Global growth to grind lower amid the new age of uncertainty

Vanguard | 21 November 2019


Continued friction from the US/China trade war, the ongoing Brexit saga and broad political uncertainty have translated to further muted expectations for global growth according to the latest research from Vanguard.

Consistent with recent findings, Vanguard's economic and market outlook for 2020 highlights the impact of increased uncertainty and stretched valuations on economic fundamentals and the investment landscape both overseas and in Australia.

Commenting on the anticipated slowdown, Vanguard economist Ms Beatrice Yeo said "Doubts of a meaningful near-term resolution of the trade war between the US and China, coupled with continued geopolitical uncertainty and deterioriating industrial growth have resulted in a slowdown in growth in the world's two largest economies."

Vanguard is forecasting growth in the US to decelerate below trend to around 1% and China to grind to a below-trend pace of 5.8% in the next 12 months. In the euro area, growth has been weak at 1% and is expected to remain sluggish.

"Bruised by disrupted supply chains and unpredictable policymaking, across most parts of the globe, growth is undeniably faltering," said Ms Yeo.

On the home front, Australia is expected to sustain a below-trend growth rate of around 2.1% against the backdrop of global uncertainty and relatively flat wages growth.

"The pain of trade wars and other global uncertainty has been to some degree, alleviated by monetary and fiscal policy actions. However, it is becoming increasingly clear in Australia that there are diminishing returns to further rate cuts and the overriding priority to achieve a budget surplus will likely limit the role fiscal policy plays at boosting activity in 2020," said Ms Yeo.

Inflation in Australia, alongside the euro area and Japan is expected to undershoot the central banks' targets.

Speculation that the Reserve Bank of Australia (RBA) is considering the introduction of unconventional monetary policy continues to rise.

"In the absence of a strong solution to boost inflation and stimulate wage growth, we see a possibility for the deployment of QE-lite by the RBA or unconvential monetary policy of some form, once the cash rate hits 0.5 or even lower at 0.25 per cent," said Ms Yeo.

This confluence of events, alongside rather-stretched equity valuations in Australia, means that muted returns are likely here to stay, with Vanguard's outlook for global capital markets remaining cautious.

Annualised returns of 4% to 6% are expected in the Australian equities market while global ex-Australian equity markets are forecast to deliver 4.5% to 6.5% returns. Annualised returns for Australian fixed income are anticipated to sit in the 0.5% to 1.5% range in comparison to 2018's forecast of 2% to 4% forecast.

"The 2020s will be an interesting decade, peppered with challenging periods of volatility, given the numerous risk events on the horizon."


About Vanguard

With more than AUD $8.3 trillion in assets under management as of 31 August 2019, including more than AUD $1.6 trillion in ETFs, Vanguard is one of the world's largest global investment management companies. In Australia, Vanguard has been serving financial advisers, retail clients and institutional investors for more than 20 years.

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Avi Tan
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Vanguard Australia
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Francesca Marinucci
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Vanguard Australia
+61 413 559 766