Hear Joe Davis’s take on what’s ahead in 2023 for the economy and financial markets. Inflation is abating, but at what cost? Our comprehensive outlook has further details
By: Vanguard Research
Vanguard economic and market outlook for 2023:
Beating back inflation
● Generationally high inflation has led to a marked slowing in global economic activity.
Rapid monetary tightening aimed at bringing down inflation will ultimately succeed,
but at a cost of a global recession in 2023.
● Current and expected conditions are like those that have signaled past global
recessions. Significantly deteriorated financial conditions, increased policy rates,
energy concerns, and declining trade volumes indicate the global economy will likely
enter a recession in the coming year. Job losses should be most concentrated in the
technology and real estate sectors, which were among the strongest beneficiaries
of the zero-rate environment.
● Inflation continued to trend higher in 2022 across most economies as supply chains
had yet to fully recover from pandemic-related distortions and as demand was
buoyed by strong household and business balance sheets. Inflation has likely already
peaked in most markets, but reducing price pressures tied to labor markets and
wage growth will take longer. As such, central banks may reasonably achieve their
2% inflation targets only in 2024 or 2025.
● Consistent with our investment outlook for 2022, which focused on the need
for higher short-term interest rates, central banks will continue their aggressive
tightening cycle into early 2023 before pausing as inflation falls and job losses
mount. Importantly, we see most central banks reluctant to cut rates in 2023
given the need to cool wage growth.
● Although rising interest rates have created near-term pain for investors, higher
starting rates have raised our return expectations for both U.S. and international
bonds, which we now expect to return roughly 4%–5% over the next decade.
● Equity markets have yet to drop materially below their fair-value range, which they
have historically done during recessions. Longer term, however, our global equity
outlook is improving because of lower valuations and higher interest rates. Our
return expectations are 2.25 percentage points higher than last year. From a U.S.
dollar investor’s perspective, our Vanguard Capital Markets Model projects higher
10-year annualized returns for non-U.S. developed markets (7.2%–9.2%) and
emerging markets (7%–9%) than for U.S. markets (4.7%–6.7%).
Acknowledgments: We thank Brand Design, Corporate Communications, Strategic Communications, and the Asset
Allocation teams for their significant contributions to this piece. Further, we would like to acknowledge the work of
Vanguard’s broader Investment Strategy Group, without whose tireless research efforts this piece would not be possible.
Vanguard Investment Strategy Group
Global Economics Team
Joseph Davis, Ph.D., Global Chief Economist
Americas
Roger A. Aliaga-Díaz, Ph.D., Americas Chief Economist
Joshua M. Hirt, CFA, Senior Economist
Andrew J. Patterson, CFA, Senior Economist
Asawari Sathe, M.Sc., Senior Economist
Adam J. Schickling, CFA
Maximilian Wieland
David Diwik, M.Sc.
Ariana Abousaeedi
Europe
Jumana Saleheen, Ph.D., Europe Chief Economist
Shaan Raithatha, CFA, Senior Economist
Roxane Spitznagel, M.Sc.
Lulu Al Ghussein, M.Sc.
Asia-Pacific
Qian Wang, Ph.D., Asia-Pacific Chief Economist
Alexis Gray, M.Sc., Senior Economist
Capital Markets Model Research Team
Qian Wang, Ph.D., Global Head of VCMM
Kevin DiCiurcio, CFA, Senior Investment Strategist
Daniel Wu, Ph.D., Senior Investment Strategist
Ian Kresnak, CFA
Vytautas Maciulis, CFA
Olga Lepigina, MBA
Ben Vavreck, CFA
Lukas Brandl-Cheng, M.Sc.
Alex Qu
Lead authors
Joseph Davis,
Ph.D.
Roger A.
Aliaga-Díaz, Ph.D.
Jumana Saleheen,
Ph.D.
Qian Wang,
Ph.D.
Andrew J.
Patterson, CF
