Vanguard’s international economic outlook – November 2022 quarterly update

Vanguard’s international economic outlook – November 2022 quarterly update

Slowing global growth


Last time, we looked at Vanguard’s November quarterly update for Canada, looking at growing downside risks and their impact on the outlook. This time, we’ll present our global outlook including the U.S. as well as future expected returns for global and Canadian bonds and equities.

China is facing up to the aftermaths of its zero-Covid policy, resulting in stricter lockdowns and a recession in its real estate sector. In Europe, an emergency of energy shortfall has hurt personal consumption and industrial production alike.

Heightened volatility in the U.K. bond and currency markets in late September, resulting from the largest package of tax cuts in generations (a.k.a. the mini budget) created havoc in the U.K. pension sector. Only a timely Bank of England intervention stopped the near-crisis in its tracks from spiraling into a global problem. But the ensuing political drama and policy U-turns have not helped build investor confidence in government policy-making and implementations. In emerging markets, growth has been slower in recent years as rising global interest rates increased debt loads and forced fiscal discipline.

In summary, according to the IMF: “Global growth is forecast to slow from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the Covid-19 pandemic.”1

Due to the factors discussed above, while Vanguard maintains the view that the Canadian economic growth will range between 3% and 4% for FY2022, the risks to the downside are increasing.

For the U.S. economy, we continue to assign a low probability of recession for the duration of 2022 (around, 25%), but our models indicate a higher probability of recession in 2023 (approximately, 65%).

For the Euro area, we foresee full-year 2022 economic growth in a range of 2%-3%, while for the U.K. economy, we continue to foresee FY2022 growth in a range of 3% to 4%.

Chinese National Bureau of Statistics reported stronger-than-consensus Q3 year-over-year GDP growth rate of 3.9% versus 3.5% in the previous quarter on the back of monetary easing and targeted fiscal measures. We expect FY2022 growth of 3% in China. For emerging markets, we foresee economic growth of around 3.3% for both full-years 2022 and 2023.

United States

The U.S. FOMC voted on Wednesday, November 2, to raise the target for its federal funds rate by 75 basis points to a range of 3.75% to 4%. Chairman Jerome Powell said it was “premature to be thinking about pausing our rate hikes.” The recent Fed decision doesn’t immediately change our U.S monetary policy outlook. However, inflation’s persistence and Fed Chair Powell’s language place the risks to our forecast squarely to the upside.

We believe the Fed will increase its rate target to at least 4.5% by the end of Q1 2023 and keep it there for an extended period while it awaits signals that inflation is headed back down toward its 2% target. In its only dovish turn, the Fed hinted in its policy statement that the pace of future rate increases could begin to slow. It added language saying the pace of increases would take “lags” – the length of time it takes policy decisions to produce their intended result and “cumulative tightening” – into account. Vanguard believes the Fed will be unlikely to reverse a restrictive monetary policy while inflation remains stubborn.

Core aspects of the economy such as consumer spending and housing have weakened materially over the course of 2022. According to the Bureau of Economic Analysis (BEA), the U.S. economy contracted at an annual rate of minus 0.6% in the Q2. The BEA reported the Q3 GDP growth rate of 2.6% on October 27. We believe that such a number overstates the strength of the U.S. economy and is driven in large part by international trade dynamics.

We continue to assign a low probability of recession for the duration of 2022 (around 25%) given current strength of the labor market. That said, our models indicate a higher probability of recession in 2023 (approximately 65%).

Key risks

  1. Declines in purchasing power of the US consumer continue to present a significant threat to the economic activity
  2. Labor and non-labor supply side constraints last through 2022 keeping inflation elevated and dual mandate in conflict
  3. Geopolitical risks, ensuing high energy prices and a Fed policy misstep resulting in a recession and/or stagflation also remain as key risk factors for the economy

Rest of the world

Europe. Economic momentum has continued to deteriorate in the Euro area in recent weeks, and Vanguard continues to expect a mild recession this quarter in Europe, stretching into the first quarter of 2023. We continue to foresee full-year 2022 economic growth in a range of 2%-3%. Our 2023 forecast range is for a contraction of -0.5% to 0.5% growth.

European nations are adapting to the cutoff in natural gas supplies from Russia, with most achieving their storage targets ahead of time through alternative sources. European Union countries have allocated, on average, around 2.5% of GDP to offset a surge in energy prices. But we remain cautious on the outlook given forecasts for a colder, drier, and an early winter.

China. High frequency data in China suggests activity modestly improved in late September as lockdowns eased and fiscal and monetary stimulus flowed through the economy. As a result, the Chinese economy reported stronger-than-consensus Q3 YoY GDP growth rate of 3.9% vs 3.5% in Q2 due to monetary easing, targeted fiscal measures, and macroprudential measures for the real estate sector.

We believe that the GDP growth will rebound in 2023 to a 4.5% annual rate, as zero covid policy is gradually relaxed, monetary stimulus flow through the economy and as the sharp downturn in real estate sector stabilizes.

Emerging markets. The growth story in emerging markets is one of relative resilience compared with that of developed markets. We foresee economic growth around 3.3% for both full-year 2022 and full-year 2023, below consensus but higher than our developed-market views.

Future expected returns2

Looking ahead, our fair-value projections reveal a global equity market that has gone through a significant price correction since November 2021 and is likely to produce stronger returns than previously estimated, over the next 10 years. With higher interest rates, bonds’ total return expectations have also improved compared with the last quarter.

Canadian and global equities. With sizable reductions in equity values across the Canadian and global markets since January, we have improved our long-term outlook for equity returns. Our median 10-year returns expectations for Canadian equities at the end of September 2022 are in a range of 4.75% to 6.75%, about 1.25% higher than our mid-year 2022 estimate. For global stocks (ex-Canada, unhedged), our forecasts have also improved by nearly 0.45%, to a 4.85%-6.85% range.

Canadian and global bonds. With rising nominal yield levels observed across developed markets because of higher inflation and consistently higher interest rate expectations, we now see a significant improvement in bond returns since the beginning of the year over the next 10 years.

At the end of September 2022, we anticipate that median 10-year returns for Canadian bonds will range from 3.3% to 4.3%, around a 1.55% p.a. increase from our forecast in January. Likewise, for global aggregate bonds (ex-Canada, hedged), we now anticipate median 10-year returns of 3.2%-4.2%, about a 1.7% p.a. improvement since the beginning of the year.

In a nutshell, 10-year median return expectations have improved for both stocks and bonds, across Canada, U.S., Europe, U.K., China and other regions improving investment returns outlook for long-term investors


1. IMF World Economic Outlook, October 2022.
2. All returns are annualized median expected returns over the next 10 years, as of September 30, 2022, using Vanguard Capital Markets Model.

Bilal Hasanjee, CFA, MBA, MSc Finance, is Senior Investment Strategist at Vanguard Investments Canada.


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