 1 percentage point from Eurozone and Japanese growth, and to trim Canadian growth by a few tenths of a percent. On the other hand, the U.S. economic outlook may be upgraded by as much as a percentage point.

To be clear, all of these countries should still enjoy growth rates of between 2.5% and 5.0% for 2021 – good by any measure. But most are moderately reduced relative to a quarter ago.

In most cases, our new forecasts are set to remain above the consensus. This is for three central reasons:

1. The winning forecasting strategy throughout the pandemic and across most nations has been to present an above-consensus view. The resilience of humankind is not to be underestimated.

2. We don’t expect much enduring scarring from the pandemic and can even see pockets of potential pent-up demand.

3. The vaccines are total game-changers. Their bumpy beginnings should not be misinterpreted as a broader failure.

U.S. politics and fiscal

President Trump vacated the White House on schedule, though not before being impeached for an unprecedented second time by the House of Representatives. The coming weeks will bring the impeachment trial to the Senate, which will decide whether to convict him. Even with some Republican representatives defecting to support the Democratic initiative, it is highly unlikely that the supermajority of 67 votes out of 100 is achieved.

One point of uncertainty is whether the Senate might decide to ban Trump from holding future office. This might be a consequential decision given rumblings that Trump is considering contesting the 2024 election. While such a ban requires only a bare majority of votes – achievable by the Democrat-led Senate – it would be peculiar and unprecedented to find the President not guilty via the impeachment trial and then to impose a punishment. Even if technically feasible, any such effort by the Democrats might well backfire by creating a deep resentment among Trump supporters that bubbles forth in some other way.

Despite speculation to the contrary, Trump did not pre-emptively pardon himself of any crimes – perhaps because to do so would have required first owning up to any crimes. As such, the next few years are likely to feature a variety of ongoing legal investigations into his past conduct.

Executive orders

President Biden was inaugurated on January 20. He conveyed a message that emphasized hope, unity and light – in each case, drawing an explicit contrast to his predecessor. The president then got to work, signing a number of executive orders. Among them, the U.S. has re-entered the Paris Agreement on climate change, re-engaged with the World Health Organization and cancelled the Keystone XL pipeline.

On this last front, the development is an undeniable negative for Canada’s oil sector, which had counted on exporting up to 830,000 barrels per day along the corridor once it was completed. The pipeline had been cancelled under Obama, revived under Trump and is now cancelled again. Perhaps that leaves open the slim chance that it could yet be revived under some future president. To the extent that pipelines can transport oil at around $10 per barrel more cheaply than the rail equivalent, this argues the country is losing roughly $3 billion in profits per year from the cancellation.

Planned legislation

Amid various swirling ideas, the Biden administration is planning to push for an immigration reform bill that would create a path to citizenship for illegal immigrants. There is also now a plan for a permanent child care benefit of $250 per month per child. It also appears that he will engage in a “Buy American” push, though it seems to us that practically every president has done that for the past 20 years. It is unclear how this would differ from the predecessors.

Not all of these will come to fruition given the slim Democrat majority in the Senate.

Of course, the biggest and most economically relevant item in the near term is the Biden administration’s plan for yet more fiscal stimulus. The ink is barely dry on the $900B stimulus package approved on December 27, and now the new administration seeks a further $1.9 trillion package. We suspect a scaled-down package will eventually be approved, worth perhaps another trillion dollars.

The main thrust is to provide a substantial $2,000 per American, and this is a big reason why the U.S. economy appears set to enjoy such a good 2021. That said, lump-sum payments are notoriously inefficient from a fiscal multiplier perspective, and the U.S. public debt will leap even higher.

Anti-trust musings

It is widely recognized that, for several decades, the biggest companies have captured an ever-rising fraction of the economic pie. This is most visible in the tech sector, but not entirely exclusive to it.

This rising firm concentration is a tricky subject for investors. On the one hand, we actively seek out big profit margins – often a feature of monopolies and oligopolies. But we also want highly innovative, fast-growing companies – which are less frequently associated with dominant firms that often become complacent. While rising firm-level concentration has undeniably increased stock market earnings in the short run, it may well be eroding them over the long run.

In theory, monopolies are bad from a societal perspective. Such companies tend to charge too much money for their products and they tend to innovate less. However, the ascent of many tech giants over the past few decades, many with few natural competitors, has challenged those assumptions (see next graphic).

In a nutshell, tech firms tend to be highly innovative and many appear to charge no price at all for their services (such as with Facebook and Google), upending the usual critique of monopolies. Furthermore, many appear to be “natural” monopolies rather than ones contrived by wheeling and dealing.

As of 01/14/2021. Source: RBC GAM

From a political standpoint, Europe has taken a traditional stance: monopolies are bad, no matter the special considerations. In turn, Europe has levied hefty fines on the (mostly American) tech giants. The U.S. approach, in contrast, has tended to be more nuanced, recognizing that these monopolies do not precisely fit into the traditional mold (see next graphic).

However, U.S. politicians are now becoming more aggressive in their own anti-trust investigations. This began under Trump, but appears set to continue under Biden (although it was not a major plank of his campaign). In some ways, anti-trust efforts over the past two years have been more aggressive than over the past two decades combined.

As at 01/19/2021. Source: RBC GAM

In the end, U.S. regulators are unlikely to tear their tech giants apart. This is in part because tech monopolies are undeniably somewhat different than in other sectors, and perhaps in part because that would give the advantage to China’s tech giants. That said, Chinese regulators appear to be turning an increasingly skeptical eye toward their own ever-expanding tech firms.

U.S. anti-trust pressures are nevertheless rising significantly after a long lull. A series of middling fixes are the most probable solution (see discussion in next graphic). For example:

• Future merger proposals may be viewed rather more skeptically.
• Such companies may be forced to pay more taxes.
• Customer privacy will be taken more seriously.
• Companies may be prevented from highlighting their own products over the competition.

As at 01/19/2021. Source: RBC GAM

-With contributions from Vivien Lee, Kiki Oyerinde and Sean Swift