Key points

• In the US, revised data suggest moderating but healthy economic growth and consumer health than initially indicated.
• Euro area growth momentum is slowing sharply, with Germany on the cusp of recession.
• UK policymakers appear to be more ready to react to global economic conditions and recent dovishness by other major central banks.

Recent economic activity data in the US support Vanguard’s view that growth is moderating but still healthy, and the labour market is cooling rather than cracking.

While data from the euro area and UK suggest varying degrees of economic health, the slowdown in China suggests a more robust fiscal policy response may be required to revive the country’s flagging economic activity.

United States

The Federal Reserve (Fed) had a strong start to its easing cycle back in September, reducing its federal funds rate by 50 basis points (bps)¹ to a range of 4.75%–5%. In our baseline view, we foresee further cuts of 25 bps at each of the Fed’s November and December meetings.

Recent revisions to key economic data suggest a firmer picture of overall growth and consumer health than initial readings at the time of the September cut indicated.  Vanguard still expects official readings for third-quarter GDP will come in below recent Fed estimates of 3.2%. We foresee full-year growth to be above 2%.

The pace of headline inflation slowed to 2.4% for the 12 months to September, down from 2.5% in August. The reading was above expectations, driven by the biggest jump in services ex-shelter prices (up 0.6% month over month) since March. Core Personal Consumption Expenditures (PCE), the Fed’s preferred inflation measure, inched higher to 2.7% for the 12 months to August, from 2.6% in July. Core PCE excludes volatile food and energy prices. We foresee the pace of core PCE rising to 2.8% by year-end because of base effects, or challenging comparisons with data from the previous year.

The latest jobs data exceeded expectations, with 254,000 non-farm jobs being added in September – about 100,000 more than consensus estimates. The unemployment rate fell from 4.2% to 4.1% in September. We believe that talk of labour market deterioration in recent months has been exaggerated. This year’s increase in the unemployment rate was driven by growth in the labour force, not by job losses, and we foresee the unemployment rate ending the year marginally above current levels.

Euro area

Euro area growth momentum is slowing sharply, with Germany on the cusp of recession. Elevated services inflation underscores our long-held view that the last mile to lowering inflation to target levels is the most difficult.

The balance of risks appears to be shifting for the European Central Bank (ECB). The central bank, which cut rates by 25 bps in both June and September, now finds its restrictive monetary and fiscal policies weighing on activity, while pricing pressures are easing more quickly than anticipated.

The ECB announced a 25 bps rate cut at its October meeting and we foresee another cut in December, which would leave interest rates at 3% by year-end. Vanguard foresees rates being cut to 2%-2.5% by mid-2025.

However, a more resilient US labour market and the prospect of significant China fiscal stimulus that could boost European exports challenges a scenario of fairly aggressive rate cuts priced in for the first half of 2025.

Recent data suggest that growth slowed in the third quarter, as a two-year manucturing slump continues. This is after GDP in the second quarter grew just 0.2% compared with the first. We have lowered our full-year growth forecast for 2024 from 0.8% to 0.6%.

The pace of headline inflation fell to 1.7% in the 12 months to September, down from 2.2% in August. A sharp 6.1% decrease in energy prices over the same period drove the decline. Core inflation, which excludes volatile food, energy, alcohol and tobacco prices, slowed marginally for the second straight month, to 2.7%. We foresee 12-month core inflation falling to around 2.5% by year-end, before reaching the ECB’s target in 2025.

The unemployment rate remained at a record low of 6.4% on a seasonally-adjusted basis in August. We foresee the unemployment rate ending 2024 around current levels, with broader growth pressures pushing the unemployment rate to the high-6% range through 2025. 

United Kingdom

In the UK, recent comments by Bank of England (BoE) Governor Andrew Bailey suggest a shift in the bank’s approach to policy-setting, as it appears to be more mindful of global conditions including recent dovishness by the Fed and the ECB.

Given this perceived shift, we now expect the BoE to cut its bank rate – currently 5% – by 25 bps at each of Its next two meetings in November and December, to end the year at 4.5%. We maintain our forecast for a further 100 bps of rate cuts in 2025.

Revised GDP data for the second quarter showed growth was not quite as strong as originally reported, with GDP growing 0.5% in the three months from April to June, compared to initial estimates of 0.6%. We have lowered our 2024 growth forecast to 1% from our previous forecast of 1.2%.

The nation’s Budget is scheduled for release on 30 October. While much remains uncertain, we’re watching for measures that could boost long-term economic growth – and productivity – primarily through greater public and private investment.

Headline inflation slowed to 1.7% in the 12 months to September, down from 2.2% in August. Core inflation, which excludes volatile food, energy, alcohol and tobacco prices, also slowed in the 12 months to September, to 3.2% from 3.6% in August. Vanguard expects core inflation to end the year around 2.8% and to hit the BoE’s 2% target by the second half of 2025.

Wage growth continued to cool during the three months to August, while the unemployment rate fell, from 4.1% to 4%. Job vacancies also declined, adding to evidence of an overall labour market softening. 

China

In October, China’s Ministry of Finance (MoF) pledged that fiscal stimulus, sufficient to ensure China hits its 5% 2024 GDP growth target, is forthcoming. However, its failure to specify a dollar figure left some observers disappointed. Vanguard sees the developments as suggesting that meaningful stimulus is forthcoming, with more specific details expected to be provided later in the month.

China’s stock market soared 32% in September, after the People’s Bank of China (PBOC) injected 800 billion yuan ($113 billion) of liquidity that helped boost sentiment.

Second-quarter GDP grew by 4.7% compared to the same period in 2023, but weaker-than-expected retail sales and industrial production figures suggest that China’s growth momentum is slowing. We anticipate that China will still be able to reach its 5% growth target for 2024—provided that a sufficiently timely fiscal policy response is in place.

The pace of headline inflation slowed to 0.4% in the twelve months to September, with much of it attributable to a rise in food prices. Core inflation was just 0.1% for the twelve months to September, down from 0.3% in August. We expect headline inflation of 0.8% and core inflation of just 1.0% for all of 2024.

The unemployment rate rose to 5.3% in August as new graduates joined the labour force. Vanguard expects the unemployment rate to remain around current levels for the rest of the year. 

The points above represent the house view of the Vanguard Investment Strategy Group’s (ISG’s) global economics and markets team as at 19 october 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 follows²:

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 US 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.

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