Issue link: https://read.uberflip.com/i/1507206
Vanguard economic and market outlook: Midyear 2023 update This update highlights significant developments since we released our 2023 economic and market outlook in December 2022. Persistent inflation, tight labor markets, rising policy rates The themes we highlighted in the Vanguard Economic and Market Outlook for 2023: Beating Back Inflation—persistent inflation, tight labor markets, rising policy interest rates—remain at midyear. Developed-market economies have proved resilient. Labor markets have stayed strong, leading to slower-than-expected disinflation. Wage pressures have moderated but linger, especially in service industries. Central banks have responded by raising monetary policy rates. We foresee continued progress in the fight against inflation, with central banks having to keep interest rates in restrictive territory for longer. And with that, we anticipate some economic weakness in the months ahead. The last mile to target inflation may take some time There's progress in the fight against inflation, but it's too early to declare victory. Vanguard sees developed-market core inflation (which excludes food and energy prices) continuing to fall through the end of 2023 from recent generational highs. But we expect it will be late 2024 or even 2025 before inflation falls back to central banks' targets, which are mostly around 2%. "We believe central banks have more work to do," said Andrew Patterson, Vanguard senior international economist. "We've always said inflation wouldn't come down magically, even as post-pandemic supply chain issues were resolved. The pandemic accelerated demographics-driven changes to labor markets. Strong demand for workers who can command higher pay than historical standards requires monetary policy that is clearly restrictive. The last leg of inflation reduction to central bank targets may be the most challenging." That last leg is also likely to vary by region, said Rhea Thomas, a Vanguard economist. "The initial catalysts for the surge in inflation were global in nature," Thomas said. "The pace at which inflation travels that last mile to target will depend more heavily on local drivers: how restrictive policy tightening is in each country or region and local demand, labor market, and housing dynamics." Thomas noted that central bankers in Australia, Canada, and now the United States have paused in what had been a relentless cycle of rate hikes. Hikes have since resumed in Australia and Canada, and Federal Reserve policymakers have hinted they will again lift rates as well.