Fixed Income Insights
Key Highlights:
- Fiscal policy played a significant role in the build-up of savings during the pandemic, but these excess savings have been largely exhausted and fiscal policy is set to become modestly restrictive, implying some downside risks to growth
- The US is experiencing a surge in immigration which is estimated will add around 10 million more people to the population than previously expected by January 2027. The additional supply of labour makes a soft landing more likely by allowing wage growth to moderate while maintaining robust employment growth
- Energy companies currently focus on reducing their scope 1 & 2 emission, where technologies are more mature, but they also need to finance new green technologies to reduce their scope 3 emissions that represent the vast majority of their emissions
Has US fiscal policy been more stimulative than expected, and what impact will it have on the economic outlook?
Fiscal policy has boosted consumption and investment post-Covid. The US federal deficit is back on its pre-Covid trend of gradual deterioration, with net interest payments making up over half of the overall deficit. Most of these are made in the US. The impact of policies such as the CHIPS and Science Act on investment is likely to remain a slight positive, but their impact may diminish over time. While fiscal policy helped build up savings during the pandemic, these savings are now largely exhausted and fiscal policy is set to become more restrictive, implying some downside risks to growth.
The impact of the growth of the labour force on the US economy
The US is experiencing a surge in immigration which is estimated will add around 10 million more people to the population than previously expected by January 2027. This influx of mainly low-wage immigrants has helped to contain wage growth in the tightest areas of the labour market in the post-Covid era. It is anticipated that immigration will add around 0.1 per cent to GDP growth in the years 2022-2024, lifted by rising equipment investment, higher government spending and increased demand for rental housing.
The progress made by energy issuers in adapting to net zero and transition
Demand for oil is expected to plateau around 2030, causing a gap between demand and net zero targets. Energy companies are currently focused on reducing Scope 1 and 2 emissions, where technologies are more mature, but they also need to reduce Scope 3 emissions, which account for over 80 per cent of the total. Progress in adapting to net zero and transition varies across geographic markets, with European energy companies at the forefront while US and Asian companies have different levels of commitment to net zero targets and emissions reduction.