An American view on business payment behaviour and TPP
Dan North (Euler Hermes Chief Economist, North America) is the author the conclusions of February 2016 of Euler Hermes SA, an Allianz company, and its PBI Payment Behaviour Index, a reliable source of business conduct done in a survey. The changes in payment behaviour indicates a rather drastic change in the amount of payments executed, particularly among businesses in the U.S.A. Since we all conduct business and expect due payments, TextileFuture feels that this index shows that the times ahead could be difficult and clouded. The same author has also released a comment on the “Five risks associated with the TPP Trans Pacific Partnership Deal”, which we add to this TextileFuture Newsletter in order to bring nearer the actual and future economic and political situation of the USA
The Euler Hermes PBI Payment Behaviour Index (PBI) fell 6.4 points from 67.2 to 60.8 over the past four quarters ending in Q4-15 (Figure 1). The deterioration in payment behaviour indicates an increase in the numbers of late payments to businesses. The PBI is developed using Euler Hermes’ proprietary past due information from policyholders about unpaid accounts receivables by their buyers. A PBI above 50 indicates payment behaviour better than average, and below 50 worse than average. Although the PBI is still above 50, it has fallen markedly over the past four quarters indicating that buyers are starting to encounter financial stress due to a weak economy. As a broad indicator of business conditions, the PBI is highly correlated to GDP growth; therefore, Euler Hermes expects to see continued tepid GDP growth of 2.3 % in 2016.
Financial conditions, shrinking profits contributing to slow payment and bankruptcies
The Federal Reserve raised the target Fed Funds interest rate for the first time in over 11 years in December 2015 (Figure 2). However, financial markets had been anticipating the move for some time, and, as a result financial conditions began to tighten well before the actual increase. One measure of tightening financial conditions is the net percentage of bankers who are widening the interest rate spreads on their loans, as represented by the blue line in Figure 2.
Looking ahead, the most likely scenario for 2016 is that the Fed will raise rates 1-2 times more this year, although it is possible they would not raise at all. Regardless of the pace of Fed hikes, bank lending conditions are quite likely to continue tightening, making it more difficult and expensive for businesses to get credit and fund their operations
These tighter lending conditions have already contributed to the increase in slow payment: If a business cannot get funding from banks, it will effectively get funding by paying its bills more slowly. After a certain point, the business will stop paying its bills altogether and declare bankruptcy.
In fact as shown in Figure 3, tightening lending conditions have historically been highly correlated with increases in nationwide bankruptcies. Furthermore, real corporate investment is slowing, and real corporate profits are actually shrinking (Figure 4) putting additional pressure on businesses. The combination of expensive credit and falling profits is quite likely to make bankruptcies rise, and Euler Hermes expects to see bankruptcies increase by 3 % in 2016 after six straight years of declines. In fact, the decaying payment behaviour as shown by Euler Hermes’ Payment Behavior Index is a strong harbinger of the coming increase in bankruptcies.
Some sectors are showing marked deterioration in late payments. For example, metals and machinery companies are facing severe financial stress due to a combination of factors including weak global demand, plummeting orders for pipe and machinery from oil drillers, and a strong dollar, which makes exports less competitive, and which causes a flood of cheap imports that are difficult to compete. Commodities producers are also under severe stress from the collapse in commodity prices. In 2016, Hermes Euler expects to see continued anaemic global demand, low commodity prices, weak machinery orders, and even though the dollar has fallen a bit in the past few weeks, we do not expect it to fall enough to boost exports or lessen competition from cheap imports. Conversely, the food sector is showing incremental improvement, and strength in auto sales has resulted in significant reductions in late payments as well. We expect to see continued strength in auto sales in 2016, boosted by cheap gasoline prices and a still ageing fleet.
Five risks associated with the TPP Trans Pacific Partnership Deal from a USA viewpoint
Dan North is the economist for the US and Canada, based in Owings Mills, Maryland. Dan has been with Euler Hermes North America since 1996, using macroeconomic and quantitative analyses to help manage the risk portfolio. Dan has appeared on a wide range of media, both in the US and abroad, and he is a top speaker at trade groups, credit managers’ associations, often meeting with clients, and prospects throughout North America
The Trans Pacific Partnership (TPP) is designed to promote trade between 12 countries; Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The TPP aims at trade liberalization in goods and services, including the reduction of over 18,000 specific tariffs. Of particular interest to the U.S. are the reduction of tariffs on agricultural products, lower barriers in services, and intellectual property (IP) protections. Despite the benefits of access to new markets and increased trade, there are still risks associated with the TPP
Risk 1: Little economic benefit to the U.S. Of the 11 other countries in the TPP, the U.S. already has free trade agreements with six of them. Of the remaining five, Brunei, Japan, Malaysia, New Zealand and Vietnam, only Japan represents a significant market at 7 % of global GDP, and the remainder represent only about 1 % of global GDP combined. Therefore, the size of the potential new markets for the U.S. is rather small, as will likely be the economic benefit. That is why the TPP is actually meaning to be a strategic agreement, which will cement U.S. trade ties to Asian countries, thus keeping China from dominating trade in the region.
Risk 2: Increased competition in some industries. Under the TPP, some industries may come under pressure. For example, autos parts makers in the U.S. and Canada may face tougher competition. Under NAFTA rules, auto parts had to have at least 60% North American content to qualify as duty free, but under TPP that threshold has been reduced to a range of 35 %-45 %, opening new markets to lower-cost manufacturers.
Risk 3: Currency manipulation. The TPP could subject U.S. trade to countries that manipulate their currencies to gain competitive advantage. In theory, a country could artificially hold down the value of its currency to make its exports more competitive and imports from the U.S. less competitive, just the opposite of the level playing field a trade agreement should promote. The TPP does not include any sanctions for currency manipulation, although the U.S. may try to argue for a side deal to create protections against it.
Risk 4: A host of smaller risks. Many specific measures in the TPP carry risks. Some of these measures include: longer pharmaceutical patents, which will quell generics, keeping prices high; intellectual property rights that could lead to Internet restrictions; lowering of standards on imported food; an investor-state resolution system, which would allow foreign corporations to sue the U.S. government; downward pressure on U.S. wages; and many more unknowns risks—the TPP is thousands of pages long.
Risk 5: Passage. The TPP is unloved by large swaths of the public, the U.S. Congress, and about half of the presidential candidates. Among many other criticisms, opponents blame prior free trade agreements such as NAFTA for destroying millions of American jobs. The bill seems unlikely to come up for a vote until at least after the 2016 elections. Depending on the outcome of the elections, the TPP may never be passed in the USA.