A recession by any other name
Energy supply-and-demand concerns, diminishing capital flows, declining trade volumes and falling output per person mean that, in all likelihood, the global economy will enter a recession in the coming year.
That said, households, businesses and financial institutions are in a much better position to handle an eventual downturn, to the extent that drawing on recent historical parallels seems misplaced. Although all recessions are painful, this one is unlikely to be historic.
Growth is likely to end 2023 flat or slightly negative in most major economies outside of China. Unemployment is likely to rise over the year but nowhere near as high as during the 2008 and 2020 downturns. Through job losses and slowing consumer demand, a downtrend in inflation is likely to persist through 2023.
|
GDP growth*
|
Unemployment rate
|
Headline inflation†
|
Monetary policy
|
|
2023
|
2023
|
2023
|
|
Country/region
|
Vanguard
|
Consensus
|
Trend
|
Vanguard
|
Consensus
|
NAIRU
|
Vanguard
|
Consensus
|
Year-end 2022
|
Year-end 2023
|
Neutral rate
|
US
|
0.25%–0.5%
|
0.9%
|
1.8%
|
4.4%
|
4.4%
|
3.5%–4%
|
3%
|
2.4%
|
4.25%
|
4.5%
|
2.5%
|
Euro area
|
0%
|
0.2%
|
1.2%
|
7.4%
|
7.1%
|
6.5%-7%
|
5.3%
|
5.2%
|
1.75%-2%
|
2.5%
|
1.5%
|
UK
|
-1% to -1.5%
|
-0.5%
|
1.7%
|
4.7%
|
4.4%
|
3.5%-4%
|
6.3%
|
6.5%
|
3.5%
|
4.5%
|
2.5%
|
China‡
|
4.5%
|
5%
|
4.3%
|
4.7%
|
N/A
|
5%
|
2.2%
|
2.3%
|
2.65%
|
2.6%
|
4.5%-5%
|
* For the US, GDP growth is defined as the year-over-year change in fourth-quarter Gross Domestic Product. For all other countries/regions, it is defined as the annual change in total GDP in the forecast year compared with the previous year.
† For the US, headline inflation is defined as year-over-year changes in this year’s fourth-quarter Personal Consumption Expenditures (PCE) Price Index compared with last year. For all other countries/regions, it is defined as the average annual change in headline Consumer Price Index (CPI) inflation in the forecast year compared with the previous year. Consensus for the US is based on Bloomberg ECFC consensus estimates.
‡ China’s policy rate is the one-year medium-term lending facility (MLF) rate.
Notes: Forecasts are as of 31 October 2022. NAIRU stands for non-accelerating inflation rate of unemployment.
Source: Vanguard.
Bond market outlook
We think central banks, including the Bank of England, European Central Bank and the US Federal Reserve, will continue to raise interest rates next year to combat inflation.
The eventual peak and persistence of interest rate rises, which will depend heavily on the path of inflation, will determine how high bond yields rise. While rising interest rates have created near-term pain for investors, higher starting interest rates have raised our return expectations for the asset class.
Using the Vanguard Capital Markets Model, which calculates our 10-year annualised return expectations1, we think domestic bonds will offer US dollar investors returns of between 4.1% and 5.1%– representing an increase on last year’s expectations (1.4% to 2.4%). Global bonds are expected to offer around 4% to 5% per annum over the next decade, up from 1.3% to 2.3% in last year’s annual forecast.
This means that for investors with an adequately long-term horizon, we expect their wealth to be higher by the end of the decade than our year-ago forecast would have suggested.
Equity market outlook
Rising interest rates, inflation and geopolitical risks have forced investors to reassess their rosy expectations for the future. The silver lining is that this year’s bear market has improved our outlook for global equities.
For US dollar investors, the VCMM projects higher 10-year annualised returns for non-US developed markets (7.2% to 9.2%) and emerging markets (7% to 9%) than for US markets (4.7% to 6.7%).
Against a challenging macroeconomic backdrop, it’s important to remember that staying focused on a client’s long-term goals and sticking to the principles of good asset allocation across a globally diversified portfolio of stocks and bonds remains a prudent approach.
1 The projections and other information generated by the Vanguard Capital Markets Model® (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modelled asset class. Simulations as at 30 September 2022. Results from the model may vary with each use and over time.