Monthly webcast

• Our latest economic webcast, entitled “Second wave concerns,” is now available. It was recorded in late June.

Summary

The COVID-19 situation remains challenging. There are several prominent negatives:

• The global daily infection rate continues to mount, with U.S. numbers also deteriorating.
• There is now tentative evidence that the U.S. economy may be shrinking again as the recoil begins due to a rising number of infections.
• Second-round economic damage is mounting: although unemployment is falling, the number of people who are unemployed for non-temporary reasons is rising.
• The emerging market infection figures are continuing to worsen.

To be sure, there are also important positives:

• The economic recovery continues across a significant swath of the developed world.
• The lives of many people are significantly less restricted than they were a few months ago.
• There is now mounting evidence that the most affected U.S. states (and their occupants) are beginning to respond to their new challenge.
• Scientists continue to push hard for scientific solutions.

Virus developments

COVID-19 continues to broaden its reach around the world, with several recent days recording more than 200,000 new infections. While the virus’ transmission rate has declined admirably since March, it is enormously frustrating that it remains a hair higher than the critical threshold of one that separates a virus in decline from one that continues to expand (see first chart). More than 11 million people have now been officially infected by the virus, though the true underlying number is thought to be perhaps 10 times higher.

Global transmission rate hovering around key threshold of one

Note: As of 07/06/2020. Transmission rate calculated as 7-day change of underlying 5-day moving average of new daily cases. Source: ECDC, Macrobond, RBC GAM

A key silver lining remains that the number of global deaths remains roughly flat. To the extent this is the ultimate test of the carnage inflicted by COVID-19, one can argue that the situation remains less dire than it was in April. However, there remains the real risk that the rising infection numbers eventually force the number of fatalities higher, too. At a minimum, the death rate has ceased to decline (see next chart).

Spread of COVID-19 globally, cases and deaths

Note: As of 07/06/2020. 7-day moving average of cases & deaths indexed to 100. Source: ECDC, Macrobond, RBC GAM

The disagreement between the infection and death numbers seems best explained by a combination of three factors:

• Rising testing rates are surfacing a larger fraction of the true number of infected people. As such, infections are likely not rising quite as quickly as they appear to be.
• A younger cohort is now getting infected. To the extent COVID-19 discriminates to an extreme degree based on age, this has been helpful.
• The quality of medical care continues to improve, including the recent discovery of a drug that cuts the incidence of death for those on ventilators by a third.

Emerging market countries continue to suffer significant growth in their caseload, though developed countries have now once again hooked higher as well (see next chart). Brazil remains the most troubled country, with around 40,000 cases per day. Fortunately, for the moment, its daily count appears to have stabilized. India, conversely, continues to suffer a gradually rising pace. It is now recording approximately 25,000 new infections per day. Mexico also continues to worsen.

COVID-19 hitting emerging market countries now

Note: As of 07/05/2020. DM aggregates case count from France, Germany, Italy, Spain, U.K. and U.S., and represents 35.6% of global cases. EM aggregates case count from Brazil, India, Iran, Peru, Russia, and Turkey and represents 32.5% of global cases.

Meanwhile, in the developed world, the U.S. remains the main problem. The country is now recording over 50,000 new cases per day on a regular basis. By way of comparison, the U.S. was managing “just” 20,000 or so new cases per day as recently as mid-June (see next chart). The U.S. has now tallied nearly 3 million total cases, or more than a quarter of the global tally.

Spread of COVID-19 in the U.S.

Note: As of 07/06/2020. Source: ECDC, Macrobond, RBC GAM

The story remains quite varied at the state level. Some states have enjoyed great success over the past several months. Others, conversely, are struggling mightily, including:

• Arizona (roughly 5,000 cases per day)
• Florida (10,000 – see chart below)
• Texas (8,000 – see subsequent chart).

The balance has lately swung in a negative direction. A shocking 45 out of 50 states (plus Washington DC) are now experiencing a transmission rate that is greater than one.

State of Florida

Note: As of 07/05/2020. 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

State of Texas

Note: As of 07/05/2020. 7-day moving average of daily new cases used as trendline. Source: The COVID Tracking Project, Macrobond, RBC GAM

Rising testing no doubt explains some fraction of the increase in these states. But it hardly explains the bulk of the trend. As depicted for Texas in the chart above, hospitalization rates are also rising – perhaps the clearest measure of distress. Moreover, the positive test rate is also extremely high (refer back to the Florida chart). This suggests the amount of testing is actually falling as a fraction of the true number of cases, as opposed to claims of the reverse. In Arizona, the positive test rate is a whopping 25%. For context, most of the developed world has a positive rate of less than 1% on its tests.

Some states that had previously been on a happy trajectory are now beginning to deteriorate anew, including Michigan and Washington State.

Interestingly, there is little evidence that the widespread protests from several weeks ago have translated into the surge of cases. It would appear that outdoor activities carry a low risk.

Elsewhere, Canada and the U.K. continue to report fairly low numbers, if no longer the declining trend from prior months.

Meanwhile, Japan – long a success story despite limited testing and quarantining – appears to be encountering turbulence. While the absolute number of new infections in the country continues to be very low, it is now indisputably rising (see next chart). We still think the country’s embrace of masks is commendable and an important factor in its relative success, but Japan now needs to be watched quite closely.

Spread of COVID-19 in Japan

Note: As of 07/06/2020. Source: ECDC, Macrobond, RBC GAM

Economic developments

After two months of nearly uniformly positive economic data, the story is becoming more mixed again. There are still positive figures – highlighted next – but also increasing evidence that the U.S. economy is starting to sputter.

The U.S. economic recovery

We start with the so-called “doctor” indicators, so named because they are viewed as sufficiently forward-looking that they merit a doctorate in economics. All three are favourable. The Korean stock price index, copper prices and the Baltic dry freight index have all recovered the bulk of their earlier losses. These are considered relevant because:

• The Korean economy is highly globalized and quite manufacturing oriented.
• Copper is a key input into industrial activity.
• The Baltic index serves as a (flawed) proxy for global trade.

While now quite backward looking, it is notable that the two U.S. GDP models maintained by the U.S. Federal Reserve are both in the process of significantly upgrading their estimate for the second quarter of the year. To be sure, the number will still be profoundly negative, but somewhat less than initially imagined.

The twin U.S. ISM numbers for June are now both above 50, with the manufacturing index up to 52.6 and the services measure up to a big 57.1 thanks to a 12 point gain. Interpretation of these remains blurry as some respondents appear to answer in the context of whether they are growing or not, whereas others answers in the context of whether business is “good”. This distinction is crucial, as we suspect most were enjoying significant growth but still depressed overall levels of activity.

The U.S. June job numbers managed to pleasantly surprise expectations. The U.S. added 4.8 million net jobs versus expectations for a 3.2 million increase. On top of the 2.7 million jobs added in May, that means a cumulative 7.4 million jobs have been restored. That’s around a third of the 21 million jobs lost in March and April. If the current rate of recovery were sustained, that would imply a complete return to labour market normality over the next 3 to 4 months.

However, more realistically, such advances become incrementally more challenging with time. Indeed, continuing jobless claims make the argument that the rate of improvement since mid-June has been only slight.

On the back of the latest job creation, the official unemployment rate fell by 2 percentage points to 11.1%. But the unofficial rate that adjusts for misclassifications achieved an even more impressive 4 percentage point drop to 12%.

U.S. economy now stumbling

For all of this good economic data, the U.S. economy may now be starting to stumble as June turns into July. Our measure of U.S. hours worked by hourly workers has hooked slightly lower (see next chart). Similarly, a survey of U.S. business sales points to a moderate retreat in the latest week (see subsequent chart).

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

Note: As of 07/01/2020. Impact compares hours worked in a day vs. median for the same day of the week in January, 2020. 7-day moving average used. Source: Homebase, Macrobond, RBC GAM

New orders and sales of U.S. businesses hammered by COVID-19

Note: Estimated as weighted average of % change in new orders or sales for all respondents. Source: Weekly Business Outlook Survey on the COVID-19 Outbreak, Federal Reserve Bank of Philadelphia, RBC GAM

In fact, we have now constructed an aggregate measure of real-time economic data for the U.S., built with 10 weekly indicators. It points to a similar trend: an impressive recovery, followed by a recent stumble (see next chart).

U.S. economic activities resume

Note: As of 07/01/2020. Economic Activity Index is the average of 10 weekly 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 America, Goldman Sachs, OpenTable, Macrobond, RBC GAM

This decline arguably makes sense given the extent to which a rising virus count is starting to prompt more cautious behavior on the part of households, businesses and governments. We discuss this in more detail in the next major section of this report.

Second-round damage

It is becoming possible to identify lasting economic damage being done to the economy. Initially, virtually the entirety of job losses were deemed to be temporary, meaning there was a high probability that people would return to their old jobs once conditions normalized. This is still mostly true, but to a declining extent (see next chart).

There are now a shrinking number of people who are unemployed on a temporary basis (admittedly in significant part because many of those people have since reclaimed their jobs), versus an approximate doubling of the number of people who have been laid off on a non-temporary basis. To be clear, the latter group is still in the distinct minority, but it reflects a cohort that classically takes longer to return to the working world.

Permanent layoffs in U.S. rising

Note: As of Jun 2020. Source: BLS, Macrobond, RBC GAM

Canadian economy

Canadian GDP has now been reported for the month of April, and was down a big 11.6%. This was slightly worse than the initial Statistics Canada estimate, and means that the peak-to-trough decline in Canadian activity was an enormous 18.2%. The release highlighted the particularly severe devastation of the accommodation and food services industry, and heavy damage to the arts, entertainment & recreation sector as well as retail services. Less obviously, the health care sector also fell by 11% and education services dropped by 9%.

While April data wouldn’t appear to be of much value when the calendar already reads July, the release was nevertheless useful in two main senses:

• It argues that the peak-to-trough damage to Canada’s economy was slightly milder than we have been assuming.
• Providing something of an offset to that first optimistic thought, Statistics Canada also generated a flash estimate for May GDP. The recovery is only estimated to have been +3%, meaning that the bulk of the recovery remains to be claimed.

The employment data released later this week for June should help to clarify whether the rate of recovery accelerated significantly in the subsequent month.

Recovery sustainability

Several recent developments are providing additional perspective on the economic trajectory ahead.

1. The second virus wave is now a reality in the U.S. That is already beginning to impede the recovery. More on that in a moment.

2. We are starting to gain a better sense for what degree of re-opening is possible and what isn’t. A significant fraction of the U.S. has now seemingly gone too far, with indoor restaurants and bars among the most likely culprits. Conversely, many countries have managed to make lesser but still significant strides – re-opening stores and factories and the like – without suffering a rising caseload.

That said, it is notable that while many developed countries have cut their new infection rate to a low level, this rate has now steadied. This is a hint that they should not ease restrictions much more than they already have, at least not without making offsetting adjustments elsewhere, such as mandating increased mask usage or instituting other safety protocols.

3. Widespread vaccine deployment is still many months off. So, a further consideration in mapping out the economic trajectory ahead is that not all countries are likely to enjoy simultaneous access to the vaccine. Some countries – particularly those where the “winning” vaccine is developed and/or those places with significant manufacturing capacity of their own – seem likely to enjoy a considerable head-start in the quest to return the lives of their citizens to normal.

Many vaccine manufacturers presently aspire to export their product justly around the world. But it is easy to imagine some countries insisting on comprehensive vaccination of their own population before allowing the export of vaccines to other nations. This could create a wedge of months to even a year or longer between when different countries gain widespread access to a vaccine.

Clarifying terms

Frequently, U.S. states with a rising number of COVID-19 cases are castigated for having reopened their economies too soon. There is some truth to that – it would have been better to have waited longer until the number of active cases had diminished further. But the real issue is not the timing of the re-opening but the amount of re-opening: it has simply been too much.

A simple thought exercise illustrates this. Is it better to have just one infected person and a transmission rate that is greater than 1, or 1,000 cases with a transmission rate below one? If the transmission rate is fixed, the answer is the latter scenario. The former will suffer an ever-rising number of infections, while the latter will enjoy a declining rate until the virus is eventually gone.

In the present context, it isn’t so much that restaurants and bars in many U.S. states opened too early, but rather that they opened at all (or at least without sufficient spacing and ventilation). This is a lesson for other jurisdictions, too.

How will the second U.S. wave be quelled?

There are a variety of ways of controlling this renewed COVID-19 outbreak in the U.S. (see next graphic).

How will the second U.S. wave be quelled?

Note: As of 07/06/2020. Source: RBC GAM

The U.S. federal and state-level governments are certainly capable of doing what many other countries have done and put in place the proper safety protocols. But the virus has become so politicized in the U.S. that this is proving difficult to do. Even setting aside the specific politics of the situation, politicians are generally reluctant to do an about-face.

Fortunately, there are good options at the municipal, business and individual levels. Indeed, these are now being pursued.

Examples of municipal adjustments include:

• Nashville has retreated from Phase 3 to Phase 2, meaning among other things that bars will be closed and restaurant capacity reduced.
• Austin and Tampa have also been notable in tightening restrictions. A variety of cities and counties in Texas are now requiring people to wear masks within businesses.

At the business level:

• Apple has now closed its stores in Houston, having closed its stores in Arizona and three other southern states not long before.
• Disney has delayed reopening Disneyland in California.

Among households:

• A recent study comparing otherwise similar jurisdictions found that the great majority of social distancing was the result of voluntary decisions by individuals rather than due to government edict. As such, households have the potential to be pivotal players in controlling the spread of COVID-19 in the U.S.
• Of course, households are unlikely to be enough by themselves, as demonstrated by Sweden’s challenges with a light-touch government.
• Household mobility data does not yet show any significant retreat in the U.S., though this may be coming.

U.S. states finally react

After dithering for far too long and contrary to our initial expectation, several U.S. states are belatedly starting to respond to the crisis in front of them. Five states have now partially reversed their reopening process. Another 20 have delayed any further easing of rules. Examples of recent action include:

• Arizona is now permitting its cities to mandate masks. The state has also just closed its gyms, bars and movie theatres for the next month.
• Texas has acknowledged the unacceptable rate of transmission in the state. It is now mandating masks in all counties with more than a minimum number of cases, and has paused its reopening plans.
• North Carolina has halted its reopening and is instructing its residents to wear masks.
• Nevada is now mandating mask wearing in public. This includes gamblers in Las Vegas.
• New York State has delayed reopening its shopping malls, movie theatres and gyms.
• New York, New Jersey, Connecticut and Hawaii are all requiring quarantines or proof of a negative coronavirus test for visitors from high-risk states.

This is very positive news, as it was genuinely unclear until the past few weeks whether states were capable of doing anything to turn the tide. In turn, alongside the help of municipal governments, businesses and households, there is a good chance that the number of new infections per day in the U.S. will peak within the next month, though the process of then whittling it down to a more tolerable load will be lengthy.

Evidence of an adjustment

Although not yet visible in the mobility data, there is now mounting evidence that the aforementioned parties are beginning to make the necessary accommodations to COVID-19 from an economic perspective.

Economic growth in the U.S. is faltering, as per the three national level charts presented earlier. While this isn’t great from a macro or financial market perspective in the short run, it points to a rising probability that the outbreak can be controlled. This is good for all parties from a long-term perspective.

Some part of the recent dip may be related to summer vacations being taken, but this does not explain everything. A closer examination of hours worked data indicates that the deterioration has been greater among the states most affected by COVID-19 than in the national average (see next chart).

COVID-19 impact on hourly workers

Note: As of 07/05/2020. Impact compares hours worked in a day vs. median for the same day of the week in January, 2020. 7-day moving average used. Source: Homebase, Macrobond, RBC GAM

A second recession?

Is this latest swoon a second recession? In the most granular sense (using weekly data), this does appear to be the beginning of a second economic dip, if less severe than the first one.

But by any conventional standard, it is not likely to be considered a second recession. Second-quarter GDP growth was so profoundly negative that third-quarter GDP remains very likely to be positive despite these fresh headwinds. Unless the economy were to shrink again into the fourth quarter of the year, it seems unlikely that any standard analysis would pick up two separate recessions.

Furthermore, even if two declines were visible at the quarterly level, economists would be inclined to lump the two events together, given their close proximity and common underlying cause.

We’ll be revisiting our economic forecasts in the coming weeks to better incorporate these various developments. The most obvious possibility is that the U.S. growth forecast may no longer be so much better off than the others when this exercise is complete.

The optimist’s guide to COVID-19

There is no shortage of problems that remain as COVID-19 grips the world. Despite that, or perhaps because of it, it is worth highlighting the various positives that nevertheless exist. To be clear, this is not a balanced perspective but rather an optimist’s guide to COVID-19.

• Fundamentally, COVID-19 is not a threat to human existence. A recent meta-analysis argues that the true infection fatality rate is just 0.64% (in the range of the 0.5% to 1.0% number we have been assuming for months). This is lower than for the Spanish Flu, SARS, MERS or Ebola, let alone the plagues of centuries old.

Furthermore, it argues that – even in a worst-case scenario in which herd immunity is the only solution to the disease -- less than 1% of the population will be felled. This virus pales in comparison to more genuinely existential risks like an asteroid, a giant solar flare, a massive volcanic event or “the singularity.”

In fact, COVID-19 might indirectly help combat those other more genuine risks by motivating policymakers to channel more public money into tackling low probability / high consequence events.

• Most countries have managed to limit the spread of COVID-19. Even the U.S. may now be pivoting in a way that achieves a similar outcome.

• Although the global infection numbers are rising, the fatality metrics are not. Society is already doing a better job of protecting the vulnerable and improving the care of COVID-19 patients, even without a silver bullet.

• For that matter, there remains a reasonable chance of a silver bullet given the money and brainpower being dedicated to the project. Further improvements are to be expected given the sheer number of therapeutics, antibody-based solutions and vaccines under development and testing. Despite the geopolitical tensions and anti-globalization forces around the globe, the world’s scientists are in the rare position of working toward a single goal to benefit all humans.

• People and businesses are increasingly managing to produce things and pursue leisure in ways that previously necessitated close contact between people. Incremental innovations on this front will continue.

• It is extremely fortunate that we live in the computer and internet age, as such sustained social distancing would have been utterly impossible without it. The environment has certainly benefited.

• Life has already normalized significantly for many people. There are certainly exceptions and life remains different in myriad ways, but many people are managing to carve out more time for family, live a less hectic existence, reduce their commuting, and are even finding more time to think and exercise.

• At least in part because COVID-19 has stripped away many distractions, society appears to be gaining a greater appreciation for the realities of racial injustice in the world, and also seems motivated to do something about it.

• The economic stimulus delivered during this crisis has been aggressive, creative and – in several regards – highly effective. The world may be in a better position to handle future economic shocks as a result of the lessons learned from this. Furthermore, the experience is providing rich insight into which, if any, of the enhanced social programs might be effective on a more permanent basis.

• Finally, practically overnight, COVID-19 has pushed the world a decade into the future in some ways. Such technologies as telecommuting and videoconferencing have long existed and were gradually enjoying rising adoption, but at a glacial pace. The virus forced their nearly universal implementation, and we are learning as a society that a surprising fraction of work can be done in a more flexible setting, precluding the need for daily commuting or lengthy business trips. These changes, in turn, create the possibility of reconfiguring office towers, changing where people live and what companies to work for now that proximity to an employer is less relevant. These changes likely would have arrived eventually, but not for many years.

-With contributions from Vivien Lee and Graeme Saunders