Heading towards an incomplete recovery?

Plunged into its first recession in more than a decade following the impact of the COVID-19 pandemic, the economy is expected to rebound in 2021. Constrained in 2020 by restrictions to contain the spread of the coronavirus, household consumption (more than two-thirds of GDP) will be the main driver of the recovery. However, household confidence will remain dependent on the course of the pandemic and will probably have to wait for vaccines to be widely distributed to fully rebound. While the Federal Reserve (Fed) is expected to keep its key interest rate close to zero in 2021, low mortgage rates are expected to encourage residential investment. In the context of the development of teleworking and the relatively low supply of existing housing, residential construction will benefit. Business investment, also dependent on the course of the pandemic, is also expected to rebound. Nevertheless, uncertain demand for commercial and office space, and oil prices that may discourage new drilling, will hamper it. On the other hand, the contribution of foreign trade is expected to be negative, with imports growing faster than exports. Moreover, the country is not expected to regain its short-lived status as a net exporter of crude oil. While making little positive contribution to growth in 2020, particularly thanks to the federal fiscal stimulus, government consumption is expected to be less buoyant in 2021. While inflation is expected to rise in line with the rebound in domestic demand, it is expected to remain subdued in view of the unfinished recovery of the labor market, which at the end of 2020 was still 6% below pre-crisis levels. Business bankruptcies are expected to accelerate in 2021 after support measures and payment deferrals prevented a wave in 2020. The retail, clothing, entertainment, energy, air transport, and hospitality sectors will be particularly vulnerable.

Record public debt after an unprecedented fiscal response

In 2020, the public deficit reached a record level because of the exceptional measures taken to respond to the impact of the COVID-19 pandemic. In 2021, while the deficit is expected to decline, particularly in the light of a gradual recovery in revenues, it will remain high due to pandemic-related expenditure. Aid voted for in 2020, equivalent to 14% of GDP, will continue to affect the deficit in 2021. Spending is expected to increase, even more so since an agreement on a new aid plan, including new guaranteed loans for SMEs, "improved" unemployment benefits, and new cheques sent directly to households was voted on at the end of 2020. Despite the surge in public debt, one of the highest in the world, the country enjoys unparalleled financing flexibility, thanks to its status as the issuer of the USD, the world's main reserve currency. State and local government finances have also come under pressure. The latter benefited from a municipal liquidity facility with the Fed, which expired on 31 December 2020.

In 2021, the current account deficit is expected to improve slightly. It will continue to be driven mainly by the large balance of goods deficit (4.0% of GDP), which is expected to widen under the impetus of rising imports. However, the surplus in the services account, which has been strongly affected by the crisis, is projected to increase. The positive primary income balance, which also declined in 2020, is expected to rebound thanks to profit repatriations from multinational companies. Remaining relatively stable in 2020, the remittances deficit is expected to change little. Flows into the financial account will finance the deficit. Nevertheless, the net international investment position, which has been in deficit for three decades (more than 60% of GDP in 2020), is expected to continue to widen.

Joe Biden, President of a divided America

Following the elections of 3 November 2020, Democratic candidate Joe Biden, Vice President from 2009 to 2017, was elected the 46th President of the United States at the expense of the outgoing President, the Republican Donald Trump. At the end of a campaign disrupted by the COVID-19 pandemic, the elections were notably characterized by the highest turnout in 120 years (66.9%) and a jump in absentee voting. The transition period before the swearing-in of the president on 20 January 2021 has proved unusually indecisive. Alleging massive fraud, the incumbent president refused to concede defeat and filed multiple legal appeals, the majority of which were dismissed. The tumultuous election period was a testament to the deep divisions in American society. Promising to work to reconcile America, President Biden made managing the health crisis, deploying vaccines, and economic recovery a priority. As a symbol of the fragmentation of the electorate, the Democrats maintained a narrow majority in the House of Representatives (222 seats out of 435), while the Republicans maintained their majority in the Senate (51 seats out of 100). Without a majority in Congress, the implementation of Joe Biden's program is expected to be difficult. In terms of foreign policy, he is expected to break with his predecessor's "America First" strategy, committing to a multilateral approach and re-engaging with traditional partners (Europe, North America). However, some tensions, such as the taxation of technological giants or the dispute over subsidies to aircraft manufacturers, will remain. Above all, trade tensions with China will not vanish, as the new president has indicated that he does not intend to immediately reverse the tariffs applied by the previous administration.