Robust Rebound for the U.S.
The speed and consistency of the economic recovery will depend on political stability and continued vaccination progress.
The U.S. entered the second quarter of 2021 on track for a robust economic rebound. Vaccine rollouts continue despite short-term disruptions for certain vaccines, and the industries most adversely affected by the coronavirus pandemic are recovering. Policy uncertainty in the U.S. decreased when the new administration took over. And the $1.9 trillion Biden stimulus package has provided further support for the improving economy.
Still, uncertainty remains.
Atradius economic analysts predict that U.S. gross domestic product (GDP) will grow by 7.0 percent for 2021, as the economy recovers. This implies that GDP will return to its 2019 level by year-end. Several risks have significant potential to undermine that projection.
Political Unrest Poses Modest Risk
After protestors stormed the U.S. Capitol in January, further civil unrest and potential violence against politicians is unlikely but possible. The impact of the Capitol Hill riots on business and trade has been limited. However, if civil unrest re-emerges and temporarily impedes government actions, fiscal spending could slow and introduction of additional stimulus measures, such as Biden’s infrastructure plan, could be delayed.
Throughout the Biden presidency, the administration will likely support growth by normalizing trade relations and loosening U.S. immigration policy. However, in the medium term, tighter environmental and tax policies might partially offset gains in GDP growth.
We expected trade with U.S. allies to return to business-as-usual this year, with a softer approach to foreign relations, particularly with China. Elements of the Trump presidency revealed China to be a long-term strategic adversary to the United States. The Biden presidency will likely bring civil diplomatic ties, but progress on policy may be more protracted. Downside risks remain for any diplomatic missteps that could cause a negative ripple effect for global trade and economic relations.
Lingering Pandemic Challenges Pose Substantial Downside Risks
The coronavirus spread rapidly in the United States, which still registers among the highest infection rates in the world. Exacerbating challenges created by the Sino-U.S. trade war, the pandemic further weakened Chinese imports to the U.S. and caused global supply-chain disruptions.
After the U.S. economy contracted 3.5 percent in 2020, it is expected to rebound this year, with momentum increasing this quarter. Private consumption is forecasted to grow 5.3 percent in Q2 (vs. falling 3.8 percent in 2020), while investments and exports are expected to grow 3.4 percent and 5.1 percent, respectively.
As the vaccine rollout continues around the world, Covid-19 numbers are still rising, with new mutations of the virus emerging early this year in the U.K., South Africa, and Brazil. Most industries are seeing modest improvement but will not fully recover until Covid-19 herd immunity is closer to reality. That should happen later this year, as long as virus mutations do not significantly reduce the effectiveness of the vaccines, so recovery should stay on the positive incline throughout 2021.
Business Insolvencies in 2020
Companies with constrained liquidity following the pandemic-driven shutdowns and demand shifts were particularly vulnerable to insolvency last year. Nevertheless, 2020 insolvencies came in lower than we anticipated a year ago. This was driven by a number of factors, including government stimulus, a strong rebound in consumer spending, and stability in bank support.
Even though the numbers have remained modest so far, insolvencies tend historically to lag behind economic downturns. The United States will likely still see an overall uptick in insolvencies among small to midsize businesses in 2021. Trade sector challenges and balance sheet strength are two of the most critical indicators of an organization’s probability of default, and these remain problematic for many smaller organizations. In addition, productivity at smaller companies is hit hard when employees are home sick.
So, we expect insolvencies to increase this year among small to midsize businesses, even as the economy overall continues to rebound.
The Future Is Uncertain, but Hope Remains
The new year brought a sharp increase in commodities pricing globally. During the shutdown, most businesses suffered from depleted inventories and reduced production levels, but now—with spending ramping up again—there is tightness in the supply chain, making it difficult to get materials on time. As a result, prices are rising throughout global industries including industrial metals, building materials, and oil. If this continues, inflationary pressures could rise and potentially cramp the U.S. recovery.
We do not expect to see runaway inflation; however, businesses may want to take steps to mitigate the risk of customer payment defaults by utilizing trade credit insurance and understanding the supply-chain risk that their industry, in particular, is experiencing.
As long as vaccine rollouts stay on track and virus variants do not become widespread and vaccine resistant, the United States is likely on track for a robust rebound in 2021 and a steady return to normalcy in trade relations and GDP growth.