Key points

• US economic growth is expected to cool with the US Federal Reserve (Fed) expected to cut interest rates in September.
• In the euro area, a gradual interest rate easing cycle is now underway with economic growth expected to moderate.  
• In the UK, a more balanced outlook for the economy has led us to anticipate that further interest rate cuts will occur only gradually. 
   

Improved economic activity in the US, euro area and the UK point to a continued uplift in the global economy for the rest of the year. However, this won’t be without its challenges and a slowdown in the pace of growth is anticipated over the coming months.

While the euro area and the UK have already started to cut interest rates,  the expectation is that the US Federal Reserve (Fed) will begin to cut interest rates in September. 

United States

Recent data suggest that the labour market is softening and the Fed appears to be taking notice. A weaker-than-expected July labour market report appeared to support the case for a September interest rate cut.

The US economy created 114,000 jobs in July, and the unemployment rate rose to 4.3%. The unemployment rate increase is attributable to labour force growth exceeding job growth rather than an increase in job losses.

US economic activity continued to be resilient in the second quarter, with real GDP increasing by an annualised 2.8%, driven by increases in consumer spending, non-residential fixed investment and government spending.

GDP growth is tracking largely in line with Vanguard’s 2% outlook for 2024. We believe that growth is likely to cool but remain at a near-trend pace by year-end. The Fed gave a strong signal that it was prepared to cut the rate target by 25 basis points at its September meeting (a basis point is one-hundredth of a percentage point). Vanguard also expects a second 25-basis-point cut this year.

For 2025, amid anticipated below-trend growth, core inflation falling to near the Fed’s 2% target and an unemployment rate rising moderately above current levels, we expect the Fed’s rate target to end the year in a range of 3.25%–3.5%.

Broad consumer prices rose in the year to July at the slowest pace since early 2021. The Consumer Price Index (CPI), a key measure of inflation, rose by 2.9% in July compared with July 2023. Core CPI, which excludes volatile food and energy prices, rose by 3.2% in the year to July.

Euro area

The euro area’s economy grew again in the second quarter, with real GDP having increased by 0.3% compared with the first quarter. This was despite an unexpected drag from Germany, where a manufacturing sector rebound remains elusive.

The pace of headline inflation increased in July, in line with our view that the path towards a 2% inflation target will be bumpy. Headline inflation rose to 2.6% in the year to July compared with 2.5% in the year to June.

While energy, food and core goods inflation are tracking at levels consistent with the 2% target set by the European Central Bank (ECB), services inflation momentum has reaccelerated in recent months.

Core inflation, which excludes volatile food, energy, alcohol and tobacco prices, remained at 2.9% on an annualised basis for a third straight month. Vanguard expects headline inflation to fall to around 2.2% for the 12 months to December and core inflation to fall to around 2.6%, reaching the ECB’s target in 2025.

The ECB noted that monetary policy remains restrictive but that domestic price pressures remain high. We expect the ECB to cut its rate by a further quarter-point in September. We anticipate quarter-point cuts quarterly thereafter, which would leave the policy rate at 3.25% at year-end 2024 and 2.25% at year-end 2025.

The unemployment rate rose to 6.5% on a seasonally adjusted basis in June from a record low of 6.4% in May. Its current level is the same as it was a year earlier. We expect to see little change to the unemployment rate by the end of the year.

United Kingdom

The most recent growth and inflation data suggest the UK economy is becoming more balanced.

Inflation was softer than expected in July and second-quarter growth was only minimally less than that of the first quarter, when the UK exited a brief recession.

GDP growth increased by 0.6% in the second quarter compared with the first, and overall, Vanguard expects the economy to grow by 1.2% in 2024.

While headline inflation increased in the year to July, rising to 2.2% from 2.0% in the year to June, it was largely attributable to energy prices having fallen by less than they did a year earlier.

Meanwhile, core CPI, which excludes volatile food, energy, alcohol and tobacco prices, slowed to 3.3% in the year to July, from 3.5% in the year to June. Vanguard expects core inflation to end the year 2024 at around 2.8% and to hit the Bank of England’s (BOE) 2% target by the second half of 2025.

The BOE cut its policy rate on 1 August (for the first time in the current cycle) by 25 basis points to 5%. We expect that further rate cuts will occur only gradually, as services inflation remains high despite recent downward progress.

The unemployment rate fell unexpectedly to 4.2% in the April–June period, from 4.4% in the March–May period. While job vacancies continued on a downward trend, employment increased, with 24,000 jobs created. Vanguard expects the unemployment rate ending 2024 in a range of 4%–4.5%.

China

Broad economic data pointed to a tepid start to the third quarter after a second quarter of below-potential growth and a continued imbalance in supply and demand.

GDP grew by just 0.7% in the second quarter compared with the first and by 4.7% compared with the second quarter last year. Consumption lost momentum in the quarter, reflecting recent data showing weak domestic demand, sluggish imports and subdued inflation.

At a late-July Politburo meeting that echoed sentiments from the twice-a-decade economic policy meeting known as the 3rd Plenum earlier in the month, policymakers pledged support on both fiscal and monetary fronts to an economy weighed down by lagging consumer demand and a housing glut.

Implementation will be essential as to whether China reaches its 2024 target for growth of “around 5%.” In the second half of 2024, we expect the economy to regain some ground and stabilise towards trend growth, with export and manufacturing investment as a tailwind.

Vanguard continues to expect China to grow by 5.1% for the full year, though continued imbalances in the country’s economy could challenge the growth outlook.

The pace of inflation as measured by consumer prices rose by 0.5% in the year to July, above expectations but well below the 3% inflation target set by the People’s Bank of China.

We expect reflation in 2024 to be mild, with headline inflation of 0.8% and core inflation, which excludes volatile food and energy prices, of just 1.0%.

The points above represent the house view of the Vanguard Investment Strategy Group’s (ISG’s) global economics and markets team as at 16 August 2024.

Asset-class return outlook

Vanguard has updated its 10-year annualised outlooks for broad asset class returns through the most recent running of the Vanguard Capital Markets Model® (VCMM), based on data as at 30 June 2024.

Our 10-year annualised nominal return projections, expressed for local investors in local currencies, are as follows¹.

¹ The figures are based on a 2-point range around the 50th percentile of the distribution of return outcomes for equities and a 1-point range around the 50th percentile for fixed income. Numbers in parentheses reflect median volatility.