United States of America

In the race to tame inflation, the final mile is the hardest

Despite durably high inflation and an aggressive monetary tightening cycle, activity was solid in 2023, with household consumption and public spending in particular driving growth. In 2024, growth is set to moderate only slightly despite the effects of higher rates, thanks for the most part to a persistently tight job market (unemployment under 4% and a robust job creation rate as at Q1 2024) supporting household consumption. Tailwinds from continued income growth will be modestly offset by depletion of pandemic-era excess savings and fragilities among financially vulnerable households (as suggested by rising delinquencies on auto loans and credit cards). Purchasing power will also benefit from moderating inflation. After peaking at 9.1% in mid-2022, CPI inflation rapidly decelerated and has stabilised at around the 3% mark since mid-2023, i.e., above the Fed’s 2% target. However, PCE inflation (the Fed’s preferred measure) is on a clearer downward trend, and the labour market shows multiple signs of loosening despite strong job growth. The Fed is therefore still expected to start cutting its target rate range (currently at 5.25%-5.50%, its highest since 2001) during the summer of 2024, albeit at a more cautious pace. These rate cuts would stimulate residential investment in the second half of the year. Nevertheless, financial conditions will remain restrictive in 2024 and weigh on corporate spending. Incentives to invest in clean energy and semiconductors should continue to keep capital expenditure afloat. While public spending was buoyant in 2023, it is likely to be more cautious this year. Rising interest charges on debt and divergent views on fiscal policy in Washington, especially in an election year, will limit federal spending. State and local governments, on the other hand, will continue to implement federal investment programs, including infrastructure, thus maintaining a positive contribution from public spending. The surprising boost to activity from net exports in 2023 is likely to run out of steam on back of the delayed effects of a strong dollar, which has further room for appreciation if other major central banks loosen policy faster.

Fiscal deficit stabilises at a high level

Falling government revenues following atypical growth in the previous fiscal year, and rising debt servicing costs contributed to a widening deficit in 2022-23. In the current fiscal year, the deficit is expected to narrow again, although it will remain well above the deficits recorded prior to the Covid-19 crisis. Under the Fiscal Responsibility Act of June 2023, which ended the debt ceiling crisis, non-defence discretionary spending would therefore remain unchanged. After the elections, a re-elected Biden would face pressure from Republican lawmakers to extend the 2017 Trump tax cuts and offset their impact with spending reductions. However, with most of the growth spending coming from debt service costs and demographically driven welfare and healthcare spending, the margin for meaningful consolidation is thin. A return to office by Trump could result in the Republicans controlling both houses of Congress, which would herald an extension of the 2017 income tax provisions and a further cut in the corporate tax rate. To compensate, we would expect to see adjustments in Biden’s green policies, more selective welfare, and a reduction of health insurance subsidies. In any scenario, large deficits are expected to persist. Although the debt burden is heavy, the authorities remain in a position to meet their financial obligations given the country’s unrivalled financing flexibility thanks to its status as issuer of the USD, the world's main reserve currency. However, the last-minute agreement to raise the debt ceiling in 2023 to avoid default demonstrated that politicisation of the debt limit is a recurring pitfall. This was one of the risks cited by Fitch to justify downgrading the US’ credit rating to AA+ in August 2023.

The current account deficit will remain high in 2024, fuelled mainly by the structural deficit in the merchandise balance (3.9% of GDP in 2023). New liquefied natural gas production capacity will support exports, particularly to Europe. After experiencing significant movements linked to disruptions in transport services in recent years, the surplus on the services account should remain stable at around 1% of GDP. The positive primary income balance (0.7% of GDP) is expected to improve slightly, as receipts from interest and deposits on US assets abroad increase. International cooperation transfers and remittances will keep the transfer balance in deficit (around 0.6% of GDP). The attractiveness of US assets and the USD is generating portfolio investments (Treasury bills, equities, etc.) to finance the deficit. Any post-election trade policy (such as higher tariffs) is unlikely to affect the trade deficit, as it originates from the US’s structurally high levels of consumption relative to production.

2024 elections set against a backdrop of high-running domestic and international tension

Incumbent Democrat Joe Biden and his Republican Predecessor, Donald Trump, have both won their respective primary races and are on course for a rematch of the 2020 contest. Concerns over Biden’s age and Trump’s legal dilemmas are unlikely to obstruct their candidacies. The race for the Presidency will be closely contested, as will those for the House of Representatives and the Senate. As neither party is expected to win the trifecta, we expect a divided Congress. In a polarised political context, the leanings of each candidate point to divergent outlooks on domestic and foreign policy. A second Trump presidency would be marked by less reliable support for key allies (Ukraine, Israel, NATO), tighter immigration policies, tax policies favoring fossil fuels and corporations, and increased trade tariffs. Under a continued Biden administration, we expect a stronger focus on industrial policy (with a preference for green policies), a push for tax hikes on corporations and high-income households, and a multilateral approach to foreign policy.

In an environment of heightened technological competition, and with tensions in the China Sea remaining high, rivalry with China continues to dominate US foreign policy and is likely to remain a priority whatever the outcome of the election. The commitment to Ukraine would be uncertain under Trump, though Senate Republicans will favour continued support. The alliance with Israel should remain strong in either case, but efforts to contain Israeli military action and avoid an escalation of the conflict will remain in place.

Payment

Exporters should pay close attention to sales contract clauses on the respective obligations of the parties and determine payment terms best suited to the context, particularly where credit payment obligations are involved. In this regard, cheques and bills of exchange are very basic payment devices that do not allow creditors to bring actions for recovery in respect of “exchange law” (droit cambiaire) as is possible in other signatory countries of the 1930 and 1931 Geneva Conventions on uniform legal treatment of bills of exchange and cheques.

Cheques are widely used but, as they are not required to be covered at their issue, offer relatively limited guarantees. Account holders may stop payment on a cheque by submitting a written request to the bank within 14 days of the cheque’s issue. Moreover, in the event of default, payees must still provide proof of claim. Certified checks offer greater security to suppliers, as the bank certifying the cheque thereby confirms the presence of sufficient funds in the account and makes a commitment to pay it. Although more difficult to obtain and therefore less commonplace, cashier’s checks – cheques drawn directly on a bank’s own account – provide complete security as they constitute a direct undertaking to pay from the bank.

Bills of exchange and promissory notes are less commonly used and offer no specific proof of debt. The open account system is only justified after a continuing business relationship has been established.

Transfers are used frequently – especially via the SWIFT electronic network, to which most American banks are connected, and which provides speedy and low-cost processing of international payments. SWIFT transfers are particularly suitable where real trust exists between the contracting parties, since the seller is dependent on the buyer acting in good faith and effectively initiating the transfer order.

For large amounts, major American companies also use two other highly automated interbank transfer systems – the Clearing House Interbank Payments System (CHIPS), operated by private financial institutions, and the Fedwire Funds Service System, operated by the Federal Reserve.

Debt Collection

Amicable phase

Since the American legal system is complex and costly (especially regarding lawyers’ fees), it is advisable to negotiate and settle out of court with customers wherever possible, or otherwise hire a collection agency.

Legal proceedings

The judicial system comprises two basic types of court: the federal District Courts with at least one such court in each state and the Circuit or County Courts under the jurisdiction of each state.

Fast-track proceedings

If the debt is certain and undisputed, US law provides for a “summary judgment” procedure, where a motion for summary judgment is based upon a claim by one party that all necessary factual issues are settled or that no trial is necessary. This is appropriate when the court determines there are no factual issues remaining to be tried, and therefore a cause of action or all causes of action in the complaint can be decided without a trial. If the judge decides that there are facts in dispute, the court will deny the motion for summary judgment and order a trial.

Ordinary proceedings

The vast majority of proceedings are heard by state courts, which apply state and federal law to disputes falling within their jurisdictions (i.e. legal actions concerning persons domiciled or resident in the state).

Federal courts, on the other hand, rule on disputes involving state governments, cases involving interpretations of the constitution or federal treaties, and claims above USD 75,000 between citizens of different American states or between an American citizen and a foreign national or foreign state body or, in some cases, between plaintiffs and defendants from foreign countries.

A key feature of the American judicial system is the pre-trial “discovery” phase, whereby each party may demand evidence and testimonies relating to the dispute from the adversary before the court hears the case. During the trial itself, judges give plaintiffs and their lawyers a considerable leeway to produce pertinent documents at any time and conduct the trial in general. This is an adversarial procedure, where the judge has more the role of an arbitrator, ensuring compliance with the procedural rules, although more and more practices enhances the role of the judge in the running of the case. The discovery phase can last several months, even years. It can entail high costs due to each adversary’s insistence on constantly providing pertinent evidence (argued by each party), and involve various means – such as investigations, requests for supporting documents, witness testimony, and detective reports – which are then submitted for court approval during the final phase of the proceedings.

In civil cases, the jury determines whether the demand is justified and also determines the penalty to impose on the offender. For especially complex, lengthy, or expensive litigations, such as insolvency cases, courts have been known to allow creditors to hold as liable the professionals (e.g. auditors) who have counselled the defaulting party, where such advisors have demonstrably acted improperly.

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Enforcement of a Legal Decision

Domestic judgments in the United States give the creditors additional rights, such as the seizure and selling of the debtor’s assets or the garnishment of their bank account. As a federal state, decisions rendered in one of the country’s states may be executed in another state’s court, provided that the enforcing court considers that it is competent to enforce any judgement.

For foreign awards, each state has its own legislation. Nevertheless, they must be first recognised as domestic judgments. If a reciprocal recognition treaty exists, the requirement is fulfilled. However, in the absence of one, exequatur proceedings aim at ensuring enforcement in domestic court, after verifying the judgment meets certain criteria provided by the state law.

Insolvency Proceedings

OUT-OF COURT PROCEEDINGS

Different state laws can propose out-of court proceedings in order to avoid any formal judicial proceedings, such as the Assignment for the benefit of creditors in the state of California, where a company turns over all of its assets to an independent third party, who liquidates and distributes them to all creditors in an equitable fashion.

RESTRUCTURING PROCEEDINGS

Chapter 11 of the American Bankruptcy Code provides a distressed entity with the opportunity to preserve its business as a going concern while implementing an operation of financial restructuring. The debtor can seek to adjust its debt by reduction the amount owed or extending repayment terms. The debtor entity and its management continue to operate the business as the debtor-in-possession. The Bankruptcy Court supervises the proceedings.

LIQUIDATION

According to Chapter 7 of the American Bankruptcy Code, the purpose of these proceedings is to implement an orderly liquidation of the distressed entity. The court-supervised process involves a trustee selling assets and distributing the proceeds to creditors in accordance with the statutory priorities provided in the Bankruptcy Code as well as pursuing available causes of action. The US Trustee appoints an independent interim trustee to administer the case. The interim trustee holds a meeting of creditors after the petition is filed. He is responsible for liquidating the estate’s assets and distributing the proceeds to the creditors. The court supervises the proceedings. State law can also provide different mechanism for liquidation of a debtor’s assets such as receivership.

Last updated: February 2024