New Articles

US Fed: A fata morgana hiking cycle?


US Fed: A fata morgana hiking cycle?

In early January, the US Federal Reserve’s communications pointing to more hikes and an earlier balance sheet run-off, together with CPI reaching a yearly rate of 7% in December, have triggered a surge in long-term US yields. Over a short span of two weeks, US 10y Treasuries yields rose 24bp from 1.5% to 1.75% and temporarily reached 1.9% (Figure 1).

Figure 1: Evolution of US 10y Treasury yield (last 2 months).

In total return, this was the largest decline of 10Y US Treasuries over the last four decades. Only in February 1980, when Chairman Volcker raised the Fed Funds rate to 21% did long-term US Treasuries have a worst two-week performance, and this was against the background of much lower growth than today. For some, this is enough to (once again) claim the switch to a new regime, where “low for longer” is replaced by rising yields, driven by higher inflation uncertainty and growing interest rate risk. For us this view reflects mostly tactical noise rather than the underlying dynamics of recent yield movements. Over the recent days, US 10y Treasury yields have consolidated again at 1.74%.

Bonds markets seem have become more confident about the near-term US recovery rather than worry about incipient stagflation. The components of US nominal yields show that the recent increase was not caused by the risk component (term premium) but by a higher expected nominal short-term rate. The inflation expectations embedded in this rate remain stable, but the implied expectations for the real rate have risen (real short-term rate). The real short-term rate is closely linked to the economic outlook. In other words, the recent yield movement can be explained by increasing confidence among market participants that the upcoming Fed rate hikes (four hikes are currently priced in for this year) are appropriate and will not derail real growth. However, residual skepticism remains. The risk premium associated with the real short-term rate (real term premium) remains negative indicating limited potential for higher longer-term rates in a sustained growth cycle. Thus, we are not dealing with a risk surge, but with a re-rating of the growth scenario (Figure 2).

Figure 2: Decomposition of US 10y Treasury yield*


Don’t be fooled by real yields based on breakeven rates. From this growth story one could hastily derive a considerable upside potential for nominal yields especially in view of still clearly negative real yields (nominal yield – breakeven). But this is a flawed reading. The breakeven rate (derived from TIPS ) is not pure measure of inflation expectations and is subject to substantial market distortions. The US 10y breakeven rates – untypically – trade 50bp above their fair value due to a combination of lack of liquidity, high demand, and limited supply (Fed holding around 20% of the outstanding TIPS volume). Using the fair breakeven value (liquidity-adjusted) to calculate real yields, we see they are almost come back to pre-crisis levels (which is nearly the same as the sum of the real rate expectation and the real term premium in Figure 2 above). The US growth story is thus already priced in and provides very little upside for nominal yields (Figure 3).

Figure 3: Real yields back pre-crisis when adjusted for liquidity distortions*

However, changes in the duration of US Treasuries might provide some small upward pressure on the yield curve. Markets are also repricing the declining dampening stock effect of the Fed’s bond holdings on the US curve. With the upcoming quantitative tightening (QT), the share of duration-bearing securities in the private sector’s balance sheet is going to increase while short-term reserves are becoming scarcer. The additional duration supply translates into upwards pressure on yields. Currently, the QE-induced duration extraction is still dampening 10y US Treasuries by 130bp. With quantitative tightening we expect this effect to diminish by 20bps by the end of the year. However, a lower fiscal impulse than expected (e.g., if the Build-Back-Better framework does not pass) could also result in lower financing need by the US government and reduce the net supply of Treasuries, which could put downward pressure on yields and partly balance the effect from quantitative tightening.

The Fed might break the hiking cycle earlier than markets expect.  The US monetary stance has undeniably become more hawkish. Given the tightening labor market, the expanded balance sheet and political pressure to fight inflation the risk reward of not tightening has indeed become too high. Cautious tightening can avoid overshooting inflation becoming embedded in expectations. However, the Fed also knows that tightening will not fight supply-side constraint-driven inflation. From this side, the pressure is going to ease over the year as we expect the inflationary pressure to abate. Our inflation tracker is already pointing at peak in Q1 2022 (Figure 4).

Figure 4: Inflation in the U.S. may peak in Q1 2022*

Sources: Refinitiv, Allianz Research

*US Inflation Tracker: equally weighted and normalized composite measure comprising 15 sub-segments (underlying trends (modified/trimmed measures), forecasts, market-based inflation measures, expected inflation implied by term structure models, monetary aggregates, consumer and producer price components, labor market indicators, commodity prices, corporate margin & profitability, and proxies for price effect from supply chain disruptions). Official measures: equally weighted and normalized composite measure comprising headline and core inflation reported by national authorities.

The normalization of the liquidity premium in the TIPS market, which should bring down breakeven rates, should also help to reduce the risk of de-anchoring inflation expectations. Instead of CPI and FOMC minutes, the focus of fixed income investors should lie on economic activity and monetary and financial conditions (MFC).

Figure 5: US Financial Conditions and ISM Manufacturing Index
Our baseline is still a cycle with three rate hikes this year and eight in total. This remains a very moderate normalization path by historical standards. On average, nominal tightening in the hiking cycles of the last 50 years reached 3.9pp and real tightening 2.8pp. For the upcoming cycle, we see tightening at only 2.0pp in nominal terms and 2.1pp in real terms. But if the growth momentum slows down further (e.g. ISM falling below 50, persistently weak retail sales as in December etc.) and if we see a noticeable tightening of MFC, then the Fed could break the tightening cycle after only two or three hikes. From today’s standpoint, 3-4 hikes would then have to be priced out. The market would switch from bear-flattening to bull-steepening (Figure 5).

Financial markets signal a shortened cycle. 
The 2y10y steepness of the US curve is already very flat compared to earlier lift-off phases (75 bps vs an average of 120bps in the 2 months prior to lift-off). Looking at the swap forward curve, we can already see inversion patterns that previously only appeared in late phases of hiking cycles, usually 2 to 3 hikes before the peak (Figure 6). These signals are somewhat at odds with the aggressive pricing on the money market, where currently 6-7 hikes are priced for the next two years.
Figure 6: Forwards at inversion point even before the hiking cycle started

Equity market developments seem to confirm a shortened cycle. Over the last 50 years, 85% of the Fed rate hikes have taken place at a moment when the S&P 500 has experienced a 12-months drawdown of less than 10%. Today we are already at -8.3%. So, we are approaching an area where rate hikes are very rare (16% of all hikes). When they took place, it was mostly in the very late phase of the cycle (Figure 7). One can, of course, emphasize the uniqueness of this post-pandemic cycle and argue that the Fed should not care about equity markets. However, the past has shown that the suppression of risky asset volatility and preservation of the wealth effect feed into the reaction function. For us, behind the tactical noise signals are piling up that the biggest risk in the U.S. bond market might thus not come from the Fed falling behind the curve, but from many market participants positioning themselves too far ahead of the curve. Like the real economy went through a full cycle in less than 2 years, markets might go through monetary cycle without substantial hiking ever happening.

Figure 7: Fed rate hikes and S&P 500 12 Drawdown

Even in the long run US yields will remain subdued. It is difficult to imagine long-term rates reestablishing clearly above 3% on a sustained basis. We currently see the long-term (5 years ahead) nominal equilibrium interest rate in the U.S. at 2.6% of which 0.6% are attributable to the real neutral rate. This equilibrium rate could only shift substantially above 3% if we experience extreme monetary tightening or if massive government spending creates a permanent boost to potential GDP. For some, President Biden’s infrastructure plan could trigger such a GDP boost. However, to double the neutral rate relative to our baseline scenario, trend growth would have to reach around 3.5% (against currently 1.8%) without triggering a permanent surge in inflation. But the equilibrium rate could also reach 3% in a negative stagflation scenario.

Figure 8: US equilibrium rate scenarios for a 5-year horizon*

In that case, the driver would be permanently de-anchored inflation expectation (over 3%) while the neutral interest rate would decline as the growth potential is impaired. On a fundamental basis it is therefore hard to justify the regime shift narrative. It is much more likely that, behind all the current market noise, the low for longer regime will prevail (Figures 8 and 9)

Figure 9: Scenarios for US real neutral rate (r*) for a 5-year horizon


State Economies Most Dependent on Outdoor Recreation

Over the past year, pandemic-related shutdowns inspired Americans to head outdoors to find open, safe places to relax and exercise in record numbers.

In 2020, 7.1 million more people headed outdoors, and overall participation in outdoor recreation surpassed 52% for the first time on record, according to the Outdoor Industry Association (OIA). Among the most popular activities was fishing, which drew higher numbers of participants across multiple age, race, and gender groups.

The surge in outdoor participation undoubtedly provided a boost to the outdoor recreation industry that was already booming before the pandemic hit. In 2012, the industry contributed about $350 billion to the U.S. economy. Heading into 2020, that contribution jumped to more than $450 billion. And with consumers heading outside in record numbers over the past year, the industry’s contribution to the economy is likely to grow.

The U.S. Bureau of Economic Analysis categorizes “outdoor activities” into a broad spectrum of hobbies and exercises, including: boating and fishing; sports like golf and tennis; RVing; festivals, sporting events, and concerts; amusement and water parks; and snow activities like skiing and snowboarding.

Among these activities, boating and fishing add the most value to the economy, accounting for a nearly $25 billion impact in 2019. That number is likely to go up, as boat sales increased by 13% in 2020. Those who fared well financially during the pandemic likely had the extra resources to purchase a boat, either fulfilling a lifelong dream or providing their family a new way to enjoy the outdoors.

For those on tighter budgets, fishing presented an economical option to enjoy the outdoors and time spent with friends and relatives. The number of first-time fishing participants jumped 42% in 2020, leading U.S. Fish and Wildlife Service Principal Deputy Director Martha Williams to tell OIA, “We are thrilled to see so many new and returning anglers enjoying our nation’s waters.”

Sports-based recreation and RVing were the second and third most impactful activities, according to Bureau of Economic Analysis data.

The boost in outdoor participation seen across the country in 2020 was particularly beneficial to states dependent on outdoor recreation economically. To identify the states most dependent on outdoor recreation, researchers at Outdoorsy analyzed data from the Bureau of Economic Analysis and created a composite index based on the outdoor recreation industry’s share of GDP, employment, and compensation in each state.

Based on these factors, Outdoorsy identified a diverse set of states—both coastal and mountainous—that topped the list. Notably, Hawaii was the only state in which outdoor recreation made up at least 5% of its GDP, employment, and compensation. In the Mountain Region, Montana and Wyoming stood out as the two states most economically dependent on outdoor recreation.

State Rank Outdoor recreation dependency index Outdoor recreation share of GDP Outdoor recreation share of employment Outdoor recreation share of total compensation  Largest economic impact activity
Hawaii     1      100.0     5.8% 5.9% 5.3% Game Areas (including Golf & Tennis)
Montana     2      94.8     4.7% 4.5% 4.1% Boating & Fishing
Wyoming     3      94.2     4.2% 5.2% 4.1% Snow Activities
Vermont     4      93.2     5.2% 4.4% 3.6% Snow Activities
Florida     5      91.6     4.4% 4.0% 3.9% Amusement & Water Parks
Maine     6      91.2     4.2% 4.7% 3.4% Boating & Fishing
Alaska     7      89.8     3.9% 4.5% 3.6% Boating & Fishing
Utah     8      85.4     3.3% 3.9% 3.1% Snow Activities
New Hampshire     9      82.8     3.2% 4.1% 2.7% Snow Activities
Colorado     10      81.2     3.1% 3.8% 2.9% Snow Activities
Idaho     11      78.6     3.0% 3.4% 2.9% RVing
Nevada     12      75.8     3.1% 3.1% 2.8% Boating & Fishing
Oregon     13      75.8     2.9% 3.4% 2.8% RVing
South Carolina     14      74.6     2.9% 3.5% 2.5% Boating & Fishing
South Dakota     15      69.6     2.5% 3.3% 2.5% RVing
United States     –      N/A     2.1% 2.5% 2.0% Boating & Fishing


For more information, a detailed methodology, and complete results, you can find the original report on Outdoorsy’s website:


Cities With the Most Economic Growth in 2021

The U.S. economy has made a remarkable comeback from the deep dive caused by the pandemic. Consumer spending (fueled by savings and government stimulus money) is strong, the economy recently added the most jobs in nearly a year, and the housing market is booming. According to the Bureau of Labor Statistics, nonfarm employment has grown by 1.5% from January to May, and the unemployment rate is now 5.9%, well below the high of 14.8% seen in April 2020.

In the spring of last year, real gross domestic product (GDP)—a measure of economic activity used to track the health of the country—fell by a record annualized rate of 31.4%, the sharpest contraction in modern U.S. history. In comparison, real GDP fell by less than 9% annualized in 2008 during the Great Recession and took several years to recover. Following the initial COVID-19 shutdowns, GDP has been recovering quickly as economic activity resumes, and is projected to return to its pre-pandemic level later this year.

Alongside the broader economic contraction were massive job losses: nonfarm employment initially dropped by 20.5 million in the early stages of the pandemic. Following this unprecedented decline, employment increased sharply in May of last year, but since then, the recovery has slowed with current employment far below pre-pandemic levels. Some cities and states have been affected more than others depending on local economic factors. As such, current unemployment rates vary widely across the country, ranging from less than 3% to more than 10%.

To find the locations with the most economic growth in 2021, researchers at Stessa analyzed data from the Bureau of Labor Statistics, the U.S. Census Bureau, and Redfin, creating a composite score based on the following factors:

-Percentage change in total employment from January to May 2021

-Unemployment rate from May 2021

-Average monthly building permits per capita (averaged over January to May 2021)

-Average monthly home sales per capita (averaged over January to May 2021)

Based on these metrics, Utah and Florida are the two states with the most economic growth this year. Both states saw employment grow by 1.5% from January to May and have lower than average unemployment rates (at 2.7% and 5.0%, respectively). At a time when housing is in short supply across much of the country, new residential construction is booming in these states, with 107 and 79 average monthly building permits per 100,000 residents, respectively, far above the national rate of 43.

At the opposite end of the spectrum, Louisiana and Alaska reported the least economic growth so far this year. Louisiana employment actually decreased slightly from January to May while employment in Alaska increased only marginally. Both states have higher than average unemployment rates and lower than average residential construction and home sales per capita.

To find the metropolitan areas with the most economic growth, Stessa ranked metros using the same composite score. To improve relevance, only metropolitan areas with at least 100,000 people were included in the analysis. Additionally, metro areas were grouped based on population size.

Here are the large U.S. metros experiencing the most economic growth in 2021.

Metro Rank   Composite score   Percentage change in total employment   Unemployment rate  Average monthly building permits per 100,000 residents  Average monthly home sales per 100,000


Nashville-Davidson–Murfreesboro–Franklin, TN    1     78.9     1.1% 3.9% 132 174
Raleigh-Cary, NC    2     78.6     1.0% 3.8% 136 168
Austin-Round Rock-Georgetown, TX    3     77.9     1.3% 4.2% 207 138
Jacksonville, FL    4     75.0     0.8% 4.2% 127 191
Orlando-Kissimmee-Sanford, FL    5     74.7     2.8% 5.4% 84 173
Oklahoma City, OK    6     73.0     1.3% 3.6% 55 139
Minneapolis-St. Paul-Bloomington, MN-WI    7     71.4     1.7% 3.8% 57 122
Tampa-St. Petersburg-Clearwater, FL    8     70.4     1.0% 4.6% 75 193
Salt Lake City, UT    9     69.9     1.1% 2.8% 78 107
Atlanta-Sandy Springs-Alpharetta, GA    10     68.9     1.1% 3.9% 55 153
Denver-Aurora-Lakewood, CO    11     65.3     1.6% 5.9% 77 156
Las Vegas-Henderson-Paradise, NV    12     64.7     3.1% 8.9% 63 181
Portland-Vancouver-Hillsboro, OR-WA    13     64.6     2.6% 5.3% 51 133
Phoenix-Mesa-Chandler, AZ    14     64.4     1.3% 6.2% 88 173
Charlotte-Concord-Gastonia, NC-SC    15     63.6     0.4% 4.3% 83 152
United States    –     N/A     1.5% 5.8% 43 165


For more information, a detailed methodology, and complete results, you can find the original report on Stessa’s website:



A particularly virulent and nasty airborne virus, it has so far accounted for 2.5 million deaths worldwide with more than 110 million cases recorded at the time of writing. Given these numbers only represent reported incidences, the real tolls could well be substantially higher.

The pandemic has especially caught western societies on the backfoot. Unlike regions more used to infectious disease outbreaks such as Asia and Africa, the likes of Europe and North America have not had to deal with a public health threat of this kind since the Spanish flu disaster of 1918, a four-wave pandemic which is thought to have killed 675,000 people in the USA and 50 million worldwide.

Vaccinations are key to emerging from the worst of the crisis during 2021, both in terms of public health and the economy.

Regarding the latter, COVID-19 has been nothing short of a disaster. America has disproportionately suffered from the coronavirus: Not only does it have the highest registered death toll, but it is also forecast to lose trillions of dollars in revenue.

Predicting the size of the economic fallout is far from straightforward, and estimates vary tremendously.

According to a study by the University of Southern California, anywhere between $3 trillion and $5 trillion could be lost over the next two years, while economists at Harvard believe the pandemic will cost the U.S. $16 trillion, assuming it is over by this fall.

While uncertainty remains as to the exact extent of the financial damage, what cannot be denied is that the financial losses are and will continue to be enormous for years to come.

The second quarter of 2020 saw real gross domestic product in the U.S. decrease at an annual rate of 31.7 percent, the largest quarterly plunge in activity on record.

And one of the most worrying patterns emerging from 2020 is companies struggling to manage cashflows and stay afloat. Payments simply are not flowing through supply chains as they ordinarily would, an observation which is borne out by several reports and surveys.

For example, trade credit insurer Atradius reports in its annual Payment Practices Barometer that businesses across the USA, Canada and Mexico are facing widespread cash and liquidity pressures. Meanwhile, business credit information firm Cortera reported that in May 2020, large companies with more than 500 employees paid their suppliers 15.6 days late on average, up from around 10 days a year earlier.

Responding to economic disruption

So, how can companies safeguard themselves against this sort of financial disruption both now and in the future?

Paying particular attention to cash flow during times of crisis is essential if businesses are to emerge from this black swan event intact–even those that appear to be in strong financial shape, given the longevity of the demand and supply chain disruption being witnessed.

At the start of the pandemic, around March 2020, Deloitte released a series of advice papers on how supply chains can cope with the then anticipated fallout, one of these being “COVID-19: Managing cash flow during a period of crisis.”

“Given the importance of cash flow in times like this, companies should immediately develop a treasury plan for cash management as part of their overall business risk and continuity plans,” the report states. “In doing so, it is essential to take a full ecosystem and end-to-end supply chain perspective, as the approaches you take to manage cash will have implications for not only your business but also for your customers.”

Deloitte draws on lessons learned from the 2003 SARS epidemic, the 2008 global financial crash, and the 2011 Japanese earthquake, offering 15 specific practices and strategies for companies to better manage their cash flow.

15 ways to better manage your cashflow

1. Ensure you have a robust framework for managing supply chain risk.

2. Ensure your own financing remains viable.

3. Focus on the cash-to-cash conversion cycle.

4. Think like a CFO, across the organization.

5. Revisit your variable costs.

6. Revisit capital investment plans.

7. Focus on inventory management.

8. Extend payables, intelligently.

9. Manage and expedite receivables.

10. Consider alternate supply chain financing options.

11. Audit payables and receivables transactions.

12. Understand your business interruption insurance.

13. Consider alternate or non-traditional revenue streams.

14. Convert fixed to variable costs, where possible.

15. Think beyond your four walls.

*Source – Deloitte, “COVID-19: Managing cash flow during a period of crisis”

Among them is advice to extend payables–in other words, take longer to pay suppliers. However, Deloitte warns against delaying payments without prior agreement with customers, urging dialogue between both parties to ensure the supply chain is as minimally disrupted as possible.

Indeed, companies may wish to bring forward payments to suppliers if it prevents them from going out of business, the consequences of which being far costlier than using up some of your own cash reserves early.

As a supplier, offering dynamic discounting solutions for those able to pay more quickly could be a way to improve your cash flows; by using this technique, you are essentially paying customers to provide you with short-term financing. Going down this route could be expensive in the long term, but it could be the only viable option if other financing methods are not available.

Perhaps the most important, albeit least tangible piece of advice is to think outside of the confines of your own business. Rather than simply focus on your own operations, companies should think about how their actions will impact the wider supply chain ecosystem.

A further question revolves around the ways in which payments are being made.

COVID-19 has accelerated the adoption of digital and automated payment methods. For instance, according to research by digital transformation platform MX, there has been a rise in mobile banking engagement of 50 percent since the end of 2019.

The U.S. has been behind the curve on supply chain financing for quite some time. Widescale adoption of electronic, data-driven invoicing will create fluidity and working capital for both suppliers and buyers.

Responding to social disruption

Another dynamic to consider is how to mitigate social disruption.

There is already evidence that the COVID-19 pandemic has rekindled divisions within society–black and ethnic minorities are disproportionately affected by the virus, while the poorest have been hit hardest by the financial costs of lockdown policies.

While not being ostensibly linked to coronavirus, the traction gained by the Black Lives Matter movement in the U.S. has undoubtedly been heightened in the pandemic’s context.

It has also prompted major shifts in consumer and business circles: Citizens and enterprises are putting time and capital towards prioritizing diversity and inclusion.

“Supplier diversity initiatives are no exception,” states supply chain software provider GEP in its 2021 Outlook. “In 2021, procurement and supply chain leaders will need to do more–by developing new approaches to include minority-owned businesses to achieve real targets for supplier diversity.”

Indeed, hardwiring diversity and inclusion into the procure-to-pay process will help organizations respond to the social unrest of 2020. This will involve tracking and benchmarking metrics at a transactional level, and companies can start by focusing on direct spending with small and diverse suppliers.

Going back to Deloitte’s advice on thinking beyond your four walls, businesses should also monitor the revenue growth of their suppliers in order to fully assess the impact of their supplier diversity and inclusion strategies.


Mexico Faces a Slow Economic Recovery After a Steep Recession

Mexico’s economic performance deteriorated steeply in 2020 which may be largely attributed to the COVID-19 pandemic and slow government action to curb disease spread. GDP contracted 8.5%, mainly due to steep declines in consumption and investment.

Atradius economic analysts predict Mexico’s GDP will partially rebound in 2021, increasing by 6.1%. The coronavirus pandemic exacerbated an already weak economic situation. Mexico entered 2020 in a mild recession, due to fiscal tightening and falling investments on the back of rising policy uncertainty.

Government leaders face growing concern over health and economic policies

Due to the severe spread of the coronavirus pandemic and the resulting economic downturn, the handling of the crisis by the government has drawn harsh criticism. Compared to most other countries in the region, Mexico took less stringent measures on a national level to contain the spread of the disease.

Some of the poorest countries in Latin America—including El Salvador, Guatemala, Honduras and Venezuela—were among the quickest to respond, most likely in recognition of the extremely limited capacity of their healthcare systems to deal with a protracted public health crisis.

While President López Obrador’s popularity has subsequently dropped, approval rates remain high, at about 60%. This is due to some popular measures taken since his inauguration in December 2018, such as raising the minimum wage, reducing government salaries (including his own) and advancements in several high-profile corruption cases. The president’s party thus remains well-positioned for mid-term elections in June 2021. General disillusionment with traditional parties underpin this expectation.

High crime rates and endemic corruption continue to undermine the business environment and state functions in Mexico. The economic repercussions of the coronavirus pandemic particularly hit workers in the informal sector, who amount to about 60% of the total labor force. Consequently, rising poverty could become a major social and political issue if government action is not taken.

Limited fiscal measures in place to counter the downturn

Mexico’s high vulnerability to the lasting effects of the COVID-19 pandemic stems from its relatively weak healthcare system, the close synchronization of its economy with the U.S. business cycle and its relatively high dependence on the services sector. These factors make Mexico more susceptible to external shocks, especially with the stagnant tourism sector.

The 2021 outlook for most sectors in Mexico ranges from fair to bleak, with particular difficulty ahead for construction, engineering, and steel. The automobile sector, Mexico’s leading source of exports, suffered from a sharp fall in external demand and severe supply chain disruptions over the past year.

To help mitigate these impacts from the COVID-19 pandemic, the central bank cut interest rates several times in 2020, to a still relatively high 4% in February 2021, while the probability of further monetary policy easing has declined. Inflation is expected to remain at the upper end of the central bank’s 2%-4% target range, mainly due to higher fuel prices and shortages from supply-side disruptions.

A protracted recovery expected in 2021

Due to meager fiscal support and comparatively high-interest rates, Mexico’s economic recovery is expected to be protracted, and GDP will likely not return to its pre-pandemic level until 2024.

Other issues include persisting economic policy uncertainty, concerns about contract enforcement and rule of law under the current government, which may continue to have a negative impact on business confidence and private investments.

Exports in the manufacturing sector should receive a boost from higher U.S. growth prospects, while an infrastructure plan may contribute to a partial recovery of investment. However, this recovery expectation remains subject to a timely containment of the pandemic, including the speed of the vaccination campaign. The government debt ratio is expected to level off in 2022 despite weaker government finances.

The peso exchange rate against the USD sharply depreciated in March 2020, which may be largely due to high capital outflows and the deterioration of the oil price. However, it appreciated again since May, and by the end of 2020, it had almost recovered its lost ground. While the exchange rate is likely to remain volatile in 2021, it is expected to continue its appreciating trend, supported by a global recovery in manufacturing.

There are glimmers of hope for Mexico’s economic recovery in 2021, aided by accelerating growth in U.S. markets on the back of massive fiscal stimulus and vaccination rollouts globally. As long as Mexico can stay on a path toward growth, a partial economic rebound could be possible in 2021.


Greetje Frankena is a deputy chief economist at Atradius based in Amsterdam.

made in china


In a survey back in May, more than 1,000 American adults, 40 percent said, “I will not purchase products made in China.” And for the first time since 2002, China is no longer consistently our top source of imports. Are we putting our money where our mouths are?

China purchase decision poll

Here’s a thought experiment.

Imports are approximately 15 percent of total U.S. consumption. China’s share of U.S. imports is about 21 percent, so our imports from China represent 3.15 percent of GDP. Forty percent of that is 1.26 percent. In a straight calculation, if 40 percent of our imports from China disappeared, then 1.26 percent of GDP would also disappear.

Of course, it’s not so straightforward. More realistically, those American consumers and producers who are trying to stop buying from China have some decisions to make. Do I buy imported items from another country or can they instead be made here at home, albeit likely at greater expense? Am I willing to pay more?

Willing to pay more question

Ripple Effect of U.S. Imports From China

There are also indirect effects. Data from the Organization for Economic Cooperation and Development show that 15.5 percent of our exports are produced or manufactured using foreign components. Of course some of that is from China and would have to be sourced differently, possibly at greater expense.

And in other potential knock-on effects, what if China, in turn, stopped buying from us overnight? China’s share of U.S. exports is 7.2 percent and the U.S. export share of GDP is 12.2 percent. Such a sea change could affect close to one percent of our GDP. American exporters would have to find buyers in other export markets (albeit potentially at a lower price because if buyers in other countries were willing to pay more than China, we’d be selling there already instead).

Labeling Q

So the question is, can we believe those 1,000 adults in the survey who say they won’t buy “Made in China”? There is a well-known response bias in surveys that occurs when survey respondents are emotive about the subject. In other words, people often say one thing but do another.

American views on China have been steadily declining for a few years and have further deteriorated with the backlash over the COVID-19 pandemic. But if history is our guide, we should not expect people to pay much extra to shun Chinese-made goods. Shoppers are price sensitive, especially lower-income consumers. And as we climb out of our pandemic-induced economic hole, Americans will be shopping for deals.



Christine McDaniel a former senior economist with the White House Council of Economic Advisers and deputy assistant Treasury secretary for economic policy, is a senior research fellow with the Mercatus Center at George Mason University.

This article originally appeared on Republished with permission.

rule of law

Rule of Law is the Bedrock of Trade Agreements

Trade agreements promote rule of law

One could argue that the fundamental goal of any trade agreement is to promote and undergird government adherence to rule of law, which in turn enables private economic activity to thrive. When coupled with commitments to market access, individuals and companies are free to do business anywhere in the world.

Trade agreements such as the newly congressionally approved U.S.-Mexico-Canada Agreement contain provisions designed to directly combat corruption and promote good regulatory practices. They also contain myriad requirements that support best administrative practices including publishing changes to regulations, allowing for public comment, and adhering to transparent processes for government tenders, for example.

What is rule of law where trade is concerned?

No country gets it perfectly right. Supporting rule of law requires vigilance, upkeep and continual improvement.

Impartial review and scrutiny can be a powerful incentive for self-reflection. In 2013, the U.S. Chamber of Commerce launched an effort to measure the qualities that companies look for “to make good investment and operating any given market.”

Its resulting Global Rule of Law and Business Dashboard identified five broad factors to assess rule of law: transparency, predictability, stability, accountability and due process. Are the laws and regulations applied to businesses operating in the market readily accessible, easily understood, and applied in a logical and consistent manner? Do governing institutions operate consistently across administrations or are decisions arbitrary and easily reversed? Can investors be confident that the law will be upheld and applied without discrimination? Does the judicial system allow for disputes to be resolved through fair, transparent, and pre-determined processes?

That’s so “meta”

The Chamber didn’t recreate the analytical wheel – it developed a “meta measure” of rule of law for business by combining underlying indicators from several established indices.

The list includes the World Economic Forum’s annual Global Competitiveness Report, the World Justice Project’s Rule of Law Index, Transparency International’s Global Corruption Barometer, the Heritage Foundation’s Index of Economic Freedom, and several World Bank survey and index products including the Doing Business reports that have been long used by governments as roadmaps for reforms. By pulling relevant pieces of these indices, the Chamber computes a composite score to rank 90 markets.

Sunshine is the best disinfectant

Rating and publishing information about the operating conditions in the marketplace can be one of the best ways to shine light on corruption and poor governance, sometimes prompting a healthy competition among governments to show improvements that will attract more businesses.

Increasing all forms of private investment, including foreign direct investment, is critical to sustaining economic growth for most countries. Over the last few years, however, multinational companies have been reducing their foreign direct investments. In 2018, FDI flows dropped 19 percent from to $1.47 trillion to $1.2 trillion.

Companies consider many criteria when evaluating where to do business. Respect for rule of law is often a decisive factor over whether companies can or will participate in an overseas market. Without sufficient rule of the law, the risks are too great and the return on investment jeopardized. Having a high degree of confidence in rule of law is clearly correlated with where FDI flows. Other than the large emerging markets of China, Brazil, Russia, Mexico and India, the top recipients of net inflows of FDI between 2000 and 2017 are the same countries that ranked highly on the Global Rule of Law and Business Dashboard.

Room for improvement

Unsurprisingly, Singapore, Sweden, New Zealand, Netherlands, Australia, Germany, United Kingdom, the United States, Japan and Canada comprise the economies held the top ten slots on the Rule of Law and Business Dashboard released in July 2019. (China fell from 19th in 2017 to 26th in 2019.)

Bottom 10 smaller framed

And, unsurprisingly, countries beset by political instability and civil strife remain stuck at the bottom of the index. Here in the Americas neighborhood, Guatemala and Honduras, Nicaragua, El Salvador and Mexico are all perilously close to bottom of the list, something we should be concerned with and engage these countries on as important trading partners.

Importantly, the Chamber report points out that, “income is not necessarily a predetermining factor in terms of the strength of the rule of law and business environment.” Senegal and Kenya, with a per capita GDP of just around $3,458 and $3,292 respectively, score similarly to South Africa with its per capita income that is almost four times higher.

In producing the study, the Chamber seeks to induce positive changes across the board over the long run. Although the Global Rule of Law and Business Dashboard hasn’t been conducted long enough with a full complement of countries to tout a concrete impact just yet, the Chamber reports that the aggregate score does seem to be moving in right direction, increasing from 51.63 percent in 2015 to 56.77 percent in 2019. Even the United States pulled its score up more than four percentage points from 2017.

The best kind of competition

Benchmarking is a valuable approach, not merely to expose flaws but as a way for governments to identify and adopt reforms yielding proven results for other countries. Governments can even market an improved ranking to potential investors.

While we often measure the outcomes of trade agreements by the volume of trade, the biggest victory may be the least appreciated: the subtle but important improvements to the way our trading partners respect the rule of law as applied to their own citizenry – and to ours.


Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on Republished with permission.


How to Avoid Bottlenecks in Your Global Operations

You can’t just turn around a giant cargo ship. Even at some of the world’s best supply chains, redirecting chemicals and other products is a Herculean effort. And when shipping to volatile countries, it becomes even harder. For U.S. companies with global operations, one of the most effective ways to mitigate risk is to ship smarter.

In the current political climate, U.S. companies should be looking to partner with more stable countries where tariff changes aren’t expected. Take the Netherlands, for example. In 2017, the U.S. had a trade surplus of $24.5 billion.

I’ve been in supply chain management for more than a decade now. Supply chain flow has a lot of one-way check valves. Once cargo has shipped, there are no “backsies.” This is why supply chain managers are always stressing over demand forecasts — something that tops the list of most critical inventory management practices. And considering that our international tariff laws have been more dynamic in the past three years, shipping U.S. goods is more complex than it used to be.

Shipping Overseas

Anyone who has shipped freight by air or sea can attest to the fact that international shipping is complex — in no small part because of the rules and regulations around certain goods. Hazardous materials, obviously, can pose some problems. So can live cultures, a number of metals, and even telecommunication devices.

But it isn’t just international law that complicates matters. Everything from custom duties to cargo inspections can create bottlenecks within the supply chain. If even one item in a container is flagged, it could stop an entire ship’s worth of containers from making it past the terminal gates. It could then be held until a more thorough inspection can be made, which can come with an additional expense.

Complicating matters further, some countries will hold U.S. shipments for the sole reason that they’re coming from America. And in countries like Saudi Arabia, every container must go through inspection. Needless to say, these situations can add a significant amount of time to your shipment, creating inefficiencies in the supply chain that can sometimes be the equivalent of an additional tariff on your goods.

Being a former geo-marketing manager, I can tell you that a global view of operations can help you appreciate the people and logistics necessary to get goods from one location to another. It takes a great deal of coordination — and a great number of trucks, ships, and planes — to keep a supply chain running smoothly.

That’s why it’s so important to have some level of global operations knowledge as a U.S. supply chain professional. It can help you identify the potential “watering holes” of many products you need to buy for your operations. After all, the more you know about an item’s origin — and what it takes to get it to your warehouse — the easier it becomes to identify any middlemen that might be artificially elevating the price of goods.

This isn’t to say you should avoid international sources for goods. On the contrary, you should be exploring all your procurement options globally, nationally, and locally. Maybe you wouldn’t need to consider upheaving your operations and relocating your warehouse as a result of shifting trade patterns, like 48% of supply chain and transportation executives are doing now.

Getting a Global Perspective

The question then remains: What should U.S. manufacturers do to better understand global supply chain operations when exporting goods abroad? The following strategies should get you started:

Travel. To find the best prices for raw materials and the cheapest places to manufacture goods, the most logical answer is to travel. Knowing the origins of your raw materials can provide you with greater appreciation for the effort necessary to get an item to the production line. It also helps put the importance of quality in perspective. You understand why everything can’t be scrapped and reworked on a whim.

Study the local competition. Business is extremely competitive. The more you understand about local competitors, the easier it is to respond to changes. The U.S. e-commerce market has grown to $561 billion, making it the second-largest in the world. It didn’t take my first boss long to realize the value consumers place on U.S. brands, as they are willing to pay a premium for these goods — even over local ones.

Ask about tax reassessment and international ‘doing business as’ discounts.Many countries offer incentives for U.S. companies to do business in their lands. Free Trade Agreementsmake it much easier and cheaper to export goods to myriad foreign markets. The only problem: Most U.S. manufacturers never inquire about discounts on port duties or refunds for certain sales. Look at national government incentives for doing business in other countries.

Secure backup buyers. Regime changes, political turmoil, and bankruptcy are just a few events that can affect sales. In case your first buyer cannot purchase your goods, you need a backup buyer. Even at a price reduction, you salvage quarterly net income. To avoid tariffs on Chinese goods, companies bought all sorts of goods towards the end of last year. By February, all that changed. U.S. ocean imports fell 4.5%, and overall U.S. imports from China dropped 9.9%.

Chances are that the supply chain will become more central — and more global — to everything. In fact, activities associated with transportation and logistics account for anywhere between 10% and 12% of global GDP. As imports and exports ebb, it could disrupt not only the U.S. economy, but also the global one. But if you get to know the local competition, leverage business incentives from other countries, and take the time to formulate contingency plans for fluctuating demands, you’re more likely to weather the next storm.


Ali Hasan R. is the co-founder and CEO of ThroughPut Inc., the artificial intelligence supply chain pioneer that enables companies to detect, prioritize, and alleviate dynamic operational bottlenecks. Ali’s unique experiences in onshore and offshore supply chain management in the United States, Russia, United Arab Emirates, Saudi Arabia, Pakistan, Bahrain, and Yemen have produced results for customers’ ongoing work, which is now featured at some of the world’s most recognized brands.

global trade

Study Shows Global Trade Represents 1 out of 5 jobs in California

The Golden State makes news headlines once again boasting its impressive job market. The latest numbers from a study released by Business Roundtable and prepared by Trade Partnership Worldwide confirms a whopping 4,710,600 jobs are supported by global trade in California. The study gathered the most recent information available reflecting employment data from 2017.

“The CEO members of Business Roundtable, who lead companies with more than 15 million employees, strongly support congressional passage of USMCA implementing legislation this year. We stand united to preserve and modernize North American trade, which supports over 12 million jobs and a strong U.S. economy,” said Tom Linebarger, Chairman and CEO of Cummins Inc. and Chair of the Business Roundtable Trade & International Committee.

In addition to the massive employment numbers supported by global trade, California’s export market is also revealing impressive numbers. The same study also revealed goods and services exports made up 11.2 percent of the state’s overall GDP as it exported up to $59.5 billion in goods and services to Mexico and Canada in 2017.

The study in its entirety can be found here.

Brazil’s BRIC Cracks on Disappointing Growth Figures

Los Angeles, CA – There’s a serious fissure developing in the BRIC wall as the latest government figures show that Brazil has slipped into recession, with the Latin American giant’s gross domestic product (GDP) contracting for a second consecutive quarter.

According to the official government statistics bureau in Brasilia, the country’s GDP stands at about $567 billion, down 0.6 percent from the previous three months, while revised figures for the first quarter showed a drop of 0.2 percent.

The government had initially had reported first-quarter growth of 0.2 percent.

The country last experienced a recession in late 2008 and early 2 009, when a world economic crisis slashed demand for steel, minerals, farm goods and other key Brazilian exports.

The BRICS – Brazil, Russia, India, China and South Africa – together represent 18 percent of the world total, are all experiencing slowdowns in their once fast-paced rates of growth. Exacerbating the economic difficulties is Russia’s volatile activity in Ukraine, which has sparked a rash of sanctions on Moscow by the US and the European Union.

Last month, leaders of the five countries met in Brazil and decided to create their own development bank as a counterweight to what they perceive are “western-dominated financial organizations like the US-based World Bank and International Monetary Fund.

The new development bank will reportedly be based in Shanghai and is expected to be functional within two years. It will be capitalized at $50 billion, a figure that could grow to $100 billion to fund infrastructure projects. The fund would also have $100 billion at its disposal “to weather economic hard times.”