United States, Canada, Mexico

Our economic and market outlook at midyear 2023

June 26, 2023

While much has changed over the first half of the year, the key aspects of our initial economic and market outlook for 2023 remain intact. Inflation has eased, but reducing price pressures tied to wage growth will take longer. Central bank rate cuts are unlikely before 2024. A mild recession in the U.S.—and in Canada and Mexico, among other nations and regions—is more likely than not.   

The Fed’s clear path

Roger Aliaga-Díaz midyear VEMO 2023

Video length: 3:08

United States

Our outlook for year-end 2023


Economic growth,

The recovery from the shortest U.S. recession in more than 150 years—a two-month downturn in early 2020—has endured one of the most aggressive interest rate-hiking cycles in Federal Reserve history. Recent growth has been stable at about 2%, annualized. We still assign a high probability to a recession, though the odds have risen that it could be delayed from 2023 to 2024.


Core inflation, year-over-year

Our base case is for the pace of consumer price increases to continue easing. Shelter inflation should slow in the second half of 2023 and return to its pre-pandemic pace by 2024. Slowing momentum in labor markets should also lower ex-shelter services inflation later this year.


Monetary policy rate

Given the long and variable lags between monetary policy shifts and discernible changes in economic activity, Federal Reserve policymakers could decide that the 500 basis points (5 percentage points) of interest rate hikes they’ve enacted since March 2022 are enough to knock inflation down to their 2% target. But we view at least one more rate increase as probable.


Unemployment rate

In our initial outlook for 2023, we described a weakening of the labor market (along with slowing growth) as a necessary condition for falling rates of inflation. The labor market has remained resilient even as disinflation has continued. Unemployment remains below 4%, where it stood when the Fed started its current rate-hiking cycle. We continue to expect some softening as a necessary condition for further progress on inflation.

What I’m watching

Consumer spending and the Fed’s rate-hiking cycle

“Consumer spending has remained remarkably consistent over the past year despite persistent inflation. If spending remains on this path, the Federal Reserve will have more work to do. Increasing the policy rate another three-quarters of a percentage point is not out of the question under such conditions.”

Josh Hirt

Josh Hirt,
Vanguard Senior Economist

A line graph shows the annualized rate of real, or inflation-adjusted, consumer spending between 2019 and 2023, as well as the pre-pandemic trend rate of growth in spending. In 2020, spending fell well below trend—a trillion dollars or more below its pre-pandemic peak of perhaps $13 trillion—but it rebounded quickly later in 2020 and early in 2021, reaching a level slightly in excess of the pre-pandemic trend. If spending remains above trend, then the low end of the federal funds rate target could rise to 6% or more. If spending falls below trend,  the low end of the target could remain at 5.25%.

Notes: The Federal Reserve sets the federal funds rate target—typically a range—as a goal for the level of short-term interest rates. The pre-pandemic trend shows the average pace of growth in real consumer spending between 2017 and 2019.

Sources: Vanguard calculations, based on U.S. Bureau of Economic Analysis data as of June 12, 2023.

What I’m watching

Declining import, wholesale prices bode well for consumers 

“Import prices have been easing rapidly since March 2022—and outright declining since February 2023—thanks in part to the rebuilding of supply chains disrupted by the COVID-19 pandemic. Producer or wholesale prices have been falling almost as quickly, helping to curb actual and expected consumer inflation toward the 2% target set by Federal Reserve policymakers. We think they will get there in 2025.”

Asawari Sathe

Asawari Sathe,
Vanguard Senior Economist

A line graph shows year-over-year rates of change in consumer and wholesale prices since 2009. Price changes reflect the core CPI, the core PPI, and imported commodities. Throughout the period, commodity prices were the most volatile, rising nearly 15% on a year-over-year basis in around 2010 and again around 2021 and declining perhaps 14% in 2014. The core CPI and core PPI were much less volatile and generally moved together, hovering in the low single digits between 2009 and 2019 before spiking and then easing in recent years. The latest readings show the core CPI up roughly 5% on a year-over-year basis, the core PPI up less than 5%, and commodity prices down 5% or more. The chart also shows a forecast of the core CPI further declining into 2024. The core CPI is expected to settle in perhaps the 2% range.

Notes: Changes in commodity prices use non-seasonally adjusted data for all commodities, based on 2021 trade values. All other data include seasonal adjustments. Core prices exclude food and energy. The Producer Price Index (PPI) measures wholesale prices. The Consumer Price Index (CPI) measures retail prices.

Sources: Vanguard calculations, based on data from Refinitiv and Moody's through May 31, 2023.

What I’m watching

A fading wage premium reflects a loosening labor market 

“The wage increases typically commanded by workers who change employers over and above the gains made by workers who stick with their employers is a window into labor market conditions. When the labor market tightens, employers first raise wages to attract new talent and then to retain current workers, factors that can boost both economic growth and inflation. The wage-gain advantage for job switchers has been waning since the middle of 2022—an encouraging sign that inflationary pressures stemming from the labor market are abating.”

Adam Schickling

Adam Schickling,
Vanguard Economist

A line graph shows year-over-year changes in nominal wage growth for job switchers and job stayers between 1998 and early 2023. Job switchers generally experienced greater wage growth than job stayers across the 25-year period, though there were a few intervals when job stayers experienced greater wage growth. Overall, wage gains ranged from a low of about 1% in around 2009 and 2010 to a peak of nearly 9% for job switchers in late 2022. The gap between the wage gains of job switchers and job stayers varied over time but averaged perhaps 1 percentage point. The largest gap, equal to a few percentage points, appeared in the late 1990s and in late 2022.

Notes: The chart is based on the Federal Reserve Bank of Atlanta’s Wage Growth Tracker, which uses data from U.S. Census Bureau surveys of nonfarm workers to estimate the median level of year-over-year changes in hourly wages. Each data point is an average of that month’s median wage growth rate and the median rates of the two preceding months.

Sources: Federal Reserve Bank of Atlanta data as of April 30, 2023.


Our outlook for year-end 2023


Economic growth,

Although economic growth has recently surprised to the upside, our proprietary leading indicators index remains in negative territory. We expect a mild recession late in the year or early next year as the effects of higher interest rates spread. The Canadian economy depends heavily on its larger, southern counterpart, and if full-year growth differs from our forecast, we believe it’s likely to disappoint.


Core inflation, year-over-year

We expect inflation to continue moderating this year. But upside risks remain, in part because shelter costs account for a relatively large share of household spending and the home loan market is dominated by variable-rate and short-term fixed-rate loans. 


Monetary policy rate

A surprise June interest rate hike by the Bank of Canada brought the annualized rate on overnight loans between banks to 4.75%. We expect at least one more rate hike in 2023. Because of high levels of household debt and the sensitivity of housing costs to rates, monetary policy is restrictive and becoming more so as inflation recedes.


Unemployment rate

Since spiking to a pandemic-induced peak of 14% in 2020, unemployment has slid to multidecade lows near 5%—well below its longer-term average of about 7%. We expect it to rise in the second half of 2023 as monetary policy further tightens and the economy slows.

What I’m watching

A source of optimism: Slowing energy and transport prices  

“Just as accelerating transportation and energy costs played meaningful roles in Canada’s mid-2022 inflationary peak, their deceleration since then has eased the headline pace of price increases for goods and services. We believe inflation will continue to moderate in Canada in the second half of 2023 and 2024, though the moderation may be more gradual.” 

Bilal Hasanjee

Bilal Hasanjee,
Vanguard Senior Investment Strategist

A graph shows both a line and stacked bars that rise, in combination, to roughly the level of the line across all of the years depicted, 2018 to mid-2023. From 2018 until early 2023, the line shows the year-over-year change in Canada’s Consumer Price Index, or CPI. At that point it changes to a dotted line representing a forecast of inflation through 2024. The CPI fluctuated around 2% between 2018 and early 2020, when it plunged briefly below zero. It then rose to about 1% in late 2020 or early 2021 and then spiked, reaching nearly 4% in 2021 and a peak of about 8% in 2022, before falling toward 4% again in early 2023. The forecast dotted line shows inflation easing steadily toward 2% by the end of 2024. The stacked bars represent four components of inflation: shelter; transportation, including energy; food; and other. As inflation spiked in 2021 and 2022, shelter; transportation, including energy; and food all contributed more to the level of the CPI than they had in the past.

Notes: The “Other” component reflects the sum of five categories: household operations and furnishings and equipment, clothing and footwear, health and personal care, recreation and education and reading, and alcoholic beverages and tobacco products.

Sources: Vanguard calculations, based on data from Refinitiv, Moody’s, and the Bank of Canada as of April 30, 2023. 


Our outlook for year-end 2023


Economic growth,

As we suggested in our 2023 outlook, the rate of growth in U.S. inventories (excluding autos) has slowed in 2023 and, in turn, so have exports from Mexico to the United States—the destination for 70% of Mexico’s exports. We expect economic growth to slow from roughly 4% in recent quarters to less than 2% by year-end. 


Core inflation, year-over-year

The headline level of price increases has been moderating faster than the core rate, which excludes food and energy prices and may provide a clearer portrait of underlying price trends. By either measure, inflation remains well above the central bank’s 3% target. 


Monetary policy rate

We expect the Bank of Mexico to maintain its current rate target through year-end for a few reasons. Interest rates already exceed the rate of inflation, which has been falling, and falling inflation with stable nominal rates means higher real (inflation-adjusted) rates, which may restrict growth. Rate cuts are likely in 2024 as the central bank moves to bolster the economy.


Unemployment rate

“The labor market remains strong,” the Bank of Mexico said in its June policy statement, and we agree. Its strength does not preclude some softening, however, which we expect as the effects of tight monetary policy—in the United States as well as Mexico—continue to build. 

What I’m watching

Leading economic indicators suggest continued growth 

“Robust consumer spending and fixed investment have recently supported economic growth in Mexico. With moderating inflation, real wage growth should continue to accelerate, suggesting that consumption could continue to expand. ‘Nearshoring’ activity—companies moving part of their production to countries close to their markets—is another positive over the medium term. Our Leading Economic Indicators Index summarizes our outlook. Nearly half of the index’s underlying indicators recently implied strong future economic activity, and more below-trend signals have been improving.” 

Vytas Maciulis

Vytas Maciulis,
Vanguard Economist

An area chart shows leading economic indicators since 1994, dividing the indicators into three groups—those implying strong future activity, those below trend but improving, and those implying weak future activity. The mix of the three indicator groups is volatile but most of the time implies strong future activity. There are meaningfully more below trend but improving indicators than those implying weak future activity. A line across the indicators shows year-over-year changes in real or inflation-adjusted gross domestic product, or GDP. GDP also is volatile, with a peak of about 20% in 2021 following a low of roughly negative 20% in 2020. The latest reading shows GDP at around 4% in 2023.

Notes: The Vanguard Leading Economic Indicators Index (VLEI) for Mexico, created to infer developing economic trends, incorporates dozens of variables for the consumer, labor market, manufacturing, exports and imports, and financial markets. Each variable is assigned a weight based on its historical correlation with economic activity and its predictive power.

Sources: Vanguard, as of June 15, 2023.

The outlook for emerging markets

Inflation appears to have peaked in Latin America, but we expect central banks to lower their interest rate targets slowly. We anticipate full-year 2023 growth of around 1.5% for the region, slowing moderately in 2024. We foresee core inflation persisting at around 6.3% in both 2023 and 2024. 

Notes: All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future results.

A closer look

Joe Davis

Our midyear 2023 outlook

Restrictive monetary policy will weigh on global economies.

Map of Asia Pacific


China’s and Australia’s economies share one attribute: Growth slowdowns are likely.

Map of Europe


Recession has already visited the euro area. A new downturn may be on the way.

Abstract of balls leading into circle

10-year asset-class returns

Our 10-year annualized return forecasts are modestly lower since the start of the year for most developed markets.

abstract of two balls with a ribbon

Inflation and portfolios

Even in the unlikely event of long-term elevated inflation, a 60/40 portfolio could serve investors well.