Key points

  • The US economy remained robust as debate continued over the timing of potential policy cuts. 
  • The euro area economy softened but avoided falling into recession in the fourth quarter. 
  • The UK fell into a technical recession in the fourth quarter, as growth slipped for the second quarter in a row.
  • Further price falls in China suggest more policy support may be required to stimulate growth. 

A mixed economic picture continues to develop across global markets. In the US, robust consumer spending and wage growth continue to resist any signs of the weakening seen in the euro area and UK economies, where growth remains near or below zero.

The latest data in the US throw into question the timing of potential interest rate cuts by policymakers, as still-strong growth could pose a risk to the progress made in their fight against inflation. 

United States – Recent growth and labour market data suggest the US economy remains robust as debates continue over the timing of potential interest-rate cuts. Progress continues in the fight against inflation, but Vanguard remains alert to risks posed by still-strong wage growth. 

The US economy produced 353,000 jobs in January, nearly double consensus estimates, and the unemployment rate remained steady at 3.7%. Annualised wage growth has topped 4% for the last three months. Such strength isn’t immediately concerning, though reflationary risks could increase if wage growth doesn’t moderate by the second half of the year.

Recently released data show that US GDP increased by an annualised 3.3% in the fourth quarter, with personal consumption accounting for nearly three-fifths of the gain. That was lower than the 4.9% annualised growth in the third quarter, but well above expectations. For full-year 2023, GDP grew by 2.5% on an average annual basis. For 2024, we foresee full-year GDP growth in a range of 0.25%–0.75%. 

The US Federal Reserve (Fed) held its target for the federal funds rate steady in a range of 5.25%–5.5% at its 31 January policy meeting. The Fed, in emphasising it wants to have “greater confidence that inflation is moving sustainably toward 2%”, in essence took a March rate cut off the table.

Core inflation, which excludes volatile food and energy prices, rose by 0.4% in January compared with December, the largest monthly gain in eight months1. Core inflation for the 12 months to January was 3.9%. However, core inflation as measured by the Personal Consumption Expenditures (PCE) index, the Fed’s preferred gauge in setting policy, slowed to 2.9% for the 12 months to December, down from 3.2% in November. On a three-month annualised basis, which reflects more recent trends, core PCE was 1.5%. 

Euro area – Amid moderation in both inflation and wage gains, we have revised our outlook for European Central Bank (ECB) interest rates. We foresee the ECB cutting its deposit facility rate by 100 to 150 basis points (bps) ‒ 1 to 1.5 percentage points ‒ in 2024 to a year-end range of 2.5%–3%. That’s greater than the 75 bps of rate cuts we foresaw in our Vanguard economic and market outlook for 2024.   

We believe the ECB will look to first-quarter inflation and wage data to confirm that it can sustainably return inflation to the ECB’s 2% target. That would allow the ECB to initiate a rate-cutting cycle with its 6 June policy announcement, with 25-basis-point cuts potentially at each of its final five policy meetings of the year.

The ECB left its deposit facility rate unchanged at 4% on 25 January. Key messages were unchanged compared with the ECB’s previous meeting in December, suggesting the ECB is pushing back on market expectations for a rate cut as soon as March. 

Headline inflation inched down to 2.8% in the 12 months to January, according to a recent estimate by Eurostat. Core inflation, which excludes volatile food, energy, alcohol and tobacco prices, was down slightly in the 12 months to January, at 3.3%, from 3.4% in December. With benign inflation and moderating wage pressures, we expect headline inflation to reach the ECB’s target by September 2024 and core inflation to reach target by December 2024.

An estimate of GDP suggests that the euro area economy remained soft in the fourth quarter but avoided falling into recession by its technical definition2. We continue to expect that any recession will be mild. 

We don’t believe that the euro area can escape with a ‘painless disinflation’. We anticipate a softening labour market as economic activity falls below its potential amid restrictive monetary and fiscal policy. The unemployment rate was unchanged at 6.4% in December and we expect it to rise to an above-consensus range of 7%–7.5% in 2024.

United Kingdom – According to the latest data for fourth quarter GDP, released on 15 February, the UK economy fell into recession in the second half of 2023. GDP contracted by 0.3% in the fourth quarter of 2023; the second consecutive quarter of falling output after slipping 0.1% in the previous quarter ‒ thus meeting the technical definition of a recession. However, indicators suggest that a modest return to growth of around 0.1%–0.3% may be underway in the first quarter. For all of 2024, we foresee below-trend GDP growth in a range of 0.5%–1% from the effects of contractionary monetary and fiscal policy. 

The Bank of England (BOE) held its Bank Rate steady at 5.25% for its fourth consecutive meeting on 1 February. The BOE appeared to push back on market expectations for a policy interest rate cut as early as June. In our base case, we foresee a first policy rate cut in August, and a total of 100 basis points ‒ or 1 percentage point ‒ of cuts in 2024.

Headline inflation held steady at 4.0% for the 12 months to January, the same as its reading in December, according to the Office for National Statistics (ONS). Core inflation ‒ which excludes volatile food, energy, alcohol and tobacco prices ‒ rose at a 5.1% pace for the 12 months to January, the same as in December. We have reduced our forecast for year-end 2024 core inflation from 2.8% to 2.6%.

The unemployment rate fell to 3.8% in the rolling three-month period from October to December, down from a revised 3.9% for the preceding rolling three-month period, according to the ONS. We foresee the unemployment rate rising to a range of 4.5%–5% over the course of 2024 amid restrictive monetary and fiscal policy.

China – Housing and auto sales data as well as data from purchasing managers’ indices suggest that weak economic growth has carried into the new year in China. As a property downturn drags on the economy, private demand and business confidence remain subdued.

The government has responded with broad but incremental stimulus measures, including support for the ailing housing and equity markets. However, we don’t anticipate large-scale stimulus as was introduced in China during the global financial crisis. 

With growth below potential and continued deflationary pressure, more concrete and decisive policy support may be needed for China to achieve its anticipated growth target of “around 5%”.

Consumer prices fell again in January, the National Bureau of Statistics of China reported on 8 February. The 0.8% decrease for the 12 months to January was the greatest since 2008. We continue to expect consumer prices to rise by 1%–1.5% in 2024. 

Pro-growth measures could help stimulate prices, but we expect any reflation to be modest and below the 3% inflation target set by the People’s Bank of China (PBOC). To mitigate deflationary pressures, we expect the PBOC to ease its policy rate from 2.5% to 2.2% in 2024, as well as to cut banks’ reserve requirement ratios.

The points above represent the house view of the Vanguard Investment Strategy Group’s (ISG’s) global economics and markets team as at 15 February 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 31 December 2023.

Our 10-year annualised nominal return projections, expressed for local investors in local currencies, are as follows3.

1 As measured by the Consumer Price Index (CPI).

The technical definition of a recession is broadly considered to be two consecutive quarters of contraction in GDP.

3 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.



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