Overview

The past few weeks have brought a mix of positives and negatives, in roughly equal proportion.

Positives:

• Some of the U.S. states most adversely affected by COVID-19 may be starting to stabilize or even improve their infection numbers.
• Partially as a result of this, we are starting to get a sense for what economic activities are and are not possible.
• We are in the process of upgrading our economic outlook for most developed countries (though not the U.S.).
• Housing markets have proven surprisingly resilient throughout the pandemic.
• Vaccine news remains incrementally positive.

Negatives:

• COVID-19 appears to be slightly intensifying once more in many (non-U.S.) developed nations. Meanwhile, it remains very much untamed across a significant number of emerging markets.
• We have downgraded our U.S. growth forecast.
• Relatedly, the U.S. economy appears to be stalling.
• While U.S. state-level infection figures are improving in several prominent states, the fatality figures continue to deteriorate.

Virus developments

COVID-19 continues to spread ever more freely, with 250,000 to 300,000 new infections per day now recorded on a global basis. Cumulatively, there have now been 16 million infections since the onset of the pandemic (see next chart).

Spread of COVID-19 globally

Note: As of 07/27/2020. Spike on 02/13/2020 due to methodology change. Source: ECDC, Macrobond, RBC GAM

While the number of global daily fatalities has not exceeded the April highs, it appears to be rising slightly (see next chart).

Spread of COVID-19 globally, cases and deaths

Note: As of 07/27/2020. 7-day moving average of cases & deaths indexed to 100. Source: ECDC, Macrobond, RBC GAM

U.S. peaking?

The U.S. remains the country most affected by COVID-19, with around 70,000 new infections reported each day. Fortunately, there is tentative evidence that the U.S. infection rate may be starting to peak (see next chart).

Spread of COVID-19 in the U.S.

Note: As of 07/27/2020. Source: ECDC, Macrobond, RBC GAM

This is far from saying that the country’s problems are over. The peak is far from concrete and the majority of states (36) still suffer a transmission rate that runs above the crucial threshold of one (see next chart).

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

Note: As of 07/26/2020. 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 1 suggests increasing new daily cases. Includes Washington, D.C.  Source: The COVID Tracking Project, Macrobond, RBC GAM

But several fascinating trends are now visible beneath the surface. Many of the most troubled states now appear to be enjoying a modestly declining infection rate. Crucially, this includes Florida and Texas (see next two slides). Other states with a declining infection trend include Alabama, North Carolina and South Carolina. This is a critical development, as it was previously unclear whether these jurisdictions had the will or had taken sufficient actions to course-correct. It would appear that COVID-19 is starting to be de-politicized as Republican leadership is beginning to take the virus more seriously, to the point of materially scaling back the Republican National Convention this summer.

State of Florida

Note: As of 07/26/2020. 7-day moving average of daily new cases used as the trendline. Positive rate calculated as 3-day moving average of new cases/new tests. Source: The COVID Tracking Project, Macrobond, RBC GAM

State of Texas

Note: As of 07/26/2020. 7-day moving average of daily new cases used as trendline. Positive rate calculated as 3-day moving average of new cases/new tests. Source: The COVID Tracking Project, Macrobond, RBC GAM

A number of other states are managing to tentatively stabilize their infection figures, including California, Georgia, Ohio and Washington State.

Conversely, several states that had previously been doing a good job of controlling the virus are now beginning to suffer a rising infection rate, albeit to only a slight degree and at low absolute levels. These include Illinois, Massachusetts and New Jersey (see next chart). It would appear that these states have become complacent and re-opened slightly too much. Fortunately, New York State has so far avoided this fate.

State of New Jersey

Note: As of 07/26/2020. 7-day moving average of daily new cases used as a trendline. Source: The COVID Tracking Project, Macrobond, RBC GAM

Emerging markets continue to struggle

Emerging market nations are collectively responsible for around three-quarters of the daily COVID-19 infections. In fairness, they represent around 85% of the world’s population and so this is not as extreme as it first looks (see next chart).

COVID-19 hitting emerging market countries now

Note: As of 07/27/2020. Source: ECDC, Macrobond, RBC GAM

Of these, India remains among the most problematic, though it may be starting to stabilize (see next chart).

Spread of COVID-19 in India

Note: As of 07/27/2020. Source: ECDC, Macrobond, RBC GAM

Latin America remains a hotbed for COVID-19.  Brazil is seemingly on an uptrend again after a period of stability (see next chart).

Spread of COVID-19 in Brazil

Note: As of 07/27/2020. Source: ECDC, Macrobond, RBC GAM

Other developed countries getting worse?

A new source of concern is that a significant swath of the developed world that had seemingly wrestled COVID-19 under control is now experiencing the start of another wave. Few countries enjoy a transmission rate below one any longer – an observation we have been making for several weeks.

Spain is now suffering a renewed outbreak, with around 2,000 new cases per day after enjoying fewer than 300 per day in June. Mercifully, this pales in comparison to the 9,000 daily cases recorded at the country’s worst, but it is nevertheless a significant deterioration (see next chart). The U.K. is now insisting on a two-week quarantine for visitors from Spain, and the country is responding by shutting down bars in targeted areas.

Spread of COVID-19 in Spain

Note: As of 07/27/2020. Source: ECDC, Macrobond, RBC GAM

France is also now registering more than 1,000 cases per day after a lengthy period below that level (see next chart). Several other European countries are experiencing a similar phenomenon, albeit to a less pronounced degree.

Spread of COVID-19 in France

Note: As of 07/27/2020. Source: ECDC, Macrobond, RBC GAM

Outside of Europe, the upward trend is similar. After practically eradicating the virus, Australia is now experiencing hundreds of new cases per day in the Melbourne area. That said, the city is now midway through a six-week lockdown and so the odds are good that the outbreak will be controlled shortly. 

Hong Kong is now struggling with more than 100 cases per day. In response, the country has closed gyms, bars and restaurants. Japan is now tallying around 250 cases per day, with most linked to Tokyo’s night entertainment districts. Israel is experiencing a significantly worse outbreak than it did in March through May. The U.K. looks to be enjoying a roughly flat trajectory, though there may be a slight upward tilt.

For its part, Canada has maintained a fairly steady keel, with a bump higher in mid-July seemingly subsequently unwound. Still, there is at least a slight upward tendency to COVID-19 infections visible relative to late June (see next chart).

Spread of COVID-19 in Canada

Note: As of 07/27/2020. Source: ECDC, Macrobond, RBC GAM

A recent study of Canadian immunity found that less than 1% of Canadians had been infected by COVID-19. This is roughly eight times higher than the official rate – a consistent finding with other such efforts around the world, and confirming that the majority of the infected are either asymptomatic or minimally symptomatic. But Canada’s rate is well short of such regions as New York City, where 10% to 20% appear to have been infected. It is also massively short of the 70% infection rate needed to achieve herd immunity (though we discuss some complications around this figure later).

With regard to the rising infection count across much of the developed world, it should be noted that we do not expect these countries to follow the unfortunate U.S. trajectory from the past month. Whereas U.S. policymakers dawdled, governments elsewhere seem much more likely to do the right thing with time to spare.  

Controlling the second wave

As we grapple with evidence that U.S. infections could now be peaking at the same time that much of the rest of the developed world is seeing at least a slight increase in infections, we can begin to comment on what is and isn’t possible from an economic standpoint.

The common theme appears to revolve around bars, indoor restaurants and perhaps gyms. The U.S. was the first to re-open these institutions, and quickly ran into trouble. It has now largely backed away by closing or significantly limiting these establishments, and the virus count is beginning to stabilize. Meanwhile, other developed countries tamed the virus without re-opening such institutions. These countries are now starting to suffer a rising infection count as they re-open.

Why are these institutions so problematic?

• All are predominantly indoor locations where people spend lengthy periods of time in the close company of others. 
• Bars would appear to be especially challenging to manage, to the extent their central purposes are to socialize and reduce one’s mental acuity via alcohol. The environment also frequently features music, which results in people conversing loudly with one another in close proximity. 
• The consumption of food and beverages largely precludes the wearing of masks. 

All of this makes social distancing practically impossible.

If this thesis is correct, the good news is that countries can get back on track to a declining virus count by shuttering or limiting a few sectors, as opposed to closing the whole economy back down. It is of course small consolation to the proprietors and patrons of such establishments. 

While it would seem that COVID-19 can be increasingly fine-tuned via the manipulation of a small number of sectors, the situation isn’t quite as precise as it seems. The fall and winter may yet bring more adverse conditions for controlling the virus from a temperature and humidity perspective. And the opening of schools – while arguably a fairly low risk proposition for regions without a high infection rate – will nevertheless incrementally add to the rate of transmission. As such, policymakers may find that they may have to limit other sectors to a greater extent as these other considerations come into play. Of course, at the same time, businesses are getting ever better at delivering their goods and services safely. That could continue to provide a welcome offset.

Herd immunity math

Herd immunity can be defined as the point at which a sufficient fraction of the population had been infected such that the virus would then struggle to spread freely. We have generally argued that pursuing herd immunity is undesirable in the case of COVID-19 due to its high natural transmission rate (or reproduction number, as it is technically known) of three. A shocking 230 million Americans would first have to get sick (70% of the population) with around 1.7 million dying (0.5% of the population). It would be the same (at least on a percent of the population basis) for the rest of the world. This is hardly an appetizing proposition. 

That is why we and policymakers have focused on other solutions: eradicating or at least flattening the curve via social distancing and then ultimately eliminating the virus via a vaccine. A vaccine, it should be noted, is a form of herd immunity but with the massive difference that people don’t have to get sick or die to achieve the necessary level of societal immunity.

However, some interesting math has recently come to light that at least challenges an aspect of this viewpoint. Herd immunity could be closer for some jurisdictions than previously imagined. While the natural transmission rate of COVID-19 may be something like three, its current transmission rate in many developed countries appears to be only slightly greater than 1. So long as current social distancing measures are maintained, it is arguably this lower transmission rate that is most relevant in determining when the virus may struggle to spread. 

With a transmission rate of 1.2, herd immunity would require just 17% of the population to be infected rather than 70%. Granted, this is well beyond current infection rates almost everywhere, but not to an insurmountable extent. Meanwhile, if one were able to maintain the transmission rate just above one (say, at 1.02), you’d only need 2% of the population to be infected before herd immunity would set in and the virus would quickly disappear. The U.S. isn’t all that far from that infection rate.

Granted, this is a somewhat theoretical exercise and subject to various complications:

1. If one can get the virus down to a transmission rate 1.02, why not implement slightly stricter protocols and get it properly below 1 and on the path to clear eradication, instead of crossing one’s fingers that this funny math works? 
2. This unorthodox herd immunity strategy only works so long as more of the economy isn’t opened up over time. It would be very tempting to do precisely that as the virus starts to vanish.

But the basic idea is that at a fixed level of social distancing, the transmission rate should gradually fall by itself as the fraction of the population that has been infected rises and herd immunity nears. Thus, for example, we shouldn’t actually say that it is impossible to have bars open while controlling the virus, but rather that it is difficult at the present level of herd infection. When more of the population has been infected, more will be possible.

Virus science

There are a number of scientific developments to share.

Compliance

A recent Australian study reached the disturbing conclusion that: 

• Ninety percent of the people testing positive for COVID-19 did not self-isolate between developing symptoms and being tested, and 
• More than half did not self-isolate after being tested while awaiting their results. 

As such, while we are right to track which jurisdictions mandate masks and which do not, and which are allowing their bars to open, it is no less important to understand how well the public is complying with social distancing decrees. This information is generally hard to secure. 

Perhaps there’s good news here. If transmission rates are only slightly above one even when most people are blatantly disregarding what is arguably the most important tenet – for sick people to stay away from others -- a relatively modest shift in this behavior could greatly limit the spread of the disease. Achieving this change may be another matter.

Surfaces

It is generally agreed that the main risk of being infected by COVID-19 is via inhalation of particles in the air. But there has also been concern about touching contaminated objects. A new study argues that the theoretical risk of getting COVID-19 by touching a contaminated object is quite low. Prior studies that reached the opposite conclusion used an unrealistic concentration of the virus. A recent investigation of surfaces in China found a transmittable amount of virus only in high-risk places like hospital bathrooms and hospital change rooms as opposed to elsewhere.

Virus risk

Studies continue to find that the fatality rate of those infected by COVID-19 varies enormously depending on several characteristics. Being old and having other chronic illnesses appear to greatly worsen the prognosis.

This is widely appreciated. But are some factors more important than others? The answer appears to be a firm “yes.” Age is easily the most important consideration, with patients in their 80s dying at 20 times the rate of those in their 50s.

In comparison, being obese roughly doubles the risk of death, as does being diabetic. Diseases of the liver, kidney and heart also had some impact. Interestingly, asthma was not associated with a higher likelihood of death.

Naturally, most elderly people possess a variety of health conditions, making for the worst outcomes of all. Nevertheless, the extent to which deaths are associated with chronic illnesses is startling: Massachusetts reported 4,071 deaths of patients with chronic conditions versus 73 without. Italian data uncovered only around 150 cases out of 3,000 deaths who did not have a chronic disease.

Vaccine delivery

The consensus forecast is becoming more optimistic regarding when the U.S. will secure enough vaccines to inoculate 25 million people. The fraction of participants voting for a relatively near-term resolution – by the end of the first quarter of 2021 – roughly doubled over the past two weeks, to 38%.

This shift in views is likely motivated by a steady stream of positive results from vaccine developers. These include:

• The Moderna vaccine. This is reported to have produced the desired antibodies in all patients tested.
• The Oxford AstraZeneca vaccine. This is generating antibodies at a rate that is three times that of a recovered patient and T-cells, as hoped. 
• Two further vaccine candidates from Pfizer. These have now received “fast track” status from the U.S. based on tentatively positive results. 
• Another 14 vaccine candidates are in clinical trials, with a further 180-some vaccines under development globally.

There remain important questions about how long immunity will last from any such vaccine, with some concern it may only be a few months.

Other drugs

What about the non-vaccine drugs that have been promoted as a means of reducing the severity of COVID-19 infections? The initially touted hydroxychloroquine appears not to deliver positive results. Remdesivir is reported to reduce the risk of death in severely ill patients by 62%, but is quite expensive and limited in supply. Dexamethasone is reported to reduce the risk of death for those on ventilators by a third, and is abundantly available and very cheap. Finally, blood thinners and oxygen have been increasingly used by health care professionals to treat COVID-19, while ventilators are increasingly only used as a last resort. 

Updated forecasts

We are in the process of updating our economic forecasts. The broad contours are already clear. 

The U.S. outlook has been downgraded, as detailed two weeks ago. Instead of a 7.1% decline in 2020 GDP, the U.S. is now forecast to experience an 8.0% drop. The sharper decline is primarily due to the country’s second bout with the virus. Also, our real-time indicators suggest a slight retreat in activity in July. We assume the economy begins to stabilize in August and then starts to edge forward thereafter. But it remains behind schedule relative to most other countries. Instead of half of the economic decline being recovered in July, it takes until November to reach that point. 

The second half of the recovery is then a much slower affair, taking until the middle of 2022. Finally, the economy eliminates all remaining economic slack by the start of 2024. This is still notably faster than after the global financial crisis, but hardly “fast.” In all of this, we assume the U.S. avoids any severe fiscal cliffs. We’ll discuss the one currently looming later in this memo.

In contrast to the U.S., we have upgraded the outlook for most other countries. This more optimistic vision is the result of several things: 

• a slightly shallower than expected economic trough
• a more robust than expected rebound to-date
• less concern about a large second wave of infections. 

As a result, Canada is now forecast to decline by “just” 6.8% in 2020 – a roughly two percentage point improvement. The upgrades to the Eurozone (to -6.6%) and the U.K. (to -8.7%) are even more notable.

That said, as with the U.S., we believe all countries will experience a slower recovery in subsequent years than previously imagined. Furthermore, we somewhat discount the head start these other countries currently enjoy, as there are limits to how much economies can recover until a vaccine has been developed. Thus, while, Canada has already restored more than half of its lost economic output, we don’t have the country returning to its prior peak until May 2022 – barely ahead of the U.S. – and the full return to normal doesn’t happen until the summer of 2023. Aligning with all of this, while the consensus growth forecast for 2020 has improved for most countries, it has weakened for 2021: others also believe the recovery will take somewhat longer to complete.

Economic developments

Real-time data

A first comment: our supply of real-time data is starting to narrow as some providers cease to conduct high-frequency surveys and others erect paywalls. We are working around these problems.

Broadly speaking, the real-time data we do have continues to argue that the U.S. economy is no longer growing (see next chart). Card-based spending data is going roughly sideways, with spending on leisure items – airlines, lodging, entertainment, restaurants and bars – down slightly versus a few weeks ago. 

U.S. economic activity levelling

Note: As of 07/18/2020. Economic Activity Index is the average of 10 high-frequency economic data series measuring the percentage change versus pre-COVID (year-over-year or versus a defined period before COVID-19 outbreak). Source: Bank of Goldman Sachs, OpenTable, Macrobond, RBC GAM

U.S. mobility data has stabilized or even retreated slightly, in contrast to most other countries that have continued to rise (see next chart).

Severity of lockdown varies by country

Note: Based on latest data available of 07/21/2020. Deviation from baseline, normalised to U.S.  Source: Google, University of Oxford, Apple, Macrobond, RBC GAM

The New York Fed’s weekly economic activity index also argues that the U.S. economy has ceased to grow (see next chart).

New York Fed Weekly Economic Index

Note: For the week ended 07/18/2020. Source: Macrobond, RBC GAM

U.S. hours-worked data argues there has been an outright retreat in activity, even after controlling for the 4^th of July holiday (see next chart).

Percentage change of hours worked by hourly workers in the U.S.

Note: As of 07/18/2020. Impact compares hours worked in a day vs. median for the same day of the week in January, 2020. Source: Homebase, Macrobond, RBC GAM

U.S. initial jobless claims for the latest week deteriorated slightly, from 1.3 million to 1.4 million. This is the first time the labour market indicator has worsened since early March. In fairness, however, continuing jobless claims continued to improve (albeit for the prior week).

This coming Thursday will then formally close out the first half of 2020 with the release of Q2 GDP. The consensus outlook is for a 35% annualized decline. Our own forecast is similar though slightly worse, at -39% annualized.

International contrast

Further to our aforementioned forecast revisions that downgraded the U.S. and upgraded the rest of the world, purchasing manager indices (PMIs) provide some support for this shift. The Eurozone composite PMI for July has now risen from 48.5 to a strong 54.8. The increase in the U.K. was even better, from 47.7 to 57.1. In contrast, the U.S. bounce was merely from 47.9 to 50.0. 

Worker shortage / job shortage

The labour market remains not just extremely weak but highly unusual. There is obviously a severe shortage of jobs on an aggregate basis, but the opposite situation also exists – there is a significant shortage of workers in some sectors. In the U.S., there are an unusual number of openings in health care and logistics (the latter consisting of roles in transportation, warehousing and delivery). Unemployed people are naturally transitioning into these sectors, but such shifts are rarely seamless and there isn’t enough room for everyone. 

China’s recovery

Chinese second-quarter GDP has now been released and recorded a remarkable 3% YoY (year over year) increase. Keep in mind the country grappled with COVID-19 earlier than everyone else. Q2 was a recovery quarter for China, in contrast to other countries where it was the trough quarter. Still, the fact that the Chinese economy is larger than a year ago is remarkable. Granted, the economy would normally be perhaps 6% larger than the year before, so something has been lost. But not a great deal.

One wonders whether the data is fully reflecting the situation on the ground, given earlier observations that the labour market numbers seemed much rosier than anecdotal information suggested. But the fact remains that China has mounted a most impressive recovery even if one refers instead to more granular data. 

It is probably not reasonable to expect other countries to manage so complete a recovery over the same timeframe. Quarantines elsewhere have been less thorough. Developed world economies are more reliant on such sectors as tourism and entertainment that will not be able to fully recover in the near term.

Housing rally

Housing markets continue to impress, proving more resilient than initially expected. It was not unreasonable to look for considerable weakness, when one factored in the following:

• massive loss of jobs
• young people moving back home
• declining immigration
• fewer international students
• fewer university students away from home and even a steep drop in Airbnb activity.

And yet U.S. existing home sales are now higher than they have ever been before. The National Association of Home Builders (NAHB) housing market index has soared to an impressive 72, far above the 30 low. Admittedly, housing starts remain well below normal, but even this is bouncing by nearly 20% per month. 

Canada has had a similar experience, despite greater underlying vulnerabilities. For example: 

• The country’s home prices are now 12% higher than a year ago.
• Resale activity is also up on the year. 
• Housing starts remain in the realm of normal.

But for all of this happy news, the final page has not yet been written on the housing market. As government support fades, delinquencies and foreclosures may rise, resulting in greater weakness later. Still, we only look for a modest decline rather than a steep drop.

Inflation fine-tuning

Inflation has naturally fallen due to the economic weakness associated with COVID-19, but not quite as much as the standard measures suggest. Many have criticized the fact that the Consumer Price Index (CPI) uses a fixed basket of goods and services. This means that changing spending habits are not immediately captured in the index. In the present context, that has significant ramifications since spending habits have changed substantially.

Fortunately, Statistics Canada has now come out with a new measure called the analytical price index. It uses a more dynamic set of weights, such that the food and shelter weights have increased whereas the clothing, footwear, recreation, education and reading weights have declined.

Just how big is the distortion? Not very. Whereas Canadian CPI was officially down 0.4% relative to a year ago as of May, the adjusted analytical measure argues the true decline is 0.1%. In turn, the distortion is a mere 0.3 percentage points. This is relevant to a bond trader, but probably not to the average person.

What about the accuracy of the numbers? Might they be less precise than normal? In the U.S., the statistical agency has discontinued its process of physically visiting stores to gather pricing information. It is continuing with phone and online research, but even here it acknowledges the response rate has declined moderately. In turn, we should probably have less confidence in the inflation numbers than usual right now. But it is not clear whether they would otherwise be higher or lower.

A final thought from us: we continue to believe there is some upside risk to inflation over the medium run, though this is not yet visible in the data.

Stimulus update

Governments remain active in supporting economies.

Fiscal

The most pressing fiscal issue is arguably in the U.S., where the primary engine of support for U.S. unemployed workers is set to expire at the end of July. A variety of proposals continue to be made and we ultimately expect a resolution that avoids a serious fiscal cliff. But time is admittedly running short and a split Congress undeniably presents a challenge. The likely solution will be a slightly less generous support program, perhaps combined with some inducement to return to work.

Meanwhile, the European Union recently reached a historic agreement over the formation of a recovery fund. The significance is twofold: 

1. The program will be funded via a form of debt mutualization that represents a small step forward in the integration of the EU. 
2. More than half of the 750 billion euros committed will come in the form of grants, making for quite a large step forward in creating something like transfer payments between the various European nations. 

While the sum of money involved is enormous, it may take the better part of a year to be begin disbursing. Still, the risk of the EU or Eurozone crumbling even as the U.K. disentangles itself from the bloc is arguably lower than it was a few months ago, despite the stresses of the pandemic.

Other countries continue to tweak and generally broaden their programs. Canada is expanding access to its wage subsidy program. The U.K. and Germany are both expanding their stimulus programs.

Monetary policy

The decision by the U.S. Federal Reserve this week is unlikely to yield a major change, though the Fed is not entirely complacent. Recent speakers have acknowledged the slowing economy. They are increasingly expected to broaden their stimulus at some point in the future, but likely not until September. For now, the most important solutions in the U.S. are medical and behavioral, not monetary.

The Bank of Canada’s latest decision yielded no major change either, beyond a pledge to keep the policy rate at its current rock-bottom level until the economy is back to full capacity. Based on the Bank’s own economic projections, that may not be until 2023 or later. Notably, the Bank of Canada’s new economic forecasts look virtually identical to our own, with an 8.1% decline for the U.S. and a 6.8% drop for Canada. 

More recently, the Bank of Canada appears to be shifting its bond purchases further out the curve. It has not had to do as much corporate bond buying as was initially expected due to the robustness of the market.

Geopolitical tensions

Geopolitical tensions remain quite high, mostly revolving around China and the U.S. This is in large part a function of U.S. antagonism toward China. But it is also significantly due to China’s more assertive global stance.

The two countries have of course been embroiled in a multi-year battle of tariffs and slights, with the virus itself also something of a China-U.S. affair to the extent the virus originated in China and has now spread most problematically within the U.S.

Recent developments include:

• China has now closed the U.S. Chengdu consulate, in response to the U.S. closure of China’s Houston consulate.
• China has imposed sanctions on U.S. weapons maker Lockheed Martin after the U.S. approved the sale of missiles to Taiwan.
• Earlier, the U.S. put sanctions on some Chinese officials over alleged human rights violations.
• China’s new national security law in Hong Kong has also been a strain on relations, with the U.S. now reducing Hong Kong’s special privileges in response.
• The Phase One trade deal between the U.S. and China at the turn of the year has not progressed toward a Phase Two deal as had originally been hoped. 

For all of this, President Trump apparently does not want to increase tensions with China between now and the election. It is far from clear he has succeeded in recent weeks. However, election considerations could put a cap on the extent to which he targets China in the coming months. Then again, there’s nothing like a common enemy to rally political support before an election.

On the subject of the U.S. election, the trajectory of U.S.-China relations would be somewhat different and presumably much less tariff-heavy if the Democrats were to win the White House. But it would not be anything like pre-2016 relations.

Not just a U.S. story

While the U.S. is indeed a key antagonist in this geopolitical skirmish, it is not alone in its actions. China has been aggressive in its territorial claims over the East China Sea and South China Sea. It has also recently skirmished with India over disputed territory. In response, India has banned a variety of popular Chinese apps, including TikTok. 

Recently, the U.K. opted out of purchasing Huawei’s 5G technology, joining a host of other developed countries.

Other trade items

The USMCA trade deal between the U.S., Mexico and Canada went into effect on July 1. The U.S. has already threatened Canada over enforcement of dairy and aluminum rules, though no new tariffs seem likely.

Not long ago, the U.S. was reported to be considering tariffs on the EU and U.K., though little has been said on the subject lately and we are dubious.

Geopolitical bottom line

Our geopolitical thinking reaches several key conclusions: 

1. It is arguably inevitable that the U.S. and China continue to experience frictions now that the world has transitioned to a multipolar era. These will likely last for years if not decades.
2. COVID-19 has arguably distracted both parties and sufficiently weakened the U.S. economy such that significant additional tariffs seem unlikely during this presidential term.
3. To the extent China is now the main “villain” from a U.S. perspective, other countries probably now have less to fear from the U.S. in terms of further protectionist actions.
4. Rising geopolitical tensions are bad for economic growth in the form of shifting supply chains and a diminished flow of goods, services, money and people. 
5. We think it is unlikely that U.S.-China antagonism will escalate to outright war.

-With contributions from Vivien Lee and Kiki Oyerinde