We estimate that the average interest rate on the current stock of corporate debt will rise from 4.20% in 2023 to 4.30% in 2024 and 4.50% in 2025, based on our assumptions about the future path of Fed policy and market interest rates. This would imply that private sector interest expense as a share of current private sector gross output will rise from 3.35% in 2023 to 3.40% in 2024 and 3.60% in 2025, an increase of 0.25pp from 2023 to 2025. The increase in interest expense that we estimate would therefore reduce capex growth by 0.10pp in 2024 and 0.25pp in 2025 and labor cost growth by 0.05pp in 2024 and 0.15pp in 2025. Related: Data Update 3 for 2023: Interest Rates and Bond Returns
- Date Posted:
- August 4, 2023
American equity exceptionalism is possible, for at least two reasons. First, the US is set to capture a sizeable share of productivity benefits from technology such as artificial intelligence. Second, a moderating global economy could work against more cyclically biased equity markets overseas, favouring those geared towards organic growth drivers. Over multi-year periods, domestic growth has been found to dominate local equity returns. A 2011 study by Clifford Asness, Roni Israelov and John Liew suggests that 39% of 15-year returns could be explained by domestic economic performance. Growth is fundamentally a function of labour and productivity. Given that most of the developed world (and China) faces at least directionally similar labour constraints, the US seems likely to be a relative growth winner thanks to prospects for greater productivity gains.