Among the key findings of the research, led by Bob Behal of our Fixed Income Group and Josh Hirt of our Investment Strategy Group: real estate values have driven atypical wealth gains across income distributions since the onset of the COVID-19 pandemic, and distress in lending markets is largely confined to the least creditworthy borrowers who drive the least amount of spending.

The chart above shows that, as a proportion of both gross domestic product (GDP) and disposable personal income, revolving credit such as credit card debt and home equity loans remains below its prepandemic trend and is likely to normalize only in the fourth quarter of 2024. The likely upshot? More room to run for the U.S. consumer. 

The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of February 14, 2024.

Our 10-year annualized nominal return and volatility forecasts are shown below. They are based on the December 31, 2023, running of the Vanguard Capital Markets Model® (VCMM). Equity returns reflect a range of 2 percentage points around the 50^th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50^th percentile. More extreme returns are possible. 

In addition to the following table with our outlook for 10-year performance, we offer an interactive graphic that presents our return and volatility estimates over both 10- and 30-year horizons, in table and chart views.

Recent growth and labor market data suggest the U.S. economy remains robust as debate continues over the timing of potential cuts in the Federal Reserve’s target for short-term interest rates. Inflation continues to ebb, but Vanguard remains alert to risks posed by still-strong wage growth.

• The U.S. economy created 353,000 jobs in January, nearly double the consensus estimate, and revisions to November and December data lifted the average monthly jobs gain over the past three months to 289,000. Geographic and industry trends suggest an improvement in labor market momentum, raising the odds that the unemployment rate will not rise as high as our year-end forecast of 4.8%.

• We continue to expect shelter inflation—an amalgamation of, for renters, rents plus utility payments, and the cost if homeowners rented similar houses—to moderate by mid-2024 and further progress toward the Fed’s broader 2% inflation target. Sticky services inflation will remain a headwind.

• For 2024, we foresee real (inflation-adjusted) economic growth of 0.25%–0.75%. However, the economy appears to be starting the year strong. A real-time Vanguard estimate is tracking first-quarter growth at a nearly 3% annualized pace.

High-frequency housing and auto sales data as well as data from purchasing managers’ indexes suggest that weak economic growth has carried into the new year. As a structural property downturn drags on the economy, private demand and business confidence remain subdued. The government has responded with broad but incremental stimulus measures, including support for the ailing housing and equity markets.

• China’s economy is increasingly reliant on government support, with the public share of total fixed investment at a 12-year high, but we don’t anticipate large-scale stimulus. With economic growth below potential and continued deflationary pressure, more concrete and decisive policy support may be needed for China to achieve its anticipated growth target of “around 5%.”

• We continue to expect consumer prices to rise by 1%–1.5% in 2024. Pro-growth measures could help stimulate prices. But we expect any reflation to be modest, below the central bank’s 3% inflation target. Consumer prices fell on a year-over-year basis for a fourth consecutive month in January, while producer prices have fallen 16 months in a row.

• To mitigate deflationary pressure, we expect the People’s Bank of China to ease its policy rate from 2.5% to 2.2% in 2024, as well as to cut banks’ reserve requirement ratios.

We believe the Governing Council of the European Central Bank (ECB) will look to first-quarter inflation and wage data, the latter of which will be available only in late spring, to confirm that it can sustainably return inflation to the ECB’s 2% target. That would allow the ECB to initiate a rate-cutting cycle with its June 6 policy announcement, with 25-basis-point cuts potentially at each of its final five policy meetings of the year.

• Amid moderating inflation and wage gains, we have revised our outlook for ECB policy rates. We foresee the ECB cutting its deposit facility rate by 100 to 150 basis points (1 to 1.5 percentage points) in 2024 to a year-end range of 2.5%–3%. That’s greater than the 75 basis points of rate cuts we foresaw in our economic and market outlook for 2024 [24-page PDF].

• We expect headline inflation to reach the ECB’s 2% target by September 2024 and core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, to reach target by December 2024.

• We forecast real (inflation-adjusted) economic growth of 0.5%–1% in 2024 and continue to expect that any recession will be mild.

• We don’t believe the euro area will enjoy a “painless disinflation.” We anticipate a softening labor market as economic activity falls below its potential amid restrictive monetary and fiscal policy. We expect the unemployment rate to rise to an above-consensus range of 7%–7.5% in 2024, up from 6.4% in December.   
  

The U.K. economy may have fallen into a technical recession, marked by two consecutive quarters of declining activity, in the second half of 2023. But high-frequency indicators suggest that a modest return to growth, around 0.1%–0.3%, may be underway in the first quarter. 

• For all of 2024, we foresee below-trend economic growth of 0.5%–1% from the effects of contractionary monetary and fiscal policy. But recent easing in financial conditions, particularly mortgage rates, should relieve pressure on households and pose an upside risk to our forecast.

• In our base case, we foresee a first policy rate cut by the Bank of England in August, and a total of 100 basis points—or 1 percentage point—of cuts in 2024. The current bank rate is 5.25%.

• We have trimmed our forecast for year-end 2024 core inflation—which excludes volatile food, energy, alcohol, and tobacco prices—from 2.8% to 2.6%.

• We foresee the unemployment rate rising to 4.5%–5% over the course of 2024 amid restrictive monetary and fiscal policy. It was 3.8% in the October–December period.

Emerging-market central banks were ahead of their developed-market counterparts in raising policy interest rates during the latest hiking cycle. Now, with inflation slowing, interest rates becoming more restrictive, and growth concerns rising, emerging-market central banks are leading the cutting cycle. Examples of banks that have lowered their policy rates include Banco Central do Brasil, Banco Central de Chile, and the Czech National Bank.

• Banco de México (Banxico), meanwhile, left its target for the overnight interbank rate unchanged at 11.25% for a seventh consecutive policy meeting this month. Banxico noted that core inflation has decelerated but remains high. It also stated that expectations for headline inflation for year-end 2024 had increased, while expectations for longer-term inflation remained stable but above Banxico’s 3% inflation target.

• Vanguard foresees full-year 2024 economic growth of 1.5%–2%, core inflation falling to 3.6%–3.8% by year-end, and the overnight interbank rate being cut to 9%–9.5% by year-end. 
  

Canada’s economy contracted in the third quarter compared with the second, but it avoided falling into a technical recession because second-quarter economic activity was revised from negative to positive.

• We foresee Canada falling into a mild recession early in 2024, with recovery later in the year in response to expected monetary policy rate cuts. We expect full-year 2024 economic growth of about 1%.

• We forecast that core inflation will fall to 2%–2.5% on a year-over-year basis, within the central bank’s target range, by the end of 2024, with house prices moderating in response to declining affordability. The latest reading was 3.4% for December.

• We expect the unemployment rate to rise to the 6%–6.5% range in 2024 amid weak economic growth. In January, it was 5.7%.

• We foresee the Bank of Canada leading a developed markets rate-cutting cycle as inflation eases and the economy contracts. We anticipate cuts to the overnight rate of 2 to 2.5 percentage points, to a range of 2.5%–3%, by the end of 2024.
  

Leading indicators suggest that resilient but subdued economic conditions will prevail early in 2024, with a gradual acceleration in the first half supported by rising real household incomes, a reflating housing market, and firming business investment.

• We expect both growth and inflation to be weaker than consensus as restrictive monetary policy takes hold. In our base case, the cash rate of the Reserve Bank of Australia is at its peak for the cycle, at 4.35%. We believe the RBA will start to cut interest rates only late in 2024.

• Vanguard forecasts a year-end 2024 cash rate of 3.85% (down from the current 4.35%), and that the rate will eventually settle in the 3%–4% range, in line with our assessment of the neutral rate, the theoretical rate that would neither stimulate nor restrict an economy.

• We expect real (inflation-adjusted) economic growth of 0.75%–1.25% for all of 2024. Having benefited from elevated commodities export prices, monetary policy less restrictive than that of other developed markets, and supportive fiscal policy, Australia has high odds of avoiding recession this year, if narrowly.

• We expect the unemployment rate, which touched 50-year lows after the pandemic, to rise throughout 2024 to about 4.6% as financial conditions continue to tighten. Unemployment stood at 3.9% in December. 

• Vanguard Capital Markets Model forecasts (interactive graphic, issued February 2024)
• How to recover the lost art of disciplined investing (article, issued February 2024)
• The ‘best financial development’ in 20 years, explained (58:13 podcast, issued January 2024)
• Sound money’s return: Not a risk shield but a long-term plus (31:13 podcast, issued January 2024)