Key points
Economic growth rates to converge
We expect growth rates to converge long-term with the US falling back to its pre-Covid trajectory and other economies rising to their pre-Covid trend.
The return of sound money
We don't think interest rates will fall back to zero, as the neutral rate has risen substantially. While there may be short-term divergence in rates, the long-term trend across the US and Europe is down.
The next decade will not be like the previous for markets
We do not believe the next decade will mirror the previous one with US equities appearing stretched in their valuations and other areas, such as Europe and emerging markets, looking particularly attractive.
Quarterly Investment Outlook
Monetary policy likely to diverge only temporarily
Notes: Monthly data from January 2005 to 20 June 2024, forecasts thereafter.
Sources: Vanguard calculations using data as of 20 June 2024, from Bloomberg and Macrobond.
Vanguard’s forecasts for year-end 2024
*Inflation forecasts are for core inflation, which excludes volatile energy and food prices, except for Australia, where we measure headline inflation, which includes food and energy.
**Our forecast for the United States year-end monetary policy rate reflects our expected Federal Reserve federal funds target range.
Notes: : Figures related to economic growth, inflation, monetary policy, and unemployment rate are Vanguard forecasts for the end of 2024. Growth and inflation are comparisons with the end of the preceding year; monetary policy and unemployment rate are absolute levels.
Sources: Vanguard, as of 25 June 2024.
What our economic experts are watching
United States
Vanguard Senior Economist
Cyclical employment and an economy with room to run
In the last two years, the three sectors that represent noncyclical employment—government, health care, and education—have created about half of the new jobs in the United States, despite representing just 30% of the labor market. Health care and education spending is nondiscretionary, so employment in these sectors is typically agnostic to the economic environment. Government employment is less sensitive than other industries to an economic downturn as the sector is an attractive destination for workers in such periods. Meanwhile, cyclical employment—the rest of the labour market—typically rises and falls with economic conditions. Though cyclical employment has moderated since 2022, it continues to grow, an encouraging sign that the economic expansion will likely continue and the labour market will remain strong throughout 2024.
Growth, inflation, monetary policy, and unemployment figures above are Vanguard forecasts for year-end 2024. Growth and inflation are comparisons with year-end 2023; monetary policy and unemployment are absolute.
Notes: Employment growth is the year-over-year change in the three-month moving average. Noncyclical employment represents education, government, and health services, industries that historically have had little correlation with the broader economy. Cyclical employment represents all other industries, such as but not limited to finance, professional and business services, construction, manufacturing, and wholesale and retail trade.
Sources: Vanguard calculations using data from the St. Louis Federal Reserve FRED database as of 13 June 2024.
Euro area
Vanguard Senior Economist
After five quarters of stagnation, a modest return to growth
After five quarters of stagnation, the euro area returned to growth in the first quarter of 2024, thanks mainly to higher exports. The growth outlook is an important factor driving underlying inflation trends and will be a key input into monetary policymaking. We expect quarterly growth rates of 0.3% or 0.4% (non-annualised) for the rest of the year, which would leave euro area growth at 0.8% for 2024 as a whole.
Growth, inflation, monetary policy, and unemployment figures above are Vanguard forecasts for year-end 2024. Growth and inflation are comparisons with year-end 2023; monetary policy and unemployment are absolute.
Sources: Vanguard calculations using data as of 7 June 2024, from Eurostat.
United Kingdom
Vanguard Senior Economist
Sticky measures of underlying inflation
Three measures of underlying inflation have slowed in 2024 but remain elevated and inconsistent with the Bank of England’s (BoE) 2% inflation target. A continued deceleration in all three will be necessary for the BOE to feel comfortable about cutting interest rates this year.
Growth, inflation, monetary policy, and unemployment figures above are Vanguard forecasts for year-end 2024. Growth and inflation are comparisons with year-end 2023; monetary policy and unemployment are absolute.
Notes: CPI is the Consumer Prices Index. Core CPI excludes volatile food, energy, alcohol, and tobacco prices. Private sector wages as presented exclude bonuses.
Sources: Vanguard calculations using data from the UK. Office for National Statistics as of 20 June 2024.
China
Vanguard Senior Economist
The mixed impact on global goods prices from China’s uneven recovery
The idea that China is “exporting deflation” doesn’t hold globally. Although its excess manufacturing capacity amid tepid domestic demand helps lower goods prices in the US. and the euro area, China’s booming manufacturing and infrastructure investments drive up energy and industrial metals prices, which especially affects commodities producers such as Australia.
Growth, inflation, monetary policy, and unemployment figures above are Vanguard forecasts for year-end 2024. Growth and inflation are comparisons with year-end 2023; monetary policy and unemployment are absolute.
Notes: We use China’s export prices as a proxy for the impact of excess capacity and China’s fixed asset investment as a proxy for the impact of investment demand. We expect a 6% drop in export prices this year and a 5.5% increase in fixed asset prices. We use a vector autoregressive model incorporating each economy’s output gap, policy rate, and goods price inflation, and China’s export prices and fixed asset investment to estimate China’s spillover to goods inflation.
Sources: Vanguard calculations using data from CEIC as of 8 June 2024.
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Global equity and fixed income outlook
Developed market sovereign bond yields have mostly risen since the start of the year, pushing our 10-year annualised return forecasts higher as well. Our ex-US developed markets domestic equities forecasts are flat to marginally higher, though higher US equity valuations have largely dragged down global equities forecasts. Forecasts are from the perspective of local investors in local currencies.
IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model (VCMM) 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 31 December 2023 and 31 May 2024. Results from the model may vary with each use and over time.
Notes: 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.
Related articles
The end of stagnation for Europe and the UK
Vanguard’s chief economist in Europe dissects the inflation and interest rate outlook for the euro area and UK.
Globalisation’s notably muted effect on inflation
Vanguard does not expect a slowdown in globalisation to cause significant inflation, particularly in the US.
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. 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 US and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, US 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.
The primary value of the VCMM is in its application to analysing potential client portfolios. VCMM asset-class forecasts—comprising distributions of expected returns, volatilities, and correlations—are key to the evaluation of potential downside risks, various risk–return trade-offs, and the diversification benefits of various asset classes. Although central tendencies are generated in any return distribution, Vanguard stresses that focusing on the full range of potential outcomes for the assets considered, such as the data presented in this paper, is the most effective way to use VCMM output.
The VCMM seeks to represent the uncertainty in the forecast by generating a wide range of potential outcomes. It is important to recognise that the VCMM does not impose “normality” on the return distributions, but rather is influenced by the so-called fat tails and skewness in the empirical distribution of modeled asset-class returns. Within the range of outcomes, individual experiences can be quite different, underscoring the varied nature of potential future paths. Indeed, this is a key reason why we approach asset-return outlooks in a distributional framework.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Past performance is not a reliable indicator of future results.
Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.
Important information
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