The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of March 23, 2023.

Our 10-year annualized nominal return and volatility forecasts are shown below. They are based on the December 31, 2022, running of the Vanguard Capital Markets Model® (VCMM). Equity returns reflect a 2-point range around the 50th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50th percentile. More extreme returns are possible. 

In its March 22 policy announcement, the Federal Reserve endorsed the health of the U.S. banking system but cautioned that recent developments were likely to result in tighter credit conditions and to weigh on economic activity. The Fed raised its target for short-term interest rates by 25 basis points (0.25 percentage point) to a range of 4.75%–5%. 

• The core Consumer Price Index, which excludes food and energy prices, rose by 0.5% in February, its fastest pace in five months, and by 5.5% compared with a year earlier. The core Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation measure, rose by 4.7% in January compared with a year earlier. We expect core PCE to end 2023 at about 3%, still higher than the Fed’s 2% inflation target.
• Aspects of the February jobs report suggest a softening in labor conditions. The size of the labor force increased by more than the number of jobs created, and wage growth lagged expectations. We expect a year-end unemployment rate of 4.5%–5%, up from 3.6%, which would mean monthly job losses averaging 250,000 in the second half of 2023.
• A recession in the second half of 2023 remains our base case, but the odds of a later downturn have risen. Core aspects of the economy, such as consumption and the labor market, continue to show above-trend activity.
• We have increased our 2023 U.S. growth outlook to 0.75%, higher than the 0.25% we set forth in the Vanguard economic and market outlook for 2023: Beating back inflation [61-page PDF]. 

A surprise move by the People’s Bank of China (PBoC) will inject liquidity into the banking system but doesn’t affect our outlook. The bank announced on March 17 that, effective March 27, it was cutting its reserve requirement ratio (RRR) by 25 basis points for large and medium-size banks with RRRs above 5%. We estimate the move will lower the banking system’s effective RRR to 7.6% and release about CNY 500 billion ($73 billion) of liquidity, resulting in modest bank-financing cost reductions.

• The PBoC move came even amid signs of economic improvement and as China has provided liquidity and credit support through other vehicles. We regard it as a strong signal to boost domestic confidence and as acknowledgment of the challenge posed by globally tightening financial conditions.
• Recent data depict economic strength after the country’s post-COVID reopening. Retail sales rebounded in the first two months of the year, having declined in the three previous months, and the Index of Services Production rose 5.5% year-on-year. We anticipate that pent-up demand will be a key growth driver this year.
• China’s manufacturing sector also strengthened in February, according to purchasing managers index data. Large enterprises had the highest reading, but small and medium-size enterprises had the greatest month-on-month gains, suggesting broad momentum.
• Recent events in the U.S. and European banking sectors may have intensified Chinese policymakers’ concerns of a deeper-than-expected global downturn, which would exert downward pressure on China’s growth through financial or trade channels. Our base case for China’s 2023 GDP growth remains unchanged at an above-consensus 5.3%, a figure consistent with a mild global downturn.

When the European Central Bank (ECB) raised its key interest rate by 50 basis points, to a 15-year high of 3.0%, on March 16, it said “inflation is projected to remain too high for too long.” It emphasized that, because of recent stresses in the banking sector, it “stands ready to respond as necessary to preserve price stability and financial stability in the euro area.”

• We foresee the ECB raising its key rate to a range of 3.75% to 4%, up from our previous view of 3.5%, though risks are skewed to the downside in the potential form of a slower-than-expected pace of hikes or a lower terminal rate. We don’t expect rate cuts before 2024.
• Core inflation (which excludes volatile food and energy prices) was 5.6% in February compared with a year earlier, a third straight month of acceleration. We expect core inflation to average 4.5% in 2023—50 basis points higher than our previous expectation—and to end the year around 3.3% as the effects of tighter monetary policy take hold.
• Buoyed by the post-pandemic reopening of China’s economy and fewer supply-chain disruptions, we now foresee euro area GDP growing by 0.5% in 2023, up from our most recent view of no growth.
• We continue to foresee a mild recession in the euro area in 2023, though we now expect it to occur in the second half of the year. The region faces a slowdown from the lagged effects of tighter monetary policy.

The Bank of England (BOE) raised the interest rate it pays on commercial bank deposits by 25 basis points to 4.25% on March 23. The bank noted in its statement that “global growth is expected to be stronger than projected in the February Monetary Policy Report, and core consumer price inflation in advanced economies has remained elevated.”

• Core inflation, which excludes volatile food and energy prices, climbed to 6.2% in February, higher than 5.8% in January but below a 6.5% October 2022 peak. We expect core inflation to fall below 4% by the end of 2023 as the effect of higher interest rates and the benefits of lower energy prices work through the economy.
• The slow disinflation process underscores our belief that the BOE will raise the bank rate to a high of 4.5% and that rate cuts will occur no earlier than 2024. Greater global financial stability concerns increase downside risks to our view.
• Forward-looking surveys suggest weakness in both wages and the broader labor market in coming quarters. We continue to expect recession in 2023, with three quarters of contraction and full-year GDP falling by about 1%, though recently stronger high-frequency data skew risks to the upside. We foresee growth of about 0.6% in 2024. 

Stronger-than-expected current data and leading indicators in both developed and emerging markets have led us to increase our forecast of aggregate 2023 emerging markets GDP growth from about 3% to about 3.25%. Purchasing managers’ indexes and consumer spending data suggest that, like some developed markets, economies in emerging markets are holding up better than expected.

• In Mexico, as in the United States, disinflation remains a gradual process. Core inflation inched down in February but remained stubborn at 8.29% compared with a year earlier. Headline inflation, however, slowed to 7.62% year-on-year in February, its slowest pace of increase since March 2022.
• The Bank of Mexico on February 9 cited the “slower-than-foreseen disinflationary process” in raising the target for its overnight interbank rate by 50 basis points to 11%. It said the balance of risks for inflation’s trajectory remained biased to the upside. The bank is scheduled to make its next policy announcement on March 30.
• Banco Central do Brasil left its Selic rate unchanged at 13.75% for a fifth straight meeting on March 22.

The effects of more restrictive monetary policy are starting to appear in Canada, perhaps more so than in other developed markets. Post-pandemic inventory rebuilds are slowing, housing and business investment is down, and leading indicators suggest a continued decline in economic activity.

• Our expectation that a tight labor market and rising wages would pull more people into the workforce is proving true. The labor force participation rate has inched higher to 65.7%. However, job growth has moderated as economic activity has slowed.
• Inflation is easing. Canada’s Consumer Price Index rose 5.2% in February compared with a year earlier, lower than a 5.9% increase in January and 6.3% in December. Core inflation, which excludes volatile food and energy prices, was 4.8%, down from 4.9% in January and 5.3% in December.
• We believe the Bank of Canada has reached its peak interest rate target, 4.5%, provided inflation doesn’t resurge and economic fundamentals remain tepid. An interest rate cut later in the year isn’t out of the question.
• We continue to foresee 2023 GDP growth of around 1%, though risks point to the downside. 

The Reserve Bank of Australia (RBA) raised its interest rate target by 25 basis points to 3.6% on March 7, the tenth consecutive meeting with a rate increase and the highest target since June 2012. We expect another 25-basis-point hike on April 4 and that 3.85% will prove to be the central bank’s peak rate target, though risks appear skewed toward further rate increases.

• Consumer prices rose by 7.4% in January compared with a year earlier, but we believe headline inflation will fall to around 4.25% by the end of 2023 as higher interest rates dampen demand. We forecast inflation falling back to the RBA’s 2%–3% target in 2024.
• Our proprietary leading indicators model shows that higher interest rates are having their desired effect. Australia’s housing prices have fallen by 9.1% over the last year, which is weighing on consumer confidence and household wealth and spending—unfortunate byproducts of the inflation fight.
• We expect 2023 GDP growth of about 1%–1.5%. 

• Perspectives on banking developments and volatility (3:01 video, issued March 2023)
• Bank closures, market volatility call for perspective (article, issued March 2023)
• Advice for investors feeling anxious (3:16 minute video, issued March 2023)
• Uncertain but navigable conditions: Vanguard weather (article, issued March 2023)
• Strong data could push U.S. recession down the road (article, issued February 2023)