Against a surprisingly resilient global economic backdrop, central banks across key developed markets kept interest rates on hold in April, although monetary policy prospects look set to diverge.

United States

Since we revised our full-year economic growth forecasts last month, economic data support our view that the US Federal Reserve (Fed) is unlikely to cut interest rates in 2024 due to the strength of the economy. The most recent inflation and employment market data imply that the strong readings from the start of the year could hold steady and that economic activity remains strong. 

The March inflation reading, as measured by the Consumer Price Index (CPI), changed financial markets’ expectations that the Fed might cut its interest rate target in June. The pace of core inflation, which excludes volatile food and energy prices, exceeded expectations in March, rising 3.8% in the 12 months to March. Headline inflation rose 3.5% for the 12 months to March.

US GDP increased at an annualised rate of 3.4% in the fourth quarter of 2023, marginally higher than the first and second estimates, as reported by the Bureau of Economic Analysis. We expect US economic growth of around 2% in 2024, higher than our initial estimate of around 0.5%. 

The US labour market remains strong, with 303,000 non-farm jobs created in March across the private sector and government agencies, while the unemployment rate fell to 3.8% in March from 3.9% in February. We expect the unemployment rate to rise only modestly to around 4% by the end of 2024.

Euro area

The European Central Bank (ECB) left interest rates on hold at 4% in April but gave its clearest signal yet that an interest rate cut may be forthcoming at its policy meeting in June. 

ECB President Christine Lagarde emphasised that the ECB would be “data-dependent, not Fed-dependent” in considering the appropriate policy rate. The reference was to the risk that if the Fed maintained its interest rate target at its current level, other central banks could be encouraged to leave interest rates higher than they otherwise might. 

The euro area’s economy has shown tentative signs that it bottomed in the fourth quarter of 2023. Activity has picked up slightly in the first quarter of 2024 as real incomes have risen with falling inflation and as financial conditions have loosened. GDP held steady in the fourth quarter of 2023, compared with the previous quarter. As such, the euro area avoided falling into recession. We continue to expect 2024 growth in a below-trend range of 0.5%–1% amid still-restrictive monetary and fiscal policy and the lingering effects of Europe’s energy crisis on industry.

Headline inflation moderated to 2.4% in the 12 months to March, down from 2.6% in February. Core inflation, which excludes volatile food, energy, alcohol and tobacco prices, fell to 2.9% in March from 3.1% in February. We expect headline inflation to fall to 2% by September 2024 and core inflation to reach that target by December.

The unemployment rate remained steady at 6.5% in February compared with an upwardly revised 6.5% in January. We expect the unemployment rate to end 2024 at around current levels.

United Kingdom

A continued moderation in wage growth and encouraging inflation news could set the stage for interest rate cuts in the summer. The Office for National Statistics (ONS) reported that average salary growth, which excludes bonuses, slowed to 6% in the December-to-February period, a sixth consecutive month of moderation.

Headline inflation rose by 3.2% in the 12 months to March 2024, down from 3.4% in February. Core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, rose at a 4.2% pace in the 12 months to March, less than February’s 4.5% increase. A reduction in the maximum price that energy suppliers can charge for a unit of energy should support falling headline inflation. We expect headline inflation to fall to just below 2% and core inflation to fall to around 2.6% by the end of 2024.

Encouraging wage and inflation data support our view that the Bank of England (BOE) will begin a series of interest rate cuts beginning in August, with the bank rate falling by a percentage point to 4.25% by the end of 2024. The BOE’s Monetary Policy Committee struck a decidedly dovish tone at its most recent policy meeting in March and held the bank rate steady at 5.25% for the fifth consecutive month.

UK GDP data for January and February suggest the UK economy is emerging from a brief recession in the second half of 2023. GDP grew by 0.1% in February, having grown by a revised 0.3% in January. Activity picked up in the first quarter amid gradually rising real incomes and a recent loosening in financial conditions. We recently revised our forecast for 2024 GDP growth to around 0.3%, down from an initial range of 0.5%–1%.

China

China’s economy appears to have made a solid start to 2024, but questions are being asked about its ability to sustain this level of growth beyond the second quarter. 

GDP grew by 5.3% in the first quarter year over year and by 1.6% compared with the fourth quarter. The annual growth figure exceeded expectations compared to first-quarter growth in 2023, when the economy rebounded strongly upon reopening after widespread Covid-19 lockdowns in 2022.

Even as first-quarter GDP growth surprised, March monthly data softened. Industrial production fell by 0.08% in March and it was a similar story in retail. Retail sales increased by 4.7% year over year in the first quarter, but in March the annual rate of growth slowed to 3.1% and monthly growth was just 0.26%. 

Vanguard believes that structural imbalances are likely to remain given the government’s policy priorities for investment and manufacturing upgrades over more direct measures to support consumer spending. We expect resulting supply-and-demand imbalances to continue to add to deflationary pressure.

The latest inflation data underscored the persistence of deflationary pressure amid weak consumer demand. Consumer prices weakened in March after a modest run-up in February, when the Lunar New Year holidays provided a boost. Broad prices fell by 1% month over month, following a 1% gain in February.

The People’s Bank of China (PBOC) left its one-year, medium-term lending facility policy rate unchanged at 2.5% in April. To mitigate deflationary pressure, we expect the PBOC to ease its policy rate from 2.5% to 2.2% in 2024 and to cut banks’ reserve requirement ratios. 

The points above represent the house view of the Vanguard Investment Strategy Group’s (ISG’s) global economics and markets team as at 17 April 2024. 

Asset-class return outlook

Vanguard has updated its 10-year annualised outlooks for broad asset class returns through the most recent running of the Vanguard Capital Markets Model® (VCMM), based on data as at 31 December 2023.

Our 10-year annualised nominal return projections, expressed for local investors in local currencies, are as follows¹.

¹ The figures are based on a 2-point range around the 50th percentile of the distribution of return outcomes for equities and a 1-point range around the 50th percentile for fixed income. Numbers in parentheses reflect median volatility.

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. 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, US 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.

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.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

Important information

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