Vanguard downgrades 2022 GDP growth forecasts for all major regions

The factors that led to the downgrade for the United States will likely continue through 2022—namely, tightening financial conditions, wages not keeping up with inflation and lack of demand for US exports.

Labour market trends are likely to keep downward pressure on the unemployment rate through year-end, though increases in 2023 are likely as the impacts of Federal Reserve policy and slowing demand take hold.

Vanguard assesses the probability of recession at about 25 per cent over the next 12 months and 65 per cent over 24 months in the United States. It believes that a period of high inflation and stagnating growth is more likely than an economic ‘soft landing’ of growth and unemployment rates around or above longer-term equilibrium levels (about 2 per cent for growth and 4 per cent for unemployment).

“Global economic growth will likely stay positive this year, but some economies are flirting with recession, if not this year, then in 2023,” said Andrew Patterson, Vanguard senior international economist in a release.

In the United States, inflation has reached 40-year highs, eroding consumers’ purchasing power and driving the Federal Reserve to aggressively raise interest rates. It expects the equivalent of 12 to 14 rate hikes of 25 basis points for the full year, with the target federal funds rates landing in the 3.25–3.75 per cent range by the year-end.

US-based Vanguard expects a terminal rate of at least 4 per cent in 2023—higher than what it considers to be the neutral rate (2.5 per cent) and above what’s currently being priced into the market. The neutral rate is the theoretical rate at which monetary policy neither stimulates nor restricts an economy.

Fibre2Fashion News Desk (DS)