The low-growth, low-rate world is here to stay, driven by secular forces that have shaped the global economy and tempered its growth for four decades, according to Vanguard’s 2017 Economic and Market Outlook.
In the company’s view, the seminal themes of globalisation, the demographic headwinds of an ageing global workforce, and rapid advances in technology are the pervasive structural economic drivers over the long term.
Vanguard rejects the persistent myth of economic stagnation and believes the world is adjusting to the disruption of structural deceleration.
“This year is likely to be remembered for Brexit, negative interest rates, an increased political focus on income inequality, and the recent US Election. These were not isolated events, but inextricably linked by the secular forces that have shaped the global economy for over forty years” says Peter Westaway, Vanguard chief economist, Europe. “We are particularly focused on the impact of technology and the rise of the ‘gig’ economy, both of which are significant disruptors. Nevertheless, the global economy has a remarkable ability to adapt to change. We anticipate muted, but enduring and positive economic growth in the years ahead.”
In contrast to the unprecedented role of the central banks in stabilising economic growth since the global financial crisis, Vanguard economists maintain current economic conditions cannot be countered solely by cyclical policy stimulus. The global expanse of low growth has reached a critical state, and the effectiveness of monetary policy is reaching its limits. Moving forward, focus should shift toward meaningful fiscal policy changes.
Amidst persistent global weakness, economic performance in Europe will be determined largely by the political response to Brexit. Considerable uncertainty remains about the terms of the UK’s departure. General elections in France and Germany in 2017 will indicate whether there is a serious risk of further countries following suit and breaking away from the EU.
The immediate short-run effects of the Brexit vote are expected to be negative for both the UK and Europe. Vanguard anticipates an overall effect of 2-3 per cent of UK GDP, as uncertainty leads firms and households to delay spending plans. This is more muted than some pre-vote predictions, a reflection of the marked depreciation of sterling, as well as the robust past and anticipated monetary policy response by the Bank of England and the expected fiscal loosening from the UK government.
With these global and domestic challenges as backdrop, Vanguard’s outlook for global stocks and bonds is the most guarded it has been in 10 years.
The expected ten-year median return of the global fixed income market is centred in the 1.5 to 2.5 per cent range, resembling the historical bond returns of the 1950s and 1960s. Vanguard forecasts show that the median outlook for global equities is in the 5-7 per cent range, a significant departure from returns experienced since the market bottomed in March of 2009.
“Given our outlook for 2017 and beyond, some investors might be tempted to add new asset classes or apply portfolio tilts in search for alpha in a low-growth world, which could expose them to undue risk and potentially erode their assets over time,” says Vanguard CEO Bill McNabb (pictured). “Now, perhaps more than ever, investors will benefit most in the long run by increasing their savings contributions, reducing their investment costs, and maintaining a thoughtful asset allocation course to reach their goals.”