Vanguard economic and market

outlook for 2024: Global summary

The global outlook summary highlights the top-level findings of Vanguard’s full
economic and market outlook, to be distributed in mid-December.

Higher interest rates are here to stay. Even entirely counteracted the impact of higher
after policy rates recede from their cyclical policy interest rates. Outside the US, this
peaks, in the decade ahead rates will settle at dynamic is less pronounced. Europe’s
a higher level than we’ve grown accustomed predominantly bank-based economy is
to since the 2008 global financial crisis (GFC). already flirting with recession, and China’s
This development ushers in a return to sound rebound from the end of Covid-19-related
money, and the implications for the global shutdowns has been weaker than expected.
economy and financial markets will be
profound. Borrowing and savings behaviour The US exceptionalism is set to fade in 2024.
will reset, capital will be allocated more We expect monetary policy to become
judiciously and asset class return expectations increasingly restrictive in real terms as
will be recalibrated. Vanguard believes that a inflation falls and offsetting forces wane. The
higher interest rate environment will serve economy will experience a mild downturn as a
investors well in achieving their long-term result. This is necessary to finish the job of
financial goals, but the transition may be returning inflation to target. However, there
bumpy. are risks to this view. A “soft landing,” in which
inflation returns to target without recession,
remains possible, as does a recession that is
Monetary policy will bare further delayed. In Europe, we expect
its teeth in 2024 anaemic growth as restrictive monetary and
fiscal policy lingers, while in China, we expect
The global economy has proven more resilient additional policy stimulus to sustain economic
than we expected in 2023. This is partly recovery amid increasing external and
because monetary policy has not been as structural headwinds.
restrictive as initially thought. Fundamental
changes to the global economy have pushed
up the neutral rate of interest – the rate at Zero rates are yesterday’s news
which policy is neither expansionary nor
contractionary. Various other factors have Barring an immediate 1990s-style
blunted the normal channels of monetary productivity boom, a recession is likely a
policy transmission, including the US fiscal necessary condition to bring down the rate
impulse from debt-financed pandemic of inflation, through weakening demand for
support and industrial policies, improved labour and slower wage growth. As central
household and corporate balance sheets banks feel more confident in inflation’s path
and tight labour markets that have resulted towards targets, we expect they will start to
in real wage growth. In the US, our analysis cut policy rates in the second half of 2024.
suggests that these offsets have almost

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.
That said, we expect policy rates to settle at a long-term productivity growth and higher
higher level compared with after the GFC and structural fiscal deficits. This higher interest rate
during the Covid-19 pandemic. Vanguard research environment will last not months, but years. It is a
has found that the equilibrium level of the real structural shift that will endure beyond the next
interest rate, also known as r-star or r*, has business cycle and, in our view, is the single most
increased, driven primarily by demographics, important financial development since the GFC.

Vanguard’s 2024 economic forecasts

GDP growth Unemployment rate Core inflation Monetary policy

2024 2024 2024

Country/ Year-end Year-end Neutral

region Vanguard Consensus Trend Vanguard Consensus NAIRU Vanguard Consensus 2023 2024 rate

US 0.5% 0.8% 1.8% 4.8% 4.4% 3.5%–4% 2.5% 2.5% 5.5%–5.75% 4%–4.5% 3%–3.5%

Euro area 0.5%–1% 0.8% 1.2% 7%–7.5% 6.8% 6.5%–7% 2.1% 2.5% 4% 3.25% 2%–2.5%

UK 0.5%–1% 0.4% 1% 4.5%–5% 4.8% 3.5%–4% 2.8% N/A 5.25% 4.25% 3%–3.5%

China 4.5%–5% 4.5% 4.1% 4.8% 5% 5% 1%–1.5% N/A 2.3%–2.4% 2.2% 4.5%–5%

Notes: Forecasts are as of 14 November 2023. For the US, GDP growth is defined as the year-over-year change in fourth-quarter GDP. For all other countries/
regions, GDP growth is defined as the annual change in GDP in the forecast year compared with the previous year. Unemployment forecasts are the average for
the fourth quarter of 2024. NAIRU is the non-accelerating inflation rate of unemployment, a measure of labour market equilibrium. Core inflation excludes volatile
food and energy prices. For the US, euro area and UK, core inflation is defined as the year-over-year change in the fourth quarter compared with the previous
year. For China, core inflation is defined as the average annual change compared with the previous year. For the US, core inflation is based on the core Personal
Consumption Expenditures Index. For all other countries/regions, core inflation is based on the core Consumer Price Index. The neutral rate is the equilibrium policy
rate at which no easing or tightening pressures are being placed upon an economy or its financial markets.
Source: Vanguard.

A return to sound money Bonds are back

For households and businesses, higher interest Global bond markets have repriced significantly
rates will limit borrowing, increase the cost of over the last two years because of the transition
capital and encourage saving. For governments, to the new era of higher rates. In our view, bond
higher rates will force a reassessment of fiscal valuations are now close to fair, with higher
outlooks sooner rather than later. The vicious long-term rates more aligned with secularly higher
circle of rising deficits and higher interest rates neutral rates. Meanwhile, term premia have
will accelerate concerns about fiscal sustainability. increased as well, driven by elevated inflation and
Vanguard’s research suggests the window for fiscal and monetary outlook uncertainty.
governments to act on this is closing fast – it is
an issue that must be tackled by this generation, Despite the potential for near-term volatility,
not the next. we believe this rise in interest rates is the single
best economic and financial development in
For well-diversified investors, the permanence 20 years for long-term investors. Our bond
of higher real interest rates is a welcome return expectations have increased substantially.
development. It provides a solid foundation for We now expect UK bonds to return a nominal
long-term risk-adjusted returns. However, as the annualised 4.4%–5.4% over the next decade,
transition to higher rates is not yet complete, compared with the 0.8%–1.8% annualised
near-term financial market volatility is likely to returns we expected before the rate-hiking cycle
remain elevated. began. Similarly, for hedged global ex-UK bonds,
we expect annualised returns of 4.5%–5.5% over
the next decade, compared with a forecast of
0.8%–1.8% when policy rates were low or, in
some cases, negative.

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If reinvested, the income component of bond markets, 4.7%–6.7% for UK equities and 6.4%–
returns at this level of rates will eventually more 8.4% for emerging markets, all from a British
than offset the capital losses experienced over pound investor’s perspective.
the last two years. By the end of the decade,
bond portfolio values are expected to be higher The global equity risk premium that emerges
than if rates had not increased in the first place. from current stock and bond market valuations
is the lowest since the 1999–2009 “lost decade.”
Similarly, the case for the 60/40 portfolio1 is The spread between global equity and global
stronger than in recent memory. Long-term bond returns is expected to be 0 to 2 percentage
investors in balanced portfolios have seen a points annualised over the next 10 years. In
dramatic rise in the probability of achieving contrast to the last decade, we expect return
a 10-year annualised return of at least 7%, from outcomes for diversified investors to be more
a 9% likelihood in 2021 to 39% today. balanced. For those with an appropriate risk
tolerance, a more defensive risk posture may
Moving up the risk spectrum, credit valuations be appropriate given higher expected fixed
appear fair in the investment-grade space but income returns and an equity market that is yet
relatively rich in high-yield. What’s more, the to fully reflect the implications of the return to
growing likelihood of recession and declining sound money.
profit margins skew the risks towards wider
spreads. IMPORTANT: The projections and other
information generated by the Vanguard Capital
Markets Model® (VCMM) regarding the likelihood
Higher rates leave equities overvalued of various investment outcomes are hypothetical
in nature, do not reflect actual investment results
A higher-rate environment depresses asset price
and are not guarantees of future results.
valuations across global markets while squeezing
Distribution of return outcomes from VCMM are
profit margins as corporations find it more
derived from 10,000 simulations for each
expensive to issue and refinance debt.
modelled asset class. Simulations as of
Valuations are most stretched in the US. As 30 September 2023. Results from the model
a result, we have downgraded our US equity may vary with each use and over time. For more
return expectations for British pound investors to information, please see the Notes section.
an annualised 4.1%–6.1% over the next 10 years
from 4.3%–6.3% heading into 2023. Within the
Notes:
US market, value stocks are more attractive than
they have been since late 2021, and small- The VCMM projections are based on a statistical
capitalisation stocks also appear attractive for analysis of historical data. Future returns may
the long term. behave differently from the historical patterns
captured in the VCMM. More importantly, the
US equities have continued to outperform VCMM may be underestimating extreme
their international peers. The key drivers of this negative scenarios unobserved in the historical
performance gap over the last two years have period on which the model estimation is based.
been valuation expansion and US dollar strength
beyond our fair-value estimates, both of which The VCMM is a proprietary financial simulation
are likely to reverse. Indeed, our Vanguard Capital tool developed and maintained by Vanguard’s
Markets Model® (VCMM) projections suggest an primary investment research and advice teams.
increasing likelihood of greater opportunities The model forecasts distributions of future
outside the US. We project 10-year annualised returns for a wide array of broad asset classes.
returns of 6.8%–8.8% for non-US developed Those asset classes include US and international

1 In our analysis, the 60% equity/40% fixed income portfolio is represented by the following indices: Equity: UK equity (MSCI UK Total Return Index) and global ex-UK equity
(MSCI AC World ex UK Total Return Index). Fixed income: UK bonds (Bloomberg Sterling Aggregate Bond Index) and hedged global ex-UK bonds (Bloomberg Global Aggregate
ex Sterling Bond Index Sterling Hedged). UK equity home bias: 25%, UK fixed income home bias: 35%.

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

Vanguard global economics team

Joseph Davis, Ph.D., Global Chief Economist

Americas Asia-Pacific Capital Markets Model Research Team

Roger A. Aliaga-Díaz, Ph.D., Qian Wang, Ph.D., Qian Wang, Ph.D.,
Chief Economist, Americas, Chief Economist, Asia-Pacific Global Head of VCMM
Global Head of Portfolio Construction Carole Okigbo, Kevin DiCiurcio, CFA,
Andrew Patterson, CFA, Senior Head of ISG, Asia-Pacific VCMM Senior Investment Strategist
International Economist Alexis Gray, M.Sc. Daniel Wu, Ph.D.
Joshua Hirt, CFA Grant Feng, Ph.D. Olga Lepigina, MBA
Asawari Sathe, M.Sc. Ian Kresnak, CFA
Europe
Adam Schickling, CFA Lukas Brandl-Cheng, M.Sc.
Jumana Saleheen, Ph.D.,
Vytautas Maciulis, CFA Ryan Zalla, Ph.D
Chief Economist, Europe
Rhea Thomas Alex Qu
Shaan Raithatha, CFA
Maria Fernanda Estrada Ben Vavreck, CFA
Josefina Rodriguez, M.Sc.
Ranieri Arcella, M.Phil. Taylor Regensburger

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Connect with Vanguard®
global.vanguard.com

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.
Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.
Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your
investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed
interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of
default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in
interest rates are likely to affect the capital value of bonds.

Important information
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