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Key points

  • Vanguard has raised its 2023 full-year growth expectations for the US economy.
  • Economic activity and inflation continue to fall in the euro area.
  • Growth and inflation also slow considerably in the UK.

The US remains an anomaly among developed markets with robust economic growth alongside falling inflation, whereas growth in the euro area and the UK has weakened.

United States – Vanguard has raised its full-year 2023 growth forecast for the US economy to 2.5%, reflecting the country’s continued economic resilience.

The Federal Reserve (Fed), the US central bank, maintained interest rates in a range of 5.25%–5.5% on 1 November. Vanguard believes the likelihood of additional rate increases in the near-term is low, but we don’t rule out further hikes. We expect the Fed to proceed cautiously and don’t expect interest rate cuts until the second half of 2024.

Core inflation1, which excludes volatile food and energy prices, fell to 3.7% in the 12 months to September, down from the 3.8% figure recorded in the 12 months to August. 

The US labour market continued to show signs of slowing. A survey of US households found that 348,000 jobs were lost in October—the greatest decline since April 2020, just after the start of the Covid-19 pandemic. 

Euro area – Subdued economic activity and falling inflation suggest the European Central Bank’s (ECB’s) interest-rate hikes over the past 18 months are taking effect.

The ECB held its main interest rate unchanged at 4% in October following 10 consecutive rate increases. We maintain our view that the central bank will keep rates on hold at 4% at least until the second half of 2024. 

Headline inflation decelerated significantly to 2.9% in the 12 months to October, according to an initial estimate. That was down from 4.3% in the 12 months to September and 5.2% in the 12 months to August. The primary driver of the slowdown in headline inflation was an 11.1% decrease in energy prices over the period.

Core inflation, which excludes food and energy prices, slowed to 4.2% in the 12 months to October, down from 4.5% in the 12 months to September. We see core inflation falling to around 3.5% by the end of 2023 and close to the ECB’s 2% target by the end of 2024.

The euro area economy contracted by 0.1% in the third quarter relative to the previous quarter. Surveys of economic activity point towards a further contraction in the fourth quarter, which would reflect an economy in recession. Recessions are typically defined as two consecutive quarters of negative growth.

United Kingdom – Higher interest rates appear to be working through the economy, but persistently high wage growth has kept services inflation high.

Headline inflation2 slowed considerably in October compared with a year earlier. The rate of inflation was at 4.6% in the 12 months to October, significantly lower than the 6.7% in the 12 months to September. The fall was driven largely by a sharp drop in goods prices inflation.

Core inflation, which excludes volatile food, alcohol and tobacco prices, was 5.7% in the 12 months to October, down from 6.1% in the 12 months to September. Annual growth in regular pay (excluding bonuses) remained high for the three months to September, at 7.7%. 

The Bank of England (BoE) maintained interest rates at 5.25% for a second consecutive meeting on 2 November. After two years of rate hikes, totalling more than five percentage points, we believe interest rates have reached a peak. Like the ECB, the UK central bank suggested rates would need to remain around current levels “for an extended period” to continue bringing inflation down. And as in the US and euro area, we don’t see interest rate cuts until mid-2024 at the earliest. 

UK economic growth slowed to a standstill in the third quarter compared to the previous quarter. 

The unemployment rate was largely unchanged at 4.2% in the July-to-September period, according to the Office for National Statistics (ONS). 

China – A mixed picture of economic data released in mid-November suggests China’s economy is gaining momentum after recent government stimulus. 

China’s economy grew by 1.3% in the third quarter relative to the second, which puts the country on track to meet the government’s 2023 full-year growth target of “around 5%”. Vanguard anticipates that further stimulus will be applied as policymakers look to carry momentum into 2024.

The points above represent the house view of the Vanguard Investment Strategy Group’s (ISG’s) global economics and markets team as at 15 November 2023.  

Measured by the Personal Consumption Expenditures (PCE) Index.

Measured by the Consumer Prices Index (CPI).

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