Overview – North America
While the robust results in North American GDP as well as “markets” have been making favorable news worldwide, undoing some of the damage from the prior US Government administrations;’ management of the Pandemic has required time and contentious funding in both the US and to a lesser extent in Canada which is influenced by the trade relationships with the US.
Recovery in North America is very uneven due to multiple factors. Support for workers displaced by the Covid virus is quite uneven in the US while being more consistent in Canada. The new variants of the Covid virus – dubbed Delta and Lambda – are still relatively unknown in terms of transmissibility and the effectiveness of the current vaccines.
Both governments are struggling with the need to keep economies open while protecting vulnerable populations. Lower income workers have been most impacted by return-to-work anomalies on a state-by-state basis as well as in urban areas of Canada resulting in many not returning to work as childcare and other dependents cared for at home such as elderly are subsidized for non-workers and if lower income individuals return to work, they jeopardize or lose these various subsidies.
In the US, bare knuckle politics with little concern for the victims is going on in many states and at a national level. Canadian reports seem to reveal higher infection and vaccination rates in urban areas but still appear less contentious than in the Unites States. Texas and Florida were reported by the US CDC as having as almost 3x the number of cases as a percentage of population compared to states taking care to follow the advice of most medical professionals regarding vaccination and masking.
US health authorities are generally advising that un-vaccinated populations can cause the spread of the pernicious virus variants even if the individuals do not have symptoms. Now, US health authorities are advising that a recent uptick in vaccinations is resulting in about 50%+ of all eligible for the vaccine are fully vaccinated. Although the vaccination numbers are improving so are the number of cases requiring treatment. Canadian authorities are reporting approximately 60% of the eligible population are vaccinated as of August 4th.
US vaccination rates are lowest in southern states, which are experiencing 3x more cases than US averages, as well as in primarily agricultural states in the mid-western regions. Canadian vaccination rates are lowest in the very rural and sparsely populated northern provinces.
BRAZIL
2021 Brazilian GDP - According to the Central Bank of Brazil - Focus Survey Report, the Brazilian financial market just raised the 2021 GDP growth rate forecast from 5.18% to 5.26%. For 2022, GDP growth rate was adjusted from 2.10% down to 2.09%. In 2022 Brazil will have presidential and state governors’ elections.
Services, the most affected economic sector by the pandemic, has accumulated a semestral increase in Volume of 9.5%; June increase in Services Volume achieved 1.7% as compared to the previous month, says IPEA, the “Institute for Applied Economic Research”, a governmental institution. This figure accumulates a 4.4% increase for the second quarter of 2021 and a 21.1% for the last 12 months ended in June 2021.
Current performance of total Volume of Services exceeded 2.4% over pre-pandemic month of February 2020, attaining its highest level since 2016.Compared to its all-times historical record of Volume of Services in 2014, current figures remain 9.1% below.
Other positive results encompassing economic sectors calls for a strong recovery of 21.2% increase in Air Service in June 2021, against May 2021, according to IBGE. Information & Communications sector rose 2.5% in June 2021, against previous month and Transportation & Services sector achieved an increase of 8.1% - June 2021 versus February 2020 (pre-pandemic month). In terms of 2021 Semestral Recoveries – Jan 2021 – June 30, 2021, the following sectors performed as follows: Industrial: 12.9%; Services: 9.5%; Commercial: 6.7%, says IBGE.
Soybean is the “Brazilian golden grain” – It is the main product of country grain crop and one of the most important export items. Today, Brazil is the world’s largest producer and exporter of Soybean, a grain originated from Asia in the 19th century. Known as one of the most versatile grain, Soybean integrates animal food, produces cooking/comestible oil, is an aggregate of biodiesel, and is fully present in the vegetarian cuisine, as vegetable meat.
In 2019, Soybean produced in Brazil achieved an all-time record of 114 million tons. Embrapa, the governmental R&D institution for agricultural products, has developed and implemented highly technological solutions to adapt the grain and the soil, as well as special and versatile planting and harvesting equipment to achieve such an inedited productivity of the Brazilian Soybean Project!
Brazilian Labor Market begins to show more dynamism reverberating the recovery of the activity level, according to IPEA. Although the May 2021 unemployment rate of 14.3% remains 1.5% above the same period in 2020, the stability of the unemployment rate is quite a reality. The situation of the labor market has improved and has brought an expansion of the employed population, which current force is 88.2 million people. In May 2019, the employed population was 93.5 million.
In the “formal” (registered) employment pool of the private sector, reports indicate a growth of 2.9 million jobs for a 12-month period ended in June 2021. Major employment sectors were Commerce, Industry, Administrative Services and Civil Construction.
Tacito Bocaiuva, E: tbocaiuva@taplowgroup.com
MEXICO
Mexico is a strategic player in the old NAFTA – North American Free Trade Agreement, in force since 1994, which in fact expired in August 2018 and was replaced by a new and similar Agreement under the Trump Administration and with the Canadians blessing as well. It is in continuity of a Regional trilateral treaty, jointly administered by Washington, DC, Ottawa
and Mexico City, with the purpose of promoting the development of the regional economy. It eliminates customs barriers to exchange merchandise and services amongst the three countries, under a free, competitive business environment, fostering increase in investments, materializing of mutually interested business opportunities, under an adequate protection of intellectual properties. In addition, the country has an active participation in other commercial blocks, such as: OMC, APEC, OCDE.
Mexico has a well-diversified economy, comprising highly technological industries, oil production surpluses for exports, agribusiness (7th largest agricultural force world-wide), mining and manufacturing sectors. Key export items includes oil, vehicles and auto parts, computers, textiles; USA is the main destination of Mexican export portfolio, with 80% of total export force. Oil, alone, PEMEX, represents 1/3 of total Mexican exports. Other typical export products are Beer – 2nd largest exporter, coffee, sugar, corn, orange, avocado, and lemon. Population is nearing 126 million, 11th place world-wide; the average age is 29 years old.
Mexican pre-Covid GDP was US$ 1,249 trillion and GDP per capita achieved US$ 9.000. Mexico is the 2nd largest economy in Latin America, only before Brazil’s, and ranks amongst the 15 largest world-wide economies.
According to the IMF – World Economic Outlook Database - April 2021, last years of pre-covid GDP annual variance indicated a 2.2% growth in 2018, -0.1% in 2019 and a -8.2% in 2020. There has been a recovery in 2021, showing a GDP increase of 5.0%.
Despite of the adverse impact of Covid-19 in the Mexican economy overall, the agricultural sector showed a small growth. Current inflation rates are: 3.5%, per - 2021 forecast; in previous years: 3.4% in 2020 and 3.6% in 2019. Unemployment rates have been low and steady, running at 3.6% in 2021, 4.4% in 2020, impacted by the pandemic,
and 3.5% in 2019. Mexican Labor Force employs 26.1% in the Industrial sector, which responds for 30.88% of GDP; the Services sector, responsible for 59.87% of GDP employs 61.37% of the active working force.
According to the IMF’s “Policy Responses to Covid-19”, via its “Policy Tracker “ of July 2nd, 2021, besides higher health expenditure of 0.4% of GDP, Mexico’s fiscal response to the Covid-19 impact in the economy included the following measures in 2020: 1) Frontloading payments of the old-age and disability pensions by 8 months; 2) Accelerating procurement processes and VAT refunds; 3) lending to firms and workers in both formal and informal sectors:
4) providing liquidity support and guarantees by development banks (257.1 billion pesos).
Tacito Bocaiuva , Americas, Regional Director E: tbocaiuva@taplowgroup.com
USA
Economic Growth: Not all growth is equal in terms of the benefits to the national, regional, and global economies. Inflation skews the assessment of GDP changes and inflationary estimates. Year over year, inflation has been reported through June 30th has been reported as 5.4% in the US and just over 3% as reported by Bank of Canada in Canada.
Projections for both countries are relatively similar with government agencies and investment managers/investment banks forecasting between slight over 3% for the remainder of the 2021-2022 year. Various analysts are skeptical and are assuming higher rates of inflation as the certainty of controlling the Pandemic is not clear now.
Importantly, some commentators believe that workforce stability will be negatively influenced by a shortage of workers willing to return to traditional workplaces and workers leaving as there is no apparent shortage or WFH (work from home) for technology and scientific knowledge workers. Taplow is gathering data for a further report on the projected prevalence of permanent and other WFH arrangements in the various major sectors of the North American economies.
Some US commentators are particularly watching the activities of our central bank – known in the US as The Federal Reserve Bank. We are in the 6th consecutive quarter of accommodative policies related to US currency. Economists and journalists note that the bank has been very careful to not let a fear of any contraction of the money supply or increase in borrowing cost impair the economy. Some critics are concerned that if the economy continues to accelerate(grow) at current rates, we may have inflation which would reduce the value of the US Dollar. Others believe that the support by “The Fed” has already depreciated the value of the US Dollar. There is a lack of consistency in opinions which results in our hesitancy to report a direction.
Employment Issues: There are 3 major issues which are challenging most employers.
1. Work from home vs from a fixed location – major employers and pundits alike are seemingly evenly divided on which strategy will be likely. Our sense is that fixed location with safeguards (frequent screening, mandatory vaccinations, separation of workspaces to assure adequate distancing) is likely to be the norm as knowing your colleagues is important for work requiring collaboration on an hour-by-hour basis.
2. Recruiting and retaining employees while striving for enhanced diversity. Costs for direct wages, benefits and training are likely issues. We already note the drop off of long service highly skilled/educated employees. Productivity is yet to be well measured under either or hybrid scenarios. Airlines appear to be particularly impacted by early retirement by senior professionals.
3. Some employees inherently have to be out in the field to accomplish their jobs. Assuring customer/client and employee health and safety will require costly and timely interventions creating new roles in many businesses. Occupational Health and Safety will never be the same.
Sustainability and Macro Issues:
People, Commitment and Persistence: most of our executives understand the reality that our workforce and our approach to doing business will require significant rethinking. Our P&L is not our only focus.
We are graded by employees, customers, competitors, and government on our ability to reduce emissions and the consumption of raw materials which contribute to global warming/climate change.
We are also graded on our approach to employment:
1. While we have to protect our employees and customers we are also realizing – in most quarters- that this is a unique opportunity to hire and develop workers for re-engineered roles in many enterprises. Training less well-educated employees for technical roles not requiring the advanced study of science, engineering, or finance. It will require rethinking required credentials but if well done, can be a catalyst for expanding our talent pool. As well, both entry level and experienced workers can be re-purposed to more meaningful and potentially higher-level roles.
2. Our ideas about employment will also change. In professional services many firms are already allowing their employees to create their own LLC or LLP and contract with the firm they “work” for.
The Impact of International Relations:
China is critical to the manufacturing processes of the entire global economy. Data on the prevalence of Chinese manufactured “chips” and numerous other components is too complex to analyze for this report however, virtually every North American manufacturing business has component parts that are to some extent manufactured in China and shipped to North America. Shortages have caused material delays and materially driven up prices for vehicles across the entire spectrum from passenger cars to trucks and consumer appliances from mobile phones to refrigerators.
Opportunities and limitations:
From the employee perspective, an undervalued employee is in a good position to make a move which may -from time to time – be very disruptive in the enterprise he or she is departing. However, every departure is an opportunity to reconsider the role and the requirements. We have seen numerous situations over the last 18 months when the current incumbent couldn’t do the job at the level really required – the replacement, while perhaps expensive, can be counted on to enhance the breadth of the function.
Similarly, the changes in the economy and the needs of an enterprise might well require the acquisition of an employee with quite different skills. The strain on even the most successful organizations and their leaders have sharpened the focus on what we need vs. what we had.
Steve Schrenzel, Managing Partner, USA E: sschrenzel@taplowes.com