Key points

  • US interest rates seen peaking at 4.5% to 4.75% but 40% chance they may have to rise further.
  • Chinese economic growth forecast for 2023 cut to 4.5% amid a changing political environment.
  • Euro area still on course for a mild recession this winter with ECB rates set to rise to 2.5%.
  • UK economy now seen contracting by between 1% and 1.5% next year as fiscal policy tightened.

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Vanguard economic update

Slowing economic momentum means we’ve cut our GDP growth forecasts still further for China and the UK this month and continue to expect recession across developed markets.

Despite a report showing GDP in the United States grew at an annual rate of 2.6% in the third quarter, we think this number overstates the underlying strength of the US economy, given the degree of monetary tightening already overseen by the Federal Reserve and still expected to come.

Following four consecutive interest-rate rises of 0.75 percentage points, the underlying composition of the GDP data confirmed that growth had slowed considerably. The housing sector appeared especially weak.

Vanguard expects below-trend US growth of around 1.7% in the fourth quarter, which would allow the US economy to eke out a gain for the full year but would still herald a likely recession in 2023 as the Fed continues to press on the brakes.

In our baseline case, we expect the US central bank’s main policy rate target to climb to a range of 4.5% to 4.75% by the end of the first quarter and stay there over the rest of 2023. But we ascribe a 40% chance that it may yet need to move beyond that to bring inflation under control, with the cost of services still accelerating even as goods prices come down.

In the euro area economy, we expect inflation to pass its peak early next year. We anticipate that the ECB will continue to raise the deposit rate until it reaches 2.5% by the first quarter of 2023.

We also continue to expect a mild euro-area recession this winter, with full-year 2023 GDP ranging from -0.5% to +0.5%.

For the UK, where we expect interest rates to peak at 4.5%, we believe 2023 is now more likely to deliver an economic contraction of between 1% and 1.5%. This is worse than we expected last month and is explained by the weaker than expected high frequency data, expected fiscal tightening of the UK government and tighter financial conditions.

Elsewhere, we’ve downgraded our expectations for the Chinese economy. Given the slowing momentum in the final quarter of 2022 and recent political developments seemingly at odds with private enterprise, we now forecast growth of 4.5% in 2023 – down from our most recent view of 5% growth.

That said, with potential for stabilisation in the real estate sector and a gradual easing in zero-Covid lockdown policies, we see risks to this view as skewed to the upside.

The points above represent the house view of the Vanguard Investment Strategy Group’s (ISG’s) global economics and markets team as of 16 November, 2022. For a deeper dive into our economists’ latest thinking, please read the full report.

Asset-class return outlook

The following are Vanguard’s latest 10-year annualised outlooks for equity and fixed income returns1.

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model 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 the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of 30 September, 2022. Results from the model may vary with each use and over time.


1 The probabilistic return assumptions depend on market conditions at the time of the running of the Vanguard Capital Markets Model® (VCMM) and, as such, can change with each running over time.

ISG updates these numbers quarterly. The projections listed above are based on a partial running of the VCMM based on data as of 30 September, 2022.

Please note that the figures are based on a 2-point range around the 50th percentile of the distribution of return outcomes for equities and a 1-point range around the 50th percentile for fixed income. Numbers in parentheses reflect median volatility.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include US and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.

Important information

For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). In Switzerland for professional investors only. Not to be distributed to the public.

The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.  The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.

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