United States, Canada, Mexico

Our economic and market outlook at midyear 2022

July 13, 2022

A Federal Reserve that is newly aggressive in the face of rising inflation expectations makes a U.S. “soft landing” less likely than we would have expected just a few months ago. Our 2022 U.S. growth forecast is a good bit lower from the start of the year, though the Canadian and Mexican economies appear relatively resilient.

Andrew Patterson, Vanguard senior international economist

“The Fed has recalibrated to a higher policy rate landscape. That’s good news for the inflation fight, but it makes continued economic expansion much more challenging.”

Andrew Patterson, Vanguard senior international economist.

United States


Economic growth

We downgraded our forecast by 2 percentage points since the start of the year because of factors we expect will continue throughout 2022—namely tightening financial conditions, wages not keeping up with inflation, and the lack of demand for U.S. exports. Vanguard sees the probability of a U.S. recession as 25% over the next 12 months and 65% over 24 months.


Headline inflation

Surging energy and food prices keep our projections for headline CPI around 7% to 7.5% by year-end 2022 before it moderates in 2023. In the current environment, headline inflation will matter more for monetary policy than it typically does.


Monetary policy

The Fed turned hawkish in recent weeks, further emphasizing inflation as a clear priority over potential implications for economic growth. We expect the target federal funds rate to end the year in a range of 3.25% to 3.75% and expect a terminal rate of at least 4% in 2023—much higher than what we consider to be the neutral rate (2.5%) and what’s currently priced into the market.*


Unemployment rate

Labor market trends are likely to keep downward pressure on the unemployment rate through the end of the year, though increases in 2023 are likely as the impacts of Fed policy and slowing demand take hold.

What to watch

Rising inflation expectations

In raising its policy interest rate target by 75 basis points on June 15, a greater increase than it had signaled at its previous meeting, the Fed cited worrisome signs that longer-term inflation expectations were rising. Vanguard’s index of common inflation expectations, calculated across a range of survey measures, has moved higher than traditional longer-term measures over the last two years.

Year-on-year percentage change readings for the Vanguard index of common inflation expectations and the Survey of Professional Forecasters 10-year-ahead personal consumption expenditures, inflation expenditures have fluctuated in a range of about 1.9% to 2.3% from 2008 through 2020. In the last two years, the two metrics have been rising rapidly, but the Vanguard index has been posting higher readings than the Survey of Professional Forecasters.

Sources: Vanguard model estimates and Federal Reserve Bank of Philadelphia data, as of June 29, 2022.



Economic growth

Our 2022 GDP growth forecast is lower than our 5% view at the start of the year. Still, we expect a resilient economy. Canada, as a net energy exporter, gets a GDP boost from higher oil and gas prices, even as they undermine consumers’ purchasing power. Population growth supports a real estate sector under pressure from rising interest rates.


Headline inflation

Economic and labor market strength will likely keep headline inflation elevated through 2022, with energy, food, and shelter prices remaining high. Anticipated Bank of Canada rate hikes should help temper core inflation to about 4.5% to 5% by year-end before further normalization toward a 2% target in 2023 and 2024.


Monetary policy

The Bank of Canada’s Governing Council says it is “prepared to act more forcefully” to prevent high prices from becoming entrenched and to bring inflation back to the bank’s 2% target. That is likely to mean front-loading increases to the overnight rate so that it is near or above the neutral rate, around 3%, by the end of 2022.*


Unemployment rate

Near record lows at midyear 2022, the unemployment rate may rise in the second half of the year as financial conditions tighten domestically and globally. Currently elevated job vacancies and accelerating wage growth suggest a labor market in position to remain healthy even as the Bank of Canada moves to rein in inflation.

What to watch

The vulnerable housing sector

Higher interest rates threaten a housing sector that’s vastly more expensive than in other developed markets. Even with population trends that support demand, a moderation in prices could be at hand.

The housing price-to-income ratios for Canada, the United States, and a basket of 25 countries all tracked a similar path from 1990 through 2005. From 2005, however, the ratio for Canada began to rise significantly and accelerated further from 2020. The ratio for Canada is now far higher than for the United States and the average for the 25-countries.

Notes: The price-to-income ratio is the ratio of real housing prices to real disposable incomes.

Sources: Vanguard calculations, based on data from the Federal Reserve Bank of Dallas, Refinitiv Datastream, and Moody’s Data Buffet, as of December 31, 2021.



Economic growth

Tightening financial conditions and inflation have proved to be headwinds, as we expected at the start of the year. Thus our full-year 2022 growth forecast is little changed. High commodities prices benefit Mexico as both an energy and agriculture exporter, but they also spur inflation that can weigh on domestic spending and growth.


Headline inflation

Slowing global growth could eventually pull headline inflation down from its May levels of above 7%, though higher commodity prices remain a risk. Headline inflation has shown signs of moderating, but more persistent core inflation has risen for seven consecutive months, suggesting a broadening of price pressures throughout the economy.


Monetary policy

Four rate increases this year have taken the policy rate to 7.75%, and we believe that the Bank of Mexico will need to take it higher still to rein in inflation. While some emerging-market central banks may be poised to cut rates in 2023 as the global economy slows, we believe that Mexico may be 12 months away from joining them.


Unemployment rate

Unemployment has fallen to 3%, below already low pre-pandemic levels. We anticipate that it could rise by half a percentage point in the coming six months, which would put it at about the level it was several years before the pandemic.

What to watch

Central banks’ inflation fights

Realized and expected increases in real policy interest rates reveal Latin American central banks’ efforts to rein in inflation.

Changes in real interest rates over the period from June 2021 through June 2023 for Brazil, Colombia, Mexico, and Chile are expected to be significant. They range from roughly 400 basis points for Chile to roughly 1,100 basis points for Brazil.

Notes: The change in real interest rates is calculated over the period of June 2021 through June 2023. The one-year backward-looking change is calculated as the change in realized policy rates minus the change in the realized year-on-year inflation rate. The one-year expected change is calculated as the market-implied year-forward policy rate minus the consensus inflation forecast of economists surveyed by Bloomberg. A basis point is one-hundredth of a percentage point.

Sources: Vanguard calculations, based on data from Bloomberg, as of June 27, 2022.

The outlook for emerging markets

We recently downgraded our forecast for full-year 2022 growth in emerging markets globally, from about 5.5% at the start of the year to about 3%. Latin American central banks have continued to raise interest rates aggressively to fight inflation broadening beyond food and energy prices. But in anticipation of slowing growth, Latin American markets are starting to price in 2023 central bank interest rate cuts.

Figures related to economic growth, inflation, monetary policy, and unemployment rate are Vanguard forecasts for the end of 2022. Growth and inflation are comparisons with year-end 2021; monetary policy and unemployment rate are absolute levels.

*The neutral rate is the theoretical interest rate at which monetary policy neither stimulates nor restricts an economy.

A closer look

Joe Davis

Our midyear 2022 outlook

Recession isn’t a forgone conclusion, but curbing inflation without stifling growth will be hard.

Map of Asia Pacific


China’s growth target of about 5.5% is vulnerable given the weak labor market and slowing global growth.

Map of Europe


Our outlook for the euro area has been downgraded amid energy prices sent soaring by war.

Abstract of balls leading into circle

10-year asset-class returns

Falling equity valuations and rising interest rates have largely increased our return forecasts.

Roger Aliaga-Diaz

Time-varying portfolios

Strategic asset allocation, not market timing, may benefit some investors given changing conditions.