Vanguard: Expect Slow But Steady Economic Growth Worldwide

March 20, 2017

[This ETF Industry Perspective is sponsored by Vanguard.]

Vanguard's economic team, led by Global Chief Economist Joe Davis, Ph.D., projects what various market and economic events the coming year may bring, along with challenges and opportunities, for investors. The team's study spans the global macroeconomic environment, inflation, monetary policies, interest rates, bond and stock markets, and asset allocation considerations.

Read the team's global market outlook summary below, and find its in-depth analysis in the comprehensive research paper, Vanguard's "2017 Economic and Market Outlook."

Global Outlook Summary

Global economy: Stabilization, not stagnation

Since the end of the global financial crisis, economic growth has fallen short of historical averages and consistently disappointed policymakers. Deflationary shocks have continued to roil the markets, and much of the world's bond market offers negative yields. Some still believe the world is headed for Japanese-style secular stagnation. And yet the modest global recovery—at times frustratingly weak—has endured, proving the most ardent pessimists wrong.

Noting that forecasters have downgraded global growth outlooks for at least five-consecutive years, we believe the risks to a consensus outlook of 3% are more balanced this year. We continue to anticipate "sustained fragility" for global trade and manufacturing, given China's ongoing rebalancing and the need for structural business-model adjustments across emerging market economies. We do not anticipate a Chinese hard landing in 2017, but we are more bearish than consensus on China's medium-run growth prospects.

Our growth outlook for developed markets remains modest but steady. Increasingly sound economic fundamentals supported by U.S. and European policy should help offset weakness in the United Kingdom and Japan. For the United States, 3% GDP growth is possible in 2017, even as job growth cools. Our long-held estimate of 2% U.S. trend growth is neither "new" nor "subpar" when accounting for lower population growth and exclusion of the consumer-debt-fueled boost to growth between 1980 and the global financial crisis.

Inflation: Global disinflationary forces waning for now

As we have previously written, many developed economies are likely to struggle to consistently achieve 2% core inflation over the medium term, given digital technology and excess commodity capacity in China and elsewhere. That said, some of the most pernicious deflationary forces are cyclically moderating. U.S. core inflation should modestly "overshoot" 2% in 2017, prompting the Federal Reserve to raise rates. U.K. inflation is also set to overshoot following the post-Brexit depreciation of sterling. By contrast, euro area inflation will only return to target levels gradually.

Monetary policy and interest rates: Central banks grapple with their limits

The Federal Reserve is likely to pursue a "dovish tightening," hawkishly raising rates to 1.5% in 2017, while leaving the federal funds rate below 2% through at least 2018. Elsewhere, further monetary stimulus is unlikely, as the benefits are waning and, in the case of negative interest rates, can prove harmful to the very credit-transmission channel that monetary policy attempts to stimulate. The European Central Bank and Bank of Japan each enacted additional quantitative easing in 2016 and, as we've previously written, remain unlikely to raise rates this decade.

Elsewhere, further monetary stimulus seems possible, but its benefits may be waning and, in the case of negative interest rates, potentially harmful to the very same credit-transmission channel that monetary policy attempts to stimulate. Even so, the European Central Bank and Bank of Japan could yet add to the quantitative easing implemented in 2016.

Chinese policymakers arguably have the most difficult task: engineering a "soft landing" by lowering real borrowing costs and the real exchange rate without accelerating capital outflows. The margin of error is fairly slim, and policymakers should continue to provide fiscal stimulus to the economy this year to avert a hard landing. The most important policy measure we are monitoring is the pace of reforms for China's state-owned enterprises, which are key sources of overinvestment and deflationary excess capacity.


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