Monthly economic outlook
September 28, 2022
Inflation is becoming more broad-based and isn’t going away easily. We see a 25% chance of a U.S. recession in 2022 and a 65% chance in 2023. Europe is likely to enter a mild recession around year-end.
Our 10-year, annualized, nominal return projections, as of June 30, 2022, are shown below. Please note that the figures are based on a 1.0-point range around the rounded 50th percentile of the distribution of return outcomes for equities and a 0.5-point range around the rounded 50th percentile for fixed income.
Notes: These probabilistic return assumptions depend on current market conditions and, as such, may change over time.
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 June 30, 2022. Results from the model may vary with each use and over time. For more information, see the Notes section.
Source: Vanguard Investment Strategy Group.
The United States’ GDP growth in the second quarter was upwardly revised but was still in negative territory with an annualized rate of –0.6%, according to a second estimate released by the Bureau of Economic Analysis. It did little to change our assessment that the U.S. would struggle to attain above-trend growth in the current and future quarters.
We now expect a mild recession in the euro area, with negative GDP for the last quarter of 2022 and the first quarter of 2023—followed by a period of stagnation, then a recovery. While we still expect 2022 growth to be in the 2%–3% range, we have lowered our 2023 forecast to a range between –0.5% and 0.5%.
As mentioned in last month’s issue, we had downgraded our full-year GDP growth forecast to a range of 2.5%–3.5% based on data indicating a flagging economic recovery so far this quarter. Consumer spending was much lower than expected.
For emerging markets, we remain below consensus on full-year 2022 economic growth with an estimate of about 3.0%. (The IMF, for example, projects growth of 3.6%.)
We are more hawkish than consensus when it comes to U.S. monetary policy. We expect the Fed to continue ratcheting up rates until it reaches a range of 3.25% to 3.75% by the end of the year, and 4.25% by the second quarter of 2023.
Notes: Vanguard’s long-run, nominal, neutral rate forecast assumes 1.8% inflation for the euro area and 2.0% inflation for the remaining countries. The neutral rate is the level at which policy interest rates would neither stimulate nor restrict an economy. Market terminal rate is the maximum overnight indexed swap implied rate between 2022 and 2025.
Source: Vanguard calculations, based on Bloomberg data as of August 9, 2022.
The consumer price index (CPI) in the United States resumed its upward climb, rising 0.1% in August on a seasonally adjusted basis, after staying flat in July. Over 12 months, headline CPI increased 8.3% (not seasonally adjusted).
The labor market in the United States exceeded expectations in August, adding 315,000 jobs, though the gains were modest compared with the more than half-million new jobs created in July. The unemployment rate edged 0.2 percentage points higher, to 3.7%, matching the pre-pandemic levels of February 2020.
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All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss. Investments in bonds are subject to interest rate, credit, and inflation risk.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
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 U.S. 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.