Vanguard economic and market outlook for 2022: Striking a better balance
Although the COVID-19 pandemic will remain a critical factor in 2022, Vanguard’s outlook for macroeconomic policy will likely be more crucial. Their outlook for the global economy will be shaped by how the support and stimulus enacted to combat the pandemic are withdrawn. The removal of policy support poses a new challenge for policymakers and a source of risk for financial markets.
While the economic recovery is expected to continue through 2022, the easy gains in growth from rebounding activity are behind us. They expect growth in both the U.S and the euro area to slow down to 4% in 2022. In China, they expect growth to fall to about 5%, and in the U.K they expect growth to be about 5.5%.
Inflation has remained high across most economies, driven both by higher demand as pandemic restrictions were lifted and by lower supply resulting from global labor and input shortages. Although a return to 1970s- style stagflation is not in the cards, they expect inflation to remain elevated across developed markets as the forces of demand and supply take some time to stabilize.
Central banks will have to maintain the delicate balance between keeping inflation expectations anchored and allowing for a supportive environment for economic growth. As negative supply shocks push inflation higher, they threaten to set off a self-fulfilling cycle of ever higher inflation, which could begin to chip away at demand. Ultimately, Vanguard anticipate that the Federal Reserve will raise rates to at least 2.5% by the end of this cycle to keep wage pressures under control and to keep inflation expectations stable.
As we look forward to 2022 and beyond, Vanguard’s long term outlook for assets is guarded, particularly for equities amid a backdrop of low bond yields, reduced support, and stretched valuations. Within fixed income, low interest rates guide their outlook for low returns, however, with rates moving higher since 2020, they see the potential for correspondingly higher returns.
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