By Vanguard’s Investment Strategy Group

The themes we highlighted at the end of 2022 – persistent inflation, tight jobs markets, rising interest rates – remain at the halfway stage in 2023. 

Developed market economies like the US, UK and euro area have proved resilient. Labour markets have remained strong, leading to slower-than-expected disinflation (falling inflation). Wage pressures have moderated but remain persistent, especially in service industries. As a result, central banks like the Bank of England have had to raise interest rates somewhat higher than we had anticipated.

We expect continued progress in the fight against inflation, with central banks having to keep interest rates higher for longer. And with that, we anticipate some economic weakness in the months ahead.

Vanguard’s year-end forecasts 

You can see our updated forecasts for the year in the table below. These figures reflect the improved performance of the global economy and enduring stickiness of inflation, and are generally higher than six months ago.

Where we expect the global economy to end 2023

Core inflation excludes volatile energy and food prices. Our US forecast for year-end interest rates reflects the low end of the US Federal Reserve's federal funds target range.

Notes: Figures are Vanguard forecasts for the end of 2023. Growth and inflation are comparisons with the end of the preceding year; interest rates and unemployment rate are absolute levels.

Source: Vanguard, as at 26 June 2023.

Expected 10-year investment returns 

Overseas stock markets, on the whole, have performed strongly this year – with the notable exception of China, the dominant emerging market by total value. For most investors around the world, the gains have reduced the expected 10-year returns of global shares. 

Bond markets have also largely recorded solid gains – but less so if we take into account the effects of inflation. 

But bucking the global trend, UK markets struggled in the first half of 2023. Falling share valuations (falling prices mean shares look better value relative to other markets) and rising bond yields (which is the same as falling bond prices) have as a result boosted our expectations for 10-year annualised returns in sterling terms. A growing difference between interest rates in the UK and the US has also improved the outlook for markets outside of the UK. 

Our forecasts are derived from a 31 May 2023, running of the Vanguard Capital Markets Model¹, which analyses historical data and simulates thousands of projections, using a series of forward-looking assumptions and indicators. 

These projections are purely hypothetical – there is no guarantee of them happening. Under the circumstances, they are nonetheless encouraging. 

Forecast returns for the next 10 years across markets

If you want any more information, either about the outlook for the UK and euro area economies, or for an explainer on what higher interest rates mean for you, please see our further reading suggestions below. 

¹ Figures are based on a 2-point range around the 50th percentile of the distribution of return outcomes for shares and a 1-point range around the 50th percentile for bonds.

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 31 May, 2023. Results from the model may vary with each use and over time. For more information, please see the ‘Investment risk information’ section.