The economic outlook for the next 10 years will be one of resiliency, with the U.S. in 2014 and 2015 facing cyclical risks tilted toward better-than-trend growth for the first time since the onset of the global financial crisis, Vanguard said Thursday.
In releasing its economic and investment outlook for the next decade, Vanguard makes its predictions for seven key areas: the global economy, inflation, monetary policy, interest rates, the bond market, the global equity market and asset allocation strategies.
The fund firm said that as in past outlooks, "we anticipate that the modest global recovery will likely endure at a below-average pace through a period of low interest rates, continuing high unemployment and debt levels and elevated policy uncertainty."
Last year's "unease" about the "reach for yield" is now joined by concern about "froth" in certain equity markets, Vanguard notes. "Market volatility is likely as the Federal Reserve undertakes the multistep, multiyear process of unwinding its extraordinarily easy monetary policy," Vanguard said. "Rather than frame this process as a negative," Vanguard believes it's "an indication of increasing economic strength."
Vanguard president and CEO Bill McNabb said on a recent conference call that the U.S. is in "unprecedented territory" in terms of what the changes in Fed policy and quantitative easing could mean. "When something slightly unexpected happens, a lot of volatility enters the market, and there are likely to be disruptions as the end [of QE] works out," McNabb said. "There are likely to be surprises."
Indeed, Vanguard says that investors should expect "less compensation for taking on additional risk than a few years ago."
Read on for Vanguard's predictions for the next decade.
1. Global economy. For the first time since the financial crisis, Vanguard's leading indicators point to a slight pick-up in near-term growth for the United States, parts of Europe, and other select developed markets. Continued progress in U.S. consumer deleveraging, strong corporate balance sheets, firmer global trade and less fiscal drag point to U.S. growth approaching 3%. Those positives, however, need to be considered alongside high unemployment and government debt; ongoing structural reforms in Europe, China, and Japan; and extremely aggressive monetary policies whose exit strategies have yet to be tested.
2. Inflation. In the near term, monetary policies designed to achieve a desirable level of inflation will continue to counteract the deflationary pressures of a high-debt world still recovering from a deep financial crisis. Key drivers of U.S. consumer inflation generally point to higher-but-modest core inflation in the 1.5% to 3% range over the next several years. In parts of Europe and in Japan, deflation remains a greater risk.
