Counsel Views – Episode 5: Eric Lascelles

Stu Morrow (Host):

Hello to our listeners, and thank you for joining us. The U.S. election is quickly approaching, and we thought it would be a good idea to get some perspective from RBC Global Asset Management's Chief Economist, Eric Lascelles. Eric maintains RBC Global Asset Management's global economic forecast and advises its portfolio managers on key themes and risks. He is also a member of the RBC Investment Strategy Committee, which is responsible for the firm's global asset mix recommendations. You may have heard him here on Counsel Views. You may have seen him here on CNBC, CNN, and other networks. Eric's written editorials have appeared in The Globe and Mail, National Post, The Wall Street Journal, and Financial Times.

Hi, Eric. Welcome back.

Eric Lascelles (Guest):

Thanks so much. It's a pleasure to be here again. Hi, everybody.

Stu Morrow (Host):

Maybe before we get into the main event, I thought you could spend a few moments updating our listeners on what you're seeing in both the Canadian and U.S. economy, as this second wave seems to be upon us, as we're starting to see more restrictions and some stimulus measures may be either running out or talks of being extended. So how are you thinking about the growth outlook now?

Eric Lascelles (Guest):

Well, you're certainly right in identifying there are some new challenges. The second virus wave is perhaps the most obvious one in the sense that in much of the developed world, including Canada and maybe the U.S., we're now seeing rising numbers of infections per day, and we've seen tighter economic policies implemented as a result. So this is a potential negative for economic growth.

I will say, in October and November, we are expecting quite minimal growth, so less growth than we've seen in prior months, less growth than we hope to see in subsequent months. Reflecting that, we have flagged the possibility there could be a month or two of outright economic decline, just based on the kind of impulses and the size as we can estimate. I wouldn't say that's a certainty, but there's a risk of that, but I wouldn't say it fundamentally challenges the recovery story though.

And so we still think the recovery likely resumes and continues its way through 2021 as well. We are aware, of course, as you mentioned, that some of the fiscal support is starting to come off on some lagged credit problems, and so on. So far, those have been surprisingly slight in terms of their detrimental impact. And so again, we do think the recovery probably persists and actually, for all of that negative talk and it's all very legitimate and it is factored into our forecast, actually, we've been in the business of upgrading our forecast more than we've been downgrading. And really it's a function of, since, gosh, late April early May, fairly reliably the economic numbers have been better than we had expected, and then the consensus had expected as opposed to worse.

Initially, the suspicion was that the economy probably had shrank something like 20 or 30% and actually it was more like a 15 to 18% drop. Then the thinking was it would take until the summer before the economy started rebounding. Actually it started rebounding in late April. And then the thinking was, maybe by the fall we'd be back to recovering half of what had initially been lost. And actually that happened as of late June. And so fairly reliably, the numbers have been better than initially expected. I think it speaks to the resilience of businesses and the ingenuity of workers and the businesses and the policymakers as well in terms of keeping the economy moving forward.

There's still a long way to go. And we still don't think normality happens before 2022 or 2023. So plenty of hard work to go and ever slowing recovery from here in all likelihood with some speed bumps in the very near term. But I would say don't forget that, reliably, this recovery has surprised in a pleasant way. You even look at China and say China is different in many regards. It's much more aggressive in terms of practically eradicating the virus and probably not something the rest of the world can realistically aspire to, but the Chinese numbers have reliably been better than expected. And indeed the Chinese economy is now 5% bigger than it was a year ago. So that's more than we can expect for other countries, but it's another little hint that we could continue to be surprised by the nature of this recovery.

Stu Morrow (Host):

That's some great perspective. Thank you, Eric. And now to the main event. I think what we're trying to target for this discussion is obviously around the U.S. election. A lot of noise out there. We've talked about the noise versus the signal in some of our written communication as well. So for you, what are the more relevant scenarios for those key policy changes that are possible post-election? So maybe with respect to taxes, spending on the regulatory front, maybe?

Eric Lascelles (Guest):

Absolutely. Those are all very much in play in this U.S. election and so very much worth discussing. So there are real policy differences being presented by the two candidates. This is not one of those center left versus center right kind of elections where the differences are fairly slight. It is more substantial than that. So I suppose more is at stake depending on your own political preference. In terms of where we see right now, the Biden platform involves significantly more fiscal stimulus as far as we can tell. And so there would be more government spending and potentially a bigger boost to the economy as a result of that. And so it's fairly close to the consensus to say that a Biden win would probably be at least a short term and maybe a medium term economic positive in the sense that this extra money would be circulating and help to keep the recovery moving during what could otherwise be a fairly difficult period.

So that's probably the biggest difference that I can mention. Within that, by the way, you would presumably have infrastructure spending and you would have more generous benefits to the unemployed and some targeted support for certain businesses. And I should say, the Trump campaign also has proposals for support, but they're generally somewhat smaller and they generally lean a little bit more on tax cuts as opposed to spending increases. In fact, for that matter, the Biden campaign proposes tax increases including on companies and on high income individuals. So that's one source of concern the stock market has occasionally had on the subject. So it seems to me, the stock market is feeling a little more confident or at least calm about that subject more recently.

So significantly different fiscal profiles. Let's not forget of course, spending more money does mean accruing more public debt. And so as much as a Biden win might be an economic positive, there would be some debt consequences. And I suppose some paying of the piper at a later date. So let's not pretend that's free money or an unambiguous good, but it's probably nevertheless, a useful justifiable thing at a time of deep recession. And so that's an important element, I think.

And then I guess beyond that, there are different regulatory philosophies afoot that Trump is in very much about deregulating it. It probably has helped to drive the economy forward, but potentially at some cost in a noneconomic sense. And so realistically we should expect a somewhat tighter regulatory handle if Biden is elected. Specifically, perhaps with the energy sector in play and limited to a greater extent than it was under Trump, if Biden is elected. Beyond that, I don't think it's so much that there are plans to greatly increase the amount of regulation, but it won't be a mission to be actively deregulating, if that makes sense. So there is some difference there, and the same with the other two obvious areas, I think about.

One would be in terms of just dealing with COVID-19. It seems like a Biden presidency would perhaps take more severe measures to limit the spread of the virus. That's a short term economic negative. It would limit some sectors of the economy in the short run, but it may well be a net positive over the longer run to the extent, presumably it actually yields a virus that is more under control, which is an attractive thing. And then the other item is the trade immigration file. So Trump has imposed tariffs. Some of those tariffs might well go away under a Biden presidency or to a minimum, you wouldn't expect to see significantly more tariffs. And so that's an economic positive. And the other one is we assume there will be a return to more normal immigration levels if there were to be a Biden win. And so economists will tell you, economies grow either because you have more workers or because the workers become more productive. So more immigration contributes to the first of those two components.

We've walked away with the view that there are significant differences and let's not overstate them. Let's not pretend that politicians have a carte blanche. They are very much limited by their fellow politicians and by the reality of the situation in terms of what they could actually introduce. But nevertheless, there are real differences here and we could see those play out over the coming year, particularly since there is a very real chance that the Democrats could pick up the Senate and the House of Representatives as well. And so actually have control of the three main levers of power that actually allow for some of these programs to be implemented.

Stu Morrow (Host):

And then view around tariffs is interesting because that's around my next question for you is, there is a view out there that Biden certainly seems more Canada friendly than Trump maybe has been. But you read some of his platform policies, they are somewhat U.S. centric as well. For Canadian industry, what would be, sort of the coming out of the election, maybe a Trump continued platform we've seen for the last four years versus a Biden administration for Canadian industries? What are some of those key implications or key industries which may be impacted under each?

Eric Lascelles (Guest):

Right. Well, let's not kid ourselves. The U.S. has turned in an isolationist direction. In fact, you could say the world has to some extent given COVID-19, but U.S. was already on that way beforehand. And some of that can be pegged directly to President Trump. He has pushed in that direction, but some of it is reflective of the broader attitudes in the U.S. So let's not assume that Biden is the anti-Trump or that he will immediately open everything and go back to the way things were four years ago, probably not completely. So that's the starting point. I'm not expecting every tariff to disappear overnight. In fact, classically Democrats actually have generally liked tariffs more than Republicans have. So it gets quite blurry if you try and think too hard about that. But in the end, there are again, fairly significant differences here.

So probably the most important observation is, if a Biden wins and the platform really, if a Biden platform is implemented, that's a positive seemingly for the U.S. economy. Arguably, that's a good for the Canadian economy as well. What's good for the U.S. is broadly speaking good for Canada. That's the most important conclusion. And if you ever look at a chart of U.S. growth and Canadian growth, they're extraordinarily similar at different points in time. And while Canadians like to think, and do have some effect on that narrative, it's mostly when the U.S. is strong, Canada benefits. And when the U.S. is weak Canada suffers. And so in general, that fiscal stimulus will indirectly benefit Canada as well.

So maybe that's the biggest, broadest comment I can make, but then digging in a little bit more, realistically, probably slightly fewer tariffs under a Biden presidency. Maybe a bit more emphasis on trade again. So this is to Canada's advantage. Canada is a huge trading partner of the U.S. and so very reliant on that relationship. Probably that relationship gets a little bit better, perhaps specifically in a softwood lumber direction and probably less pressure on the dairy sector and these sorts of things. So those are economic positives for Canada.

To the extent U.S. tax rates might go up. Conceivably that gives Canada a competitive advantage of sorts to the extent that our tax rates might not go up, or maybe more precisely our tax rates,. In some cases did go up some time ago, and this is maybe leveling the playing field a little bit. So there's a broader helping hand that comes from that. You can think about the oil sector and to the extent there might be additional constraints placed on the U.S. oil sector, I suppose, at the margins that gives some additional opportunity to Canada's energy sector. Though it does equally complicate some of the pipeline projects that are ongoing in the U.S. And so I think that's a consideration.

And then maybe the other two thoughts that aren't so much industry specific as somewhat broader. One would be, generally speaking, businesses in markets like it when they can see how things are going to play out in the future. And one of the hallmarks of the Trump era has been a great deal of policy uncertainty. So if you had a Biden win, probably a little bit less policy uncertainty, and so that could be a helpful thing. And then the other one is realistically, we can say that just the political level relationship between Canada and the U.S. might be a bit friendlier with a Biden presidency. It's been chilly over the last four years. It probably would improve to some extent on that front.

And so, there probably are a number of positives. If you want to look for negatives from a Biden win, and by the way, I'm emphasizing Biden win just because the betting market seemed to think there's about a 65% chance and some of the more sophisticated models argue he has as much as a 90% chance of winning. So that's where the focus is. Simultaneously, we've already seen what Trump has done. We don't need to talk about what he would do. He's already done those things. It would be close to a status quo situation. So that's why we're focused in that direction.

So in terms of negatives though, well, Canada could lose a little bit of immigration quality. To the extent that it's been hard for skilled immigrants to get into the U.S. in recent years that has arguably been to Canada's advantage. Some of those programmers and highly skilled individuals have come to Canada instead. Might be a little bit harder to attract that caliber of individual, though I do think Canada's immigration quality can likely remain quite high. And then the other thought, I guess, as it pertains to the currency. So the expectation is that a Biden presidency might be associated with a weaker U.S. dollar. That means a stronger Canadian dollar. And while that has its advantages, it means you can holiday in the U.S. for cheaper, and it means Canada can buy more of the rest of the world, all sorts of reasons to celebrate. Ultimately, it can be an economic challenge to the extent that you are suddenly less competitive relative to your big neighbor to the south. So a mix of implications, but arguably some good things in there for Canada in that mix.

Stu Morrow (Host):

That's great, Eric. Well said. I think it will be a very interesting next few weeks to watch, and then perhaps, a few weeks after the election to watch the outcome as well. So, as always, it's an absolute pleasure having you here on behalf of RBC, PH&N Investment Counsel. Eric, thanks for taking the time as usual to spend with us, to share your thoughts on these two topics. We really appreciate it.

Eric Lascelles (Guest):

Oh my pleasure. Anytime. Thank you.

Stu Morrow (Host):

Thanks again, Eric. Take care.