Eurozone and UK recession more likely than US over next 12 months: Vanguard
Global economies are experiencing key structural changes that may have long-term implications for the performance of various asset classes. The trade-off between inflation and growth is central to global markets. Meanwhile, in the hours leading up to market, US futures are in the green with the S&P 500, Nasdaq and Dow all in positive territory, up almost 1%.
Taking the current scenario in context, Vanguard’s global economics and markets teams highlighted in a recent report that the economic and market outlook for 2022 underscored the need for policymakers to strike a better balance between controlling inflation and supporting economic growth.
Vanguard estimates that recession is more likely in the Eurozone and the UK than in the US over the next 12 months, but becomes likely in all three regions over the next 24 months
In the outlook report, Vanguard says: A Federal Reserve that is newly aggressive on rising inflation expectations makes a US ‘soft landing’ less likely than we expected just a few months ago. . Our US growth forecast for 2022 is a little lower since the start of the year.
We have lowered our guidance by 2 percentage points since the start of the year due to factors that we believe will continue through 2022, namely tightening financial conditions, wages not keeping up with the inflation and lack of demand for US exports. Vanguard sees the probability of a US recession at 25% over the next 12 months and 65% over 24 months.
Soaring energy and food prices keep our projections for the headline CPI around 7% to 7.5% by the end of 2022 before it moderates in 2023. In In the current environment, headline inflation will matter more to monetary policy than it usually does.
The Fed has become hawkish in recent weeks, emphasizing inflation as a clear priority over potential implications for economic growth. We expect the target fed funds rate to end the year in a range of 3.25% to 3.75% and at an end rate of at least 4% in 2023, much higher than what we consider the neutral rate (2.5%) and what is the current market price.