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Markets and economy

Vanguard economic and market outlook for 2023: Beating back inflation

Our base case for 2023 includes a global recession brought about by policymakers’ efforts to control inflation.
3 minute read
December 12, 2022
Markets and economy
Economic outlook

In our 2022 economic and market outlook, we outlined how we believed the removal of policy accommodation would shape the economic and financial market landscape. Policy has in fact driven conditions globally in 2022, one of the most rapidly evolving economic and financial market environments in history. But one fact has been made abundantly clear: So long as financial markets function as intended, policymakers are willing to accept asset price volatility and a deterioration in macroeconomic fundamentals as a consequence of fighting inflation.

Our outlook in brief:

  • The stabilization of global consumer behavior, cyclical acceleration in demographic and geopolitical trends, and rapid monetary tightening suggest a more challenging macroeconomic environment in 2023 that, in our view, will help bring down the rate of inflation.
  • Global conditions today and those anticipated in the coming months are similar to those that have signaled global recessions in the past. Energy supply-and-demand concerns, diminishing capital flows, declining trade volumes, and declining output per person mean that the global economy will likely enter a recession in the coming year.
  • Inflation continued to trend higher in 2022 across most economies as supply chains have yet to fully recover from pandemic-related distortions and as demand has been buoyed by strong household and business balance sheets. Our base case of a global recession in 2023 signifies slowing consumer demand and modest job losses that should put inflation on a downward trend through 2023, with central bankers reasonably looking to achieve their 2% inflation targets in 2024 or 2025.
  • Although rising interest rates have created near-term pain for investors, higher starting rates have raised our return expectations for U.S. and international bonds. We now expect U.S. and international bonds to return 4%–5% per year over the next decade.
  • Globally, our 10-year equity return expectations are 2.25 percentage points higher than they were at this time last year. From a U.S. 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%).

Learn more about our views on the global economic outlook, inflation, monetary policy, and the implications for investors.

Vanguard's 2023 economic and market outlook is available

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IMPORTANT: The projections and 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. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class. Simulations as of September 30, 2022. 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 U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. 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.

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