Better-than-expected workforce and productivity gains are behind the U.S. economy’s continued vigor. A combination of productivity growth of 2.7% and the addition of 3.5 million people to the workforce more than offset the effects of Fed monetary policy tightening in 2023. Household balance sheets bolstered by pandemic-related fiscal policy and a virtuous cycle where job growth, wages, and consumption fuel one another provide additional support. Although 2023 growth exceeded expectations in many other developed markets, none rivaled the United States’ above-trend growth. The following chart highlights the differences in GDP progressions among the U.S., the euro area, and the United Kingdom.

Growth has been below the pre-COVID-19 trend in the euro area and the U.K., where productivity has waned and policy has become restrictive. We’ve lowered our forecasts for the year-end unemployment rate in both regions amid stronger-than-expected employment gains; however, falling job vacancies and shorter workweeks are gradually loosening labor markets in both regions.

The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of March 21, 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.

At its last meeting on March 20, the Fed left its federal funds rate target unchanged in a range of 5.25%–5.5%. The Fed increased its forecasts for real GDP growth and inflation.

• The economy expanded by 2.5% on an average annual inflation-adjusted basis in 2023, higher than the 1.9% increase registered in 2022. For 2024, we foresee growth of around 2%, higher than our initial growth estimate, in part because of the continued runway for consumer demand.

• The unemployment rate rose to 3.9% in February, up from 3.7% in January, but in our view the labor market remains on solid footing. We expect that labor supply strength and job growth will continue for a good part of 2024 before gradually subsiding and the unemployment rate ending 2024 at around 4%.

• Core inflation, as measured by the Personal Consumption Expenditures Price Index, edged down to 2.8% year over year in January from 2.9% in December. We continue to believe that the last mile to 2% inflation will remain challenging and that sticky services inflation will take time to unwind. 

The economy is showing early signs of momentum toward what is likely to be an uneven recovery. Although supply-side factors such as industrial production and fixed asset investment recently exceeded consensus estimates, demand-side factors such as retail sales fell short of expectations. 

• That supply-demand imbalance is just one factor that may make it difficult for China to reach its official economic growth target of “around 5%” for 2024. Other factors include persistent economic challenges stemming from an extended property downturn and base effects, or comparisons to year-earlier numbers, which will be higher this year.

• Consumer prices broke a four-month string of annual declines in February, but we don’t believe that spells the end for China’s recent dip into deflation. Rather, we attribute the higher prices in February to easy year-earlier comparisons. Lunar New Year holidays occurred in February this year; in 2023, they occurred in January.

• 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 and to cut banks’ reserve requirement ratios.

Although the euro area avoided falling into recession in the fourth quarter of 2023, we continue to expect 2024 growth in a below-trend range of 0.5%–1% amid still-restrictive monetary and fiscal policy and the lingering effects of Europe’s energy crisis on industry.

• We foresee the European Central Bank initiating a deposit facility rate-cutting cycle in June, with 25-basis-point cuts potentially at each of its final five 2024 policy meetings leading to a year-end range of 2.5%–3%.  (A basis point is one-hundredth of a percentage point.)

• An upside surprise to initial inflation data for February effectively ruled out an April start to rate cuts. However, the confluence of moderating wage growth, inflation expectations that remain in check, and lackluster demand supports our expectation for headline inflation to fall to 2% by September 2024 and core inflation to reach that target by December.

• The labor market may be softer than the unemployment rate would suggest as job vacancy rates, though still high, have receded, labor hoarding remains elevated, and the number of hours worked has stagnated. We have downgraded our year-end 2024 unemployment rate forecast to 6.5%.

The U.K. economy fell into recession in late 2023, but a monthly estimate for growth in January suggested the recession could be short. That said, we have lowered our forecast for economic growth to 0.3% for full-year 2024.

• The Bank of England (BOE) held the bank rate steady at 5.25% for a fifth consecutive meeting in March as it waits for further evidence that inflationary pressures are subsiding before beginning to cut. In our base case, we foresee a first policy rate cut in August, and a total of 100 basis points—or 1 percentage point—of cuts in 2024.

• Headline inflation slowed to 3.4% in February year over year, the smallest annual gain since September 2021. We foresee it falling to just below 2% by the end of 2024.

• The unemployment rate was 3.9% in the November–February period, marginally higher than in the preceding rolling three-month period. As in the euro area, the labor market’s gradual loosening appears mainly driven by soft factors such as reduced vacancies and fewer hours worked, rather than an increase in unemployment. As such we have lowered our year-end 2024 unemployment rate forecast to a range of 4%–4.5%.

We continue to see GDP growth around 4% for global emerging markets in 2024, led by growth around 5% for emerging Asia. We anticipate growth in a range of 2%–2.5% for emerging Europe and Latin America, though our recent U.S. growth upgrade could signal positive implications for Mexico and all of Latin America.

• For Mexico, we are anticipating 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 avoided recession in the fourth quarter of 2023, with greater-than-expected growth driven by exports and consumption. Although risks remain, we no longer foresee Canada falling into recession in the next three to six months. We continue to anticipate full-year 2024 growth of around 1%.

• The Bank of Canada (BOC) held its overnight rate steady at 5.0% for a fifth straight meeting in March. However, we expect it to trim its overnight rate by 50 to 75 basis points this year, to a year-end range of 4.25%–4.5%.

• As in the United States, we anticipate that the “last mile” of inflation reduction could be the most challenging. We continue to foresee core inflation falling to a year-over-year increase within the BOC’s target range of 2%–2.5% by the end of 2024, with house prices moderating in response to declining affordability.

• We foresee the unemployment rate rising to a range of 6%–6.5% in 2024 amid weak economic growth.

The economy has shown modest signs of progress since the start of the year, primarily through consumption and business investment. We continue to expect that Australia will avoid recession in 2024, with economic growth below trend at around 1%.

• Recently, the key drivers of inflation have been domestic in nature. Productivity growth has been low, leaving unit labor costs growing at a rate above what would be consistent with the Reserve Bank of Australia’s (RBA) 2%–3% target. We foresee the pace of both headline and core inflation falling year-over-year to around 3% by the end of 2024.

• Noting that inflation remains elevated even as it continues to moderate, the RBA left its cash rate unchanged at 4.35% in March. Vanguard anticipates that the RBA will cut the cash rate to 3.85% by the end of 2024, and that the rate will eventually settle in a range of 3%–4%.

• We expect the unemployment rate to rise to around 4.6% by the end of 2024 as financial conditions tighten in an environment of elevated interest rates.

• Continued runway for U.S. consumer demand (article, issued March 2024)
• A resilient U.S. economy continues to surprise (article, issued March 2024)
• Why the Fed might choose to forgo rate cuts (article, issued March 2024)
• Reasons for caution about U.S. equity valuations (article, issued February 2024)