{"id":1774,"date":"2024-02-02T05:16:12","date_gmt":"2024-02-02T05:16:12","guid":{"rendered":"https:\/\/actinvest.com.au\/?p=1774"},"modified":"2024-02-02T05:16:12","modified_gmt":"2024-02-02T05:16:12","slug":"investment-and-economic-outlook-january-2024","status":"publish","type":"post","link":"https:\/\/actinvest.com.au\/index.php\/investment-and-economic-outlook-january-2024\/","title":{"rendered":"Investment and economic outlook, January 2024"},"content":{"rendered":"

Region-by-region economic outlook and latest forecasts for investment returns.<\/p>\n

\"\"<\/p>\n

.<\/p>\n

What might shipping detours of more than 3,000 nautical miles mean for goods prices and broad inflation rates? Not a lot, for now. Shipping contracts are typically locked in for a year or more, and shipping costs account for only about 1% of core goods prices. That said, freight rates for ships to move immediately out of Chinese ports have doubled in recent weeks, and Middle East-related risks to the global inflation outlook remain elevated.<\/p>\n

As shipping companies avoid the Red Sea, container ship costs spike<\/h5>\n

\"\"<\/p>\n

Notes:\u00a0<\/strong>The Shanghai Containerised Freight Index is based on spot rates, or rates for immediate payment and delivery, in U.S. dollars per 40-foot-equivalent units for U.S. destination ports and 20-foot-equivalent units for other global destination ports.<\/sup><\/p>\n

Sources:<\/strong>\u00a0Shanghai Shipping Exchange and Bloomberg as of January 12, 2024.<\/sup><\/p>\n

\u201cThe steady decrease in the pace of inflation around the world in recent months is encouraging for policymakers,\u201d said Shaan Raithatha, a Vanguard senior economist. \u201cHowever, should the tensions in the Middle East escalate or continue for an extended period, the risk does increase for an upswing in inflation through higher goods prices, as well as through the potential for energy supply disruption.\u201d<\/p>\n

Vanguard expects central banks in developed markets to cut policy interest rates in 2024, though only in the second half of the year. We believe that market expectations for earlier cuts don\u2019t acknowledge the challenges of bringing inflation down that last mile to many central banks\u2019 2% targets, given stickier wage-related services inflation. The risk of a new advance in goods prices due to protracted geopolitical tensions could give central bankers something else to consider.<\/p>\n

Outlook for financial markets<\/h5>\n

Our 10-year annualised nominal return and volatility forecasts are shown below. Equity returns reflect a range of 2 percentage points around the 50th<\/sup>\u00a0percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50th<\/sup>\u00a0percentile. More extreme returns are possible.\u00a0<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
\n

5th percentile<\/strong><\/p>\n<\/td>\n

\n

25th percentile<\/strong><\/p>\n<\/td>\n

\n

50th percentile<\/strong><\/p>\n<\/td>\n

\n

75th percentile<\/strong><\/p>\n<\/td>\n

\n

95th percentile<\/strong><\/p>\n<\/td>\n

\n

Volatility<\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Australian Equities<\/strong><\/p>\n<\/td>\n

\n

-3.3%<\/p>\n<\/td>\n

\n

2.1%<\/p>\n<\/td>\n

\n

5.6%<\/p>\n<\/td>\n

\n

9.1%<\/p>\n<\/td>\n

\n

14.4%<\/p>\n<\/td>\n

\n

21.5%<\/p>\n<\/td>\n<\/tr>\n

\n

U.S. equities (unhedged)<\/strong><\/p>\n<\/td>\n

\n

-4.0%<\/p>\n<\/td>\n

\n

1.3%<\/p>\n<\/td>\n

\n

5.0%<\/p>\n<\/td>\n

\n

8.8%<\/p>\n<\/td>\n

\n

14.6%<\/p>\n<\/td>\n

\n

19.9%<\/p>\n<\/td>\n<\/tr>\n

\n

Emerging markets equities (unhedged)<\/strong><\/p>\n<\/td>\n

\n

-4.1%<\/p>\n<\/td>\n

\n

2.9%<\/p>\n<\/td>\n

\n

7.3%<\/p>\n<\/td>\n

\n

11.6%<\/p>\n<\/td>\n

\n

18.3%<\/p>\n<\/td>\n

\n

28.0%<\/p>\n<\/td>\n<\/tr>\n

\n

Global ex-Australia equities (unhedged)<\/strong><\/p>\n<\/td>\n

\n

-2.3%<\/p>\n<\/td>\n

\n

2.7%<\/p>\n<\/td>\n

\n

6.1%<\/p>\n<\/td>\n

\n

9.7%<\/p>\n<\/td>\n

\n

15.1%<\/p>\n<\/td>\n

\n

19.4%<\/p>\n<\/td>\n<\/tr>\n

\n

Global equities (unhedged)<\/strong><\/p>\n<\/td>\n

\n

-2.2%<\/p>\n<\/td>\n

\n

2.7%<\/p>\n<\/td>\n

\n

6.1%<\/p>\n<\/td>\n

\n

9.6%<\/p>\n<\/td>\n

\n

15.0%<\/p>\n<\/td>\n

\n

19.2%<\/p>\n<\/td>\n<\/tr>\n

\n

Australian REITs<\/strong><\/p>\n<\/td>\n

\n

-3.7%<\/p>\n<\/td>\n

\n

1.9%<\/p>\n<\/td>\n

\n

5.4%<\/p>\n<\/td>\n

\n

8.9%<\/p>\n<\/td>\n

\n

14.2%<\/p>\n<\/td>\n

\n

5.5%<\/p>\n<\/td>\n<\/tr>\n

\n

Australian aggregate bonds<\/strong><\/p>\n<\/td>\n

\n

3.5%<\/p>\n<\/td>\n

\n

4.2%<\/p>\n<\/td>\n

\n

4.8%<\/p>\n<\/td>\n

\n

5.3%<\/p>\n<\/td>\n

\n

6.1%<\/p>\n<\/td>\n

\n

5.5%<\/p>\n<\/td>\n<\/tr>\n

\n

Australian government bonds<\/strong><\/p>\n<\/td>\n

\n

3.2%<\/p>\n<\/td>\n

\n

4.0%<\/p>\n<\/td>\n

\n

4.5%<\/p>\n<\/td>\n

\n

5.1%<\/p>\n<\/td>\n

\n

5.9%<\/p>\n<\/td>\n

\n

5.8%<\/p>\n<\/td>\n<\/tr>\n

\n

Australian Linkers<\/strong><\/p>\n<\/td>\n

\n

1.9%<\/p>\n<\/td>\n

\n

3.1%<\/p>\n<\/td>\n

\n

4.0%<\/p>\n<\/td>\n

\n

4.9%<\/p>\n<\/td>\n

\n

6.4%<\/p>\n<\/td>\n

\n

5.5%<\/p>\n<\/td>\n<\/tr>\n

\n

Australian Credit<\/strong><\/p>\n<\/td>\n

\n

4.4%<\/p>\n<\/td>\n

\n

5.1%<\/p>\n<\/td>\n

\n

5.6%<\/p>\n<\/td>\n

\n

6.1%<\/p>\n<\/td>\n

\n

6.9%<\/p>\n<\/td>\n

\n

4.4%<\/p>\n<\/td>\n<\/tr>\n

\n

Global bonds (hedged)<\/strong><\/p>\n<\/td>\n

\n

3.1%<\/p>\n<\/td>\n

\n

4.2%<\/p>\n<\/td>\n

\n

4.9%<\/p>\n<\/td>\n

\n

5.7%<\/p>\n<\/td>\n

\n

7.0%<\/p>\n<\/td>\n

\n

4.7%<\/p>\n<\/td>\n<\/tr>\n

\n

Global government bonds (hedged)<\/strong><\/p>\n<\/td>\n

\n

2.8%<\/p>\n<\/td>\n

\n

3.9%<\/p>\n<\/td>\n

\n

4.6%<\/p>\n<\/td>\n

\n

5.4%<\/p>\n<\/td>\n

\n

6.6%<\/p>\n<\/td>\n

\n

4.9%<\/p>\n<\/td>\n<\/tr>\n

\n

Australian cash<\/strong><\/p>\n<\/td>\n

\n

2.8%<\/p>\n<\/td>\n

\n

3.7%<\/p>\n<\/td>\n

\n

4.4%<\/p>\n<\/td>\n

\n

5.2%<\/p>\n<\/td>\n

\n

6.2%<\/p>\n<\/td>\n

\n

1.9%<\/p>\n<\/td>\n<\/tr>\n

\n

Australian inflation<\/strong><\/p>\n<\/td>\n

\n

0.1%<\/p>\n<\/td>\n

\n

1.3%<\/p>\n<\/td>\n

\n

2.1%<\/p>\n<\/td>\n

\n

2.9%<\/p>\n<\/td>\n

\n

4.1%<\/p>\n<\/td>\n

2.4%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/p>\n

Notes:\u00a0<\/strong>These probabilistic return assumptions depend on current market conditions and, as such, may change over time.<\/sup><\/p>\n

Region-by-region outlook<\/h5>\n
Australia<\/strong><\/h5>\n

Leading indicators suggest that Australia\u2019s economy has improved somewhat since mid-2023. But they also suggest that\u00a0economic growth<\/strong>\u00a0is below trend, and inflation risks that skew to the upside mean that further monetary policy rate hikes aren\u2019t off the table.<\/p>\n

    \n
  • We expect both growth and inflation to be weaker than consensus as restrictive monetary policy takes hold. Our base case is that\u00a0Reserve Bank of Australia<\/strong>\u00a0(RBA) rate hikes are complete. However, we believe that the RBA will start to cut interest rates only late in 2024, because we expect inflation to fall to the RBA\u2019s target only in 2025.<\/li>\n
  • We expect real (inflation-adjusted)\u00a0GDP<\/strong>\u00a0growth of 0.75%\u20131.25% for all of 2024, with about a 40% probability of a recession over the next 12 months.<\/li>\n
  • The\u00a0unemployment rate<\/strong>\u00a0remained at 3.9% on a seasonally adjusted basis in December. We expect an unemployment rate that touched 50-year lows after the pandemic to rise throughout 2024 as financial conditions continue to tighten in a higher-rate environment.<\/li>\n<\/ul>\n
    United States<\/strong><\/h5>\n

    We expect the core Personal Consumption Expenditures index\u2014the Fed\u2019s preferred\u00a0inflation<\/strong>\u00a0measure, which excludes food and energy prices\u2014to fall to 2.3% on a year-over-year basis by the end of 2024. It was 3.2% in November. The last mile of the journey back to 2% inflation will be challenging, however, owing to the \u201csticky\u201d nature of services inflation.<\/p>\n

      \n
    • We believe that market expectations for a\u00a0Federal Reserve<\/strong>\u00a0interest rate cut in March are overly optimistic. It likely will be midyear before policymakers are confident that they have reined in inflation sufficiently to start cutting their target for short-term interest rates.<\/li>\n
    • In its latest Summary of Economic Projections (SEP), the Fed suggested it would trim its target for short-term\u00a0interest rates<\/strong>\u00a0with three 25-basis-point cuts in 2024. (A basis point is one-hundredth of a percentage point.) Vanguard believes the Fed will go further. We foresee the equivalent of six to eight quarter-point cuts\u2014a total of 150 to 200 basis points\u2014driven not by a soft landing but by the onset of a mild\u00a0recession<\/strong>\u00a0late in the year.<\/li>\n
    • A higher\u00a0unemployment rate<\/strong>\u00a0than the Fed envisions would be commensurate with a contraction in GDP growth. We foresee a 2024 year-end unemployment rate of 4.8%, higher than the 4.1% envisioned in the SEP. For now, the labour market appears healthy.<\/li>\n
    • We foresee full-year 2024 real (inflation-adjusted) U.S. GDP growth of 0.25%\u20130.75%.<\/li>\n<\/ul>\n
      China<\/strong><\/h5>\n

      Amid weak domestic consumption and private investment, stimulus will need to play a role in the revival of China\u2019s economy. An indication of the government\u2019s approach came on January 2, when the\u00a0People\u2019s Bank of China<\/strong>\u00a0(PBOC) announced it had issued CNY 350 billion (USD 49 billion) in loans in December. The government chose to stimulate via its \u201cpledged supplementary lending\u201d facility, which provides support during property downturns. Vanguard expects the funds will be used toward supply-side projects, such as social housing construction and urban village renovation.<\/p>\n

        \n
      • We expect real (inflation-adjusted)\u00a0economic growth<\/strong>\u00a0of 4.5%\u20135% in 2024, near our expectation of a 5% government growth target.<\/li>\n
      • To mitigate deflationary pressure, we expect the PBOC to ease its policy\u00a0interest rate<\/strong>\u00a0from 2.5% to 2.2% in 2024, as well as to cut banks\u2019 reserve requirement ratios. The PBOC left its one-year medium term lending facility (MLF) policy rate unchanged at 2.5% on January 15. Vanguard doesn\u2019t consider an unchanged policy rate surprising because a cut at this point would have weighed on banks\u2019 profitability. However, the volume of MLF operations increased, suggesting an injection of liquidity into the market.<\/li>\n
      • We expect prices to climb out of deflationary territory over the course of 2024, with headline\u00a0inflation<\/strong>\u00a0in a range of 1.5%\u20132% and core inflation of 1%\u20131.5%, amid expectations of higher food prices. Both would be below the PBOC\u2019s 3% inflation target.<\/li>\n<\/ul>\n
        Euro area<\/strong><\/h5>\n

        High-frequency data suggest that a further mild contraction occurred in the euro area economy in the fourth quarter. A preliminary estimate of fourth-quarter\u00a0GDP<\/strong>, scheduled to be released January 30, could confirm that the economy fell into\u00a0recession<\/strong>\u00a0in the period after GDP contracted by 0.1% on a seasonally adjusted basis in the third quarter.<\/p>\n

          \n
        • The economy is slowing broadly in line with our expectations at this stage of policy tightening by the\u00a0European Central Bank<\/strong>, and we continue to expect that a recession will be mild. We foresee full-year 2024 real (inflation-adjusted) GDP growth of 0.5%\u20131%.<\/li>\n
        • Markets are pricing in ECB rate cuts totalling 140 basis points, beginning in the second quarter. We believe that rate cuts will total only 75 basis points and won\u2019t begin until the middle of the year. (A basis point is one-hundredth of a percentage point.) Our outlook is predicated on the ECB\u2019s own forecasting model. A risk to our view is that the ECB\u2019s reaction to GDP and inflation data could deviate from the past as the central bank navigates a narrow path between inflation and recession risk.<\/li>\n
        • Vanguard cautions that only about 60% of the disinflationary process in core\u00a0inflation<\/strong>\u00a0is complete. Most of the progress still to be achieved is concentrated in stickier services inflation, as two-thirds of the services basket continues to show inflation rates above 3%.<\/li>\n
        • We anticipate a softening in the\u00a0labour market<\/strong>\u00a0as economic activity falls below its potential amid restrictive monetary and fiscal policy. We expect the unemployment rate to rise to an above-consensus range of 7%\u20137.5% in 2024, illustrating our scepticism that a \u201cpainless disinflation\u201d is attainable.<\/li>\n<\/ul>\n
          United Kingdom<\/strong><\/h5>\n

          As in the euro area, economic growth in the U.K. continues to hover near zero. After modest growth in the first half of 2023, the U.K. economy contracted by 0.1% in the third quarter, a second GDP estimate showed. That was a revision from a preliminary estimate of 0% growth. High-frequency data suggest the economy stagnated or contracted minimally in the fourth quarter, in line with our outlook for a mild\u00a0recession<\/strong>.<\/p>\n

            \n
          • For all of 2024, we foresee below-trend\u00a0GDP<\/strong>\u00a0growth in a range of 0.5%\u20131% as the effects of contractionary monetary and fiscal policy are fully felt. As inflation falls, however, we expect economic activity to receive a modest boost from gains in real wage growth.<\/li>\n
          • We continue to foresee fewer and later\u00a0Bank of England<\/strong>\u00a0(BOE) rate cuts than the markets do. We expect 100 basis points of policy rate cuts in 2024 beginning in the middle of the year at the earliest, compared with market expectations for 120 basis points of cuts beginning in May or June. (A basis point is one-hundredth of a percentage point.)<\/li>\n<\/ul>\n
            Emerging markets<\/strong><\/h5>\n

            Some central banks in\u00a0Latin America<\/strong>, including those in Chile and Brazil, have already begun to cut policy\u00a0interest rates<\/strong>, and we expect further cuts in 2024. But the gaps between high rates of monetary policy and receding rates of inflation are wide, particularly in Latin America, meaning that monetary policies are restrictive. We expect them to remain so even amid rate cuts.<\/p>\n

              \n
            • In\u00a0emerging Europe<\/strong>, where the gap between policy and inflation rates isn\u2019t as large and policy is consequently less restrictive, we foresee first-half policy rate cuts amid economic growth concerns that are greater than in Latin America.<\/li>\n
            • In\u00a0emerging Asia<\/strong>, where inflation didn\u2019t run as high and growth prospects appear brighter, we don\u2019t foresee rate cuts until the second half of 2024.<\/li>\n
            • We expect emerging markets\u00a0GDP\u00a0<\/strong>to grow mostly in line with consensus in 2024 and to a greater degree than that of developed markets. We anticipate real (inflation-adjusted) growth of around 4% for emerging markets broadly\u2014around 5% for emerging Asia and 2%\u20132.5% for emerging Europe and Latin America.<\/li>\n<\/ul>\n
              Canada<\/strong><\/h5>\n

              Core inflation has gone sideways in recent months, complicating the calculus for the\u00a0Bank of Canada<\/strong>\u00a0(BOC), which we expect to be among the first developed market central banks to cut policy interest rates this year.<\/p>\n

                \n
              • We foresee Canada falling into a mild\u00a0recession<\/strong>\u00a0early in 2024, with recovery later in the year in response to expected monetary policy rate cuts. We anticipate full-year 2024 real (inflation-adjusted)\u00a0economic growth<\/strong>\u00a0of about 1%.<\/li>\n
              • We anticipate that BOC rate cuts could as much as halve the overnight rate, to a range of 2.5%\u20133%, by the end of 2024.<\/li>\n
              • We foresee core\u00a0inflation<\/strong>\u00a0falling to 2%\u20132.5% on a year-over-year basis, within the BOC\u2019s target range, by the end of 2024, with house prices moderating in response to declining affordability.<\/li>\n
              • Employment was virtually unchanged in December and the\u00a0unemployment rate<\/strong>\u00a0held steady at 5.8%. We foresee the unemployment rate rising to 6%\u20136.5% in 2024.<\/li>\n<\/ul>\n

                \u00a0<\/p>\n

                Important information:<\/strong><\/sup><\/p>\n

                The projections and other information generated by the Vanguard Capital Markets Model\u00ae 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.<\/strong><\/sup><\/p>\n

                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.<\/sup><\/p>\n

                The Vanguard Capital Markets Model is a proprietary financial simulation tool developed and maintained by Vanguard\u2019s 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 U.S. 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.<\/sup><\/p>\n

                All investing is subject to risk, including the possible loss of the money you invest.<\/sup><\/p>\n

                Investments in bonds are subject to interest rate, credit, and inflation risk. Investments in stocks and bonds issued by non-U.S. companies are subject to risks including country\/regional risk and currency risk. These risks are especially high in emerging markets.<\/sup><\/p>\n

                This article contains certain 'forward looking' statements. Forward looking statements, opinions and estimates provided in this article are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Forward-looking statements including projections, indications or guidance on future earnings or financial position and estimates are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. There can be no assurance that actual outcomes will not differ materially from these statements. To the full extent permitted by law, Vanguard Investments Australia Ltd (ABN 72 072 881 086 AFSL 227263) and its directors, officers, employees, advisers, agents and intermediaries disclaim any obligation or undertaking to release any updates or revisions to the information to reflect any change in expectations or assumptions.<\/sup><\/p>\n

                \u00a0<\/p>\n

                \u00a0<\/p>\n

                By Vanguard
                \nJanuary 2024
                \nvanguard.com.au<\/p>\n","protected":false},"excerpt":{"rendered":"

                Region-by-region economic outlook and latest forecasts for investment returns.<\/p>\n","protected":false},"author":1,"featured_media":1775,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[4],"tags":[],"_links":{"self":[{"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/posts\/1774"}],"collection":[{"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/comments?post=1774"}],"version-history":[{"count":1,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/posts\/1774\/revisions"}],"predecessor-version":[{"id":1776,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/posts\/1774\/revisions\/1776"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/media\/1775"}],"wp:attachment":[{"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/media?parent=1774"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/categories?post=1774"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/actinvest.com.au\/index.php\/wp-json\/wp\/v2\/tags?post=1774"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}