China, Australia

Our economic and market outlook at midyear 2023

June 26, 2023

China’s and Australia’s economies are in some ways on opposite trajectories. Monetary policy rates continue to climb in Australia amid sticky inflation. A recent interest rate reduction in China, meanwhile, is unlikely to stoke demand. One attribute they’ll likely share: a slowdown in growth for the rest of the year.

China’s gradual economic healing

Qian Wang midyear VEMO 2023 video

Video length: 3:10


Our outlook for year-end 2023


Economic growth,

Although we see China’s economy as likely to grow by more than we anticipated at the start of the year, the bulk of those gains have already occurred. The pent-up demand unleashed in the first quarter after the removal of COVID-19 restrictions has yielded to a broad-based weakening. Full-year growth above a conservative government target is likely, but three years of policy uncertainty will weigh on confidence.


Core inflation, year-over-year

Lower energy and pork prices have contributed to a series of weak inflation prints. Alongside slowing growth, that has led us to nearly halve our inflation forecast from the start of the year. A rebound later this year is likely as credit demand strengthens and food and energy prices stabilize.


Monetary policy rate

A recent People’s Bank of China cut to 2.65% for the key 1-year medium-term lending facility should have little tangible economic effect. We believe an additional 10 to 20 basis points of cuts are likely. But China’s challenge is a lack of demand for money, not a lack of supply. The likelihood of aggressive fiscal stimulus is low because of an increasing local government debt burden.    


Unemployment rate

The labor market has improved steadily since China’s post-pandemic reopening, with the headline unemployment rate declining to 5.2%. However, youth unemployment has climbed to a record high, posing a downside risk to growth. 

What Im watching

China’s limited global spillover effects

“In past economic recoveries, China’s appetite for commodities and other goods benefited its trade partners. Now, as its economy bounces back from COVID-19-related downturns, China is less likely to support global growth. That’s because its current recovery has been led by the services sector, and services exports account for much less of its trading partners’ gross domestic product than goods exports.”

Grant Feng

Grant Feng,
Vanguard Senior Economist

A bar chart shows various countries’ or regions’ shares of GDP represented by goods and services exports to China. For the United States, goods represent 0.5% and services 0.3%. For Canada, goods are 1.0% and services 0.4%. For the euro area, goods are 1.6% and services 0.5%. For Japan, goods are 2.9% and services 0.6%. For Australia, goods are 7.0% and services 0.9%. For Thailand, goods are 6.3% and services 1.2%. For Singapore, goods are 14.8% and services 4.7%.

Notes: This chart is based on 2019 gross domestic product because the COVID-19 pandemic skews more recent available data.

Source: Vanguard calculations, using China's General Administration of Customs data via CEIC.


Our outlook for year-end 2023


Economic growth,

Our growth forecast is little changed from the start of the year. But tepid first-quarter growth and our expectation for subdued consumption in the coming quarters skew risks to the downside. Our proprietary leading indicators model suggests growth will fall below trend. We place a 40% probability on recession in the next 12 months—below that of many developed markets but still significant. 


Headline inflation, year-over-year

Despite some mixed signals recently, we believe inflation has peaked; our forecast remains where it was at the start of the year. Still, recent higher-than-expected readings suggest higher interest rates will be required to dampen demand. We foresee inflation falling to the high end of the central bank’s 2%-3% target range only in late 2024 or 2025.


Monetary policy rate

A historically aggressive effort to slow the Australian economy—and thereby quell inflation—almost certainly will continue. The Reserve Bank of Australia (RBA) raised its cash rate target a dozen times between May 2022 and June 2023. We foresee two more rate hikes, taking the rate target to 4.6% by year-end, higher by 25 basis points than our view at the start of the year amid signs of sticky inflation. 


Unemployment rate

An unemployment rate that has flirted with near- 50-year lows is likely to rise in the second half of the year and further—to 4.75%—in 2024 as financial conditions tighten. The RBA will be attuned to unit labor costs, which have risen as productivity growth has been subdued. An increase in productivity will be required for wage growth to remain consistent with the RBA’s inflation target.

What Im watching

A measure of inflation's stickiness

“Inflation that is broad-based, affecting a wide range of goods and services, is likely to remain stickier than inflation confined to a small proportion of items. The proportion of goods and services whose prices have risen by more than 5% has started to drop back after reaching more than 30-year highs at the end of 2022. We’ll want to see that proportion continue to fall.” 

Alexis Gray

Alexis Gray,
Vanguard Senior Economist

A line chart shows the proportion of Australian consumer price index components that have risen by more than 5% in each quarter since 1980. The figure peaked in this inflation cycle at 69% in the fourth quarter of 2022. That was the highest since it hit 71% in the second quarter of 1989. It fell back to 60% in the first quarter of 2023.

Notes: Data points are quarterly.

Source: Vanguard calculations, using Australian Bureau of Statistics data through the first quarter of 2023.

The outlook for emerging markets

We expect emerging Asia to boast sharply higher growth than the rest of the world’s emerging markets. We foresee growth of 5.25% this year, cooling somewhat to 5% in 2024. The outlook is based on China’s strong first-quarter growth and resilient activity globally.

Compared with emerging markets globally, emerging Asia faces tame inflation of less than 2% in 2023, meaning central banks don’t need to restrict activity to constrain prices.

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 the Americas


Resilient economies are ultimately likely to face the prospect of recession.

Map of Europe


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

Abstract of balls leading into a 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 balls separated by ribbon

Inflation and portfolios

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