Vanguard’s economic and market outlook at midyear 2023

Joe Davis: Hello. The theme of our 2023 Vanguard economic and market outlook was “Beating Back Inflation.” So how is the outlook proceeding halfway through the calendar year? Well, there are three core components of our economic and market outlook.

First, that inflation, although it would tend to recede over the course of 2023, would increasingly become stickier even if inflation rates were lower.

Secondly, because of that stickiness of inflation, which we see in the tightness in the labor market and the pressures on wages and some other select input costs, that we would have central banks around the world, broadly speaking, very unlikely to lower interest rates and, in fact, they would need to remain in restrictive territory well into 2024, well beyond the current calendar year.

And then thirdly, we would need to see some weakness in the labor market to ultimately bring inflation down from these generational high levels, down to that 2% or so target that most central banks around the world tend to focus on. And if anything, on that third dimension, the global economy has held up even better than our initial projections.

So, as we look into the rest of this calendar year 2023, our outlook remains broadly unchanged, that we will continue to see modest progress on the inflation front, in part because interest rates, tied by the central banks, will need to remain in the restrictive territory to ultimately bring inflation down. And with that, we will see some weakness, economic weakness, in the months ahead.

The one silver lining in all this is that you have parts of the financial markets, in particular the bond market, increasingly pricing in this reality of higher interest rates not only for this year but for the years to come, which should be a ballast for fixed income portfolios and, with that, broadly diversified global portfolios.