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How US Stimulus Measures, Political Landscape Impact Canadian International Trade
COVID-19 has had a major impact on both developed and emerging economies. At HSBC, we’ve identified about a 7% economic retraction, on average, for developed countries and a 2% drop for developing economies. These economic hits have been difficult to absorb, but we’re now at a significant turning point as nations around the world begin to ease lockdown measures in efforts to reopen their economies and kickstart recovery efforts.
Much like Canada, the United States has announced and implemented widespread stimulus measures to support organizations and citizens across the country. While providing an immediate benefit to both citizens and businesses during the worst of the COVID-19 pandemic, these measures also bring questions about potential impacts in the long-term and access for organizations originating in other markets.
A recent HSBC webinar delved into the COVID-19 economic situation south of the border, and what that means for Canadian international trade and businesses with operations, partners and customers in the US.
Stimulus spending and the political landscape
The administration of US President Donald Trump has taken aggressive action to ease the impact of COVID-19, spending trillions in stimulus measures aimed at shoring up the American economy.
Central to this effort is the Coronavirus Aid, Relief and Economic Security (CARES) Act that was part of a $2.2 trillion relief package for individuals, businesses and government organizations impacted by COVID-19. The CARES Act included key provisions such as the Paycheck Protection Program (PPP), emergency grants for businesses applying for SBA Economic Injury Disaster Loans, increased funding for business education programs and relaxed criteria for filing Chapter 11 bankruptcy.
“The PPP has been incredibly popular,” says Christopher Rosello, Head of Public Policy, HSBC Bank US, NA. “Businesses are now able to turn those loans into grants if they meet the right criteria — including Canadian companies already operating in the United States.”
Canadian firms hoping to transform those loans to grants must keep scrupulously accurate records on how those funds are being used, said Jaron Campbell, Head of International Subsidiary Banking, HSBC Bank US, NA. There is a myriad of conditions that must be met for the loans to become grants, so it’s crucial that organizations have sound records to prove they’ve followed the proper guidelines.
Rosello agreed, saying diligent record-keeping is more important than ever given the rise of fraudulent use of the PPP. He noted there have been a number of scams associated with the program that have required law enforcement to crack down and lay loan fraud charges1. This will probably lead to oversight investigations and a wave of audits in the future.
Changes to the PPP could therefore also be on the horizon, including a greater emphasis placed on ensuring minority communities can get access to the funds, Rosello said. HSBC has been working closely with its customers, and has processed more than 4,000 PPP applications with a 90% approval rate, he added.
Meantime, the Federal Reserve's Main Street Lending Program, worth $600 billion, will become operational soon as an additional stimulus package for middle market businesses that need cash flow support.
Unlike other programs, Main Street Lending Program loans are not forgivable, and banks are required to carry some of the risk, which is estimated to be between 5% to 15%. Eligible companies will have to adhere to multiple program rules, such as limits on executive compensation and stock buybacks. For that reason, it’s viewed more as a backstop for organizations that cannot currently secure additional loans from their financial institutions, Rosello said.
Looming election means bumpy road for passing legislation
While Republicans and Democrats reached across the aisle to quickly pass four crucial COVID-19 bills to help stimulate the economy, there’s no question there will be an increase in partisan feuding as November’s presidential election approaches, Rosello noted. There might be another stimulus bill over the summer as Democrats controlling the House of Representatives push for more spending, while Republicans will likely take a more “wait and see” approach, he predicted.
A new spending bill could include additional limited liability protections for businesses, expanded employment benefits and possibly more stimulus cheques. But Rosello pointed out that how fast new spending bills get passed is a big unknown given the partisan saber-rattling that’s sure to become more dramatic as the election nears.
Rosello also told the webinar to expect a rise in protectionist “America First” sentiments from both Democrats and Republicans who will make the case to support American workers, businesses and jobs, particularly in the health-care sector. Public opinion polls have made clear that voters want to see a more self-sufficient America post-pandemic.
The road ahead
How will the aggressive stimulus measures impact the US economy in the medium term? Ryan Wang, US Chief Economist, HSBC Securities told the webinar that the level of collaboration between the US Treasury Department and the Federal Reserve has been unprecedented, and so has the amount of dollars spent so far to prop up the American economy.
As 2020 began, HSBC forecast the US federal deficit would hover around the $1 trillion mark. Now, with $3 trillion in stimulus measures passed, the deficit will likely hit $4 trillion.
With interest rates remaining low and poised to fall further, there is increasing speculation about the health of the American dollar and its standing as the world’s reserve currency. Wang noted that there probably isn’t going to be a substantial change for the dollar’s standing in the medium term. But he added that the US government will need to start communicating how it plans to spend money in the long term. Those plans and their impact on the US economy could be driving factors for Canadian businesses that are currently operating in, or plan to expand to, the United States.
How will US economic realities impact Canadian businesses? Read here.
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1 Forbes, May 14 2020, Federal Charges Of PPP Loan Fraud Are Here To Remind You These Loans Are Not “Free Money”
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