Vanguard's Economic and Market Overview
Euro area
2% to 3%
Economic growth
We've twice downgraded our outlook this year because of
higher energy prices—once before and once after Russia's
invasion of Ukraine. Risks are growing, though recession in
the next 12 months isn't a foregone conclusion. But a
complete cutoff from Russian natural gas would almost
certainly lead to rationing and recession.
~8% to 8.5%
Headline inflation
We expect headline inflation to peak close to 10% in the third
quarter, higher than current record levels. But by the end of
2023, we foresee inflation falling back toward the European
Central Bank's 2% target. For now, European consumers
grapple with rapid price rises that extend to an array of goods
and services.
WHAT TO WATCH
Many nations, one policy rate
The European Central Bank has accelerated the
development of a tool to fight "fragmentation risk,"
a widening of sovereign debt spreads because of
nonfundamental factors. The tool's creation supports
our base case that the ECB will be able to raise
interest rates more aggressively while avoiding a
scenario of sovereign stress.
Yield spread, in percentage points
7.0
6.0
Draghi:
"Whatever it
takes"
Draghi
speech in
Jackson
Hole
ECB
pivot
PEPP
5.0
APP
4.0
3.0
Danger zone
20
2.0
0.5% to 0.75%
Monetary policy
The European Central Bank has signaled a July interest rate
hike. We expect the deposit rate to move into positive territory
in the third quarter for the first time since 2012. The ECB has
turned hawkish recently given broadening inflation pressures.
"Fragmentation risk" complicates matters: The ECB manages
policy for 19 nations.
~7%
Unemployment rate
We foresee the labor market remaining historically strong
with a comparatively low unemployment rate by year-end.
Wage pressures continue to build as job vacancy rates have
risen to new records.
Notes: Figures related to economic growth, inflation, monetary policy, and unemployment rate are Vanguard forecasts for the end of 2022.
Growth and inflation are comparisons with year-end 2021; monetary policy and unemployment rate are absolute levels.
For institutional use only. Not for distribution to retail investors.
1.0
0.0
2008
2015
2022
Notes: Yield spread represents the interest rate premium to 10-year
German bunds of a market-capitalization-weighted composite of 10-year
yields in Spain, Italy, Greece, Portugal, and Ireland. Key events affecting
spreads include then-ECB President Mario Draghi's July 2012 pledge to
do "whatever it takes" to preserve the euro; Draghi's August 2014
Jackson Hole, Wyo., speech heralding monetary stimulus; the January
2015 introduction of the non-standard Asset Purchase Programme (APP)
monetary policy vehicle; the March 2020 introduction of the non-standard
Pandemic Emergency Purchase Programme (PEPP) monetary policy
vehicle; and a June 2022 ECB news conference heralding aggressive
monetary policy tightening. Spreads above 2.5% are typically said to have
entered a "danger zone" likely to spur policy action.
Sources: Vanguard calculations, based on
data from Bloomberg through June 20, 2022.
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