By Vanguard’s Investment Strategy Group

Central banks and policymakers will continue to drive market conditions globally in 2023 in an effort to combat persistently high inflation. In this, we believe they are willing to accept market volatility and a deterioration in the economic conditions.

Global conditions today and those anticipated in the coming months are similar to those that have signalled global recessions in the past and our base case is for a global recession in 2023.

Failing to act aggressively to combat inflation, though, risks harming households and businesses in the long term.

A recession by any other name

Energy supply-and-demand concerns, diminishing capital flows, declining trade volumes and falling output per person mean that, in all likelihood, the global economy will enter a recession in the coming year.

That said, households, businesses and financial institutions are in a much better position to handle an eventual downturn, to the extent that drawing on recent historical parallels seems misplaced. Although all recessions are painful, this one is unlikely to be historic.

We expect that growth will likely end 2023 flat or slightly negative in most major economies outside of China. Unemployment is likely to rise over the year but will be nowhere near as high as during the 2008 and 2020 downturns.

Through job losses and slowing consumer demand, inflation will likely trend downtrends over the course of 2023.


GDP growth*

Unemployment rate

Headline inflation†

Monetary policy

















Year-end 2022

Year-end 2023

Neutral rate













Euro area













-1% to -1.5%























* For the US, GDP growth is defined as the year-over-year change in fourth-quarter Gross Domestic Product. For all other countries/regions, it is defined as the annual change in total GDP in the forecast year compared with the previous year.
† For the US, headline inflation is defined as year-over-year changes in this year’s fourth-quarter Personal Consumption Expenditures (PCE) Price Index compared with last year. For all other countries/regions, it is defined as the average annual change in headline Consumer Price Index (CPI) inflation in the forecast year compared with the previous year. Consensus for the US is based on Bloomberg ECFC consensus estimates.
‡ China’s policy rate is the one-year medium-term lending facility (MLF) rate.
Notes: Forecasts are as of 31 October 2022. NAIRU stands for non-accelerating inflation rate of unemployment.
Source: Vanguard.

Bond market outlook

We think central banks, including the Bank of England, European Central Bank and US Federal Reserve, will continue to raise interest rates next year to combat inflation.

The eventual peak and persistence of interest rate rises, which will depend heavily on the path of inflation, will determine how high bond yields rise. (Yields move inversely to bond prices and are the effective rate of interest paid on bonds at any given time).

While rising interest rates have created near-term pain for investors, higher starting interest rates have raised our return expectations for bonds.

Using the Vanguard Capital Markets Model, which calculates our 10-year annualised return expectations1, we think domestic, GBP-denominated bonds will offer UK-based investors returns of between 4.7% and 5.7% – representing an increase on last year’s expectations (0.8% to 1.8%). Global bonds (excluding UK bonds, hedged to GBP) are expected to offer around 4.3% to 5.3% per annum over the next decade, up from 0.7% to 1.7% in last year’s annual forecast.

So for investors with an adequately long-term horizon, we expect their wealth to be higher by the end of the decade than our year-ago forecast would have suggested.

Stock market outlook

Rising interest rates, inflation and geopolitical risks have forced investors to reassess their rosy expectations for the future. The silver lining is that this year’s market downturn has improved our long-term outlook for global shares.

For UK investors, UK shares are likely to return between 4.6% and 6.6% per year over the next decade while global shares (ex-UK, unhedged) will return between 6.1% and 8.1%.

Against such a challenging economic backdrop, it’s important to remember to stay focused on your long-term goals. History repeatedly shows that sticking to the principles of good asset allocation across a globally diversified portfolio of shares and bonds remains a prudent approach for investors.


1 IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of 30 September, 2022. Results from the model may vary with each use and over time.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include US and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.

Important information

This article is designed for use by, and is directed only at, persons resident in the UK.

The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.  The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.

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