.
For the last decade-plus, a lack of both automation and new general-purpose technologies (GPTs) have weighed on U.S. economic growth. But new research suggests that artificial intelligence (AI) will prove to be the next GPT, powering above-trend growth. Our forthcoming Megatrends research paper, due for release in June, discusses the importance of GPTs in driving periods of above-trend growth over the last 130-plus years.
“If the AI impact approaches that of electricity, our base case is that [productivity] growth will offset demographic pressures, producing an economic and financial future that exceeds consensus expectations,” said Joe Davis, global chief economist and the lead researcher.
The new research harnesses a uniquely long and rich dataset that captures historical shifts in megatrends that have driven about 60% of the change in per capita GDP growth. It finds that, among megatrends that also include demographics, fiscal deficits, and globalisation, only technology has been a consistent, powerful driver of not only growth but also the Federal Reserve’s nominal target for short-term interest rates, inflation, and stock market valuations.
Notes: The chart breaks down three drivers of technology: augmentation, efficiency, and transformation. Augmentation refers to technological advances where humans benefit from machines, such as personal computers and power tools, raising productivity and trend employment. Efficiency refers to advances that raise GDP per worker, usually by automating away tasks previously performed by human labour. Transformation refers to GPTs that (eventually) unleash creative destruction through the economy. Our forthcoming research quantifies the prospects of AI transforming the economy in the years ahead.
Source: calculations, as of May 2024.
Our 10-year annualised nominal return and volatility forecasts are shown below. They are based on the 31 March, 2024, running of the Capital Markets Model® (VCMM). Equity returns reflect a range of 2 percentage points around the 50th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50th percentile. More extreme returns are possible.
Notes: These probabilistic return assumptions depend on current market conditions and, as such, may change over time.
Source: Investment Strategy Group.
IMPORTANT: The projections or other information generated by the Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modelled asset class. Simulations are as of 31 March, 2024. Results from the model may vary with each use and over time.
The views below are those of the global economics and markets team of Investment Strategy Group as of 15 May, 2024.
Sticky inflation continued in the first quarter, a development that the Reserve Bank of Australia (RBA) underscored in its 7 May monetary policy announcement. The RBA left its cash rate target unchanged at 4.35%, a more than 12-year-high level that has been in place for more than six months.
Inflation isn’t yet on a sustainable path toward the Federal Reserve’s 2% target. The headline Consumer Price Index rose 3.4% year over year and 0.3% month over month in April. Core inflation, which excludes volatile food and energy prices, remained elevated, at 3.6% year over year and 0.3% month over month.
Will the Bank of Canada (BOC) begin a rate-cutting cycle next month? The Consumer Price Index (CPI) for April, which Statistics Canada released on 21 May, could be key. We expect the BOC to cut its overnight rate target by 25 basis points on 5 June, but a rate cut could be in jeopardy if the pace of inflation rises for a second consecutive month.
Stronger growth momentum, higher energy prices, and a more hawkish outlook for the U.S. Federal Reserve have led us to raise our outlook for the European Central Bank (ECB) deposit facility rate at year-end. We’ve also increased our forecasts for full-year GDP growth and core inflation.
Recent signals point to an uptick in economic activity and a firming of inflation persistence, leading to an increase its outlook for 2024 GDP growth, from 0.3% to 0.7%, and its outlook for year-end core inflation, from 2.6% to 2.8%.
After a strong start to the year and with a four-month deflationary period apparently behind it, China’s economy seems on its way to 2024 GDP growth of “around 5%,” the target set at a Politburo meeting two months ago. However, given continued pressure on the property sector and weak consumer confidence, we remain cautious about the sustainability of growth momentum.
Sticky inflation and the path of U.S. policy rates have the attention of central bankers in Latin America’s leading economies. On May 8, Brazil’s central bank cut its key interest rate to 10.5%. Though a smaller cut than it had signalled at its previous policy meeting, it was the bank’s seventh consecutive rate reduction. One day later, Mexico’s central bank held rates steady, having initiated its first cut of the policy cycle a meeting earlier.
IMPORTANT: The projections and other information generated by the Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
The Capital Markets Model is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.
This article contains certain 'forward looking' statements. Forward looking statements, opinions and estimates provided in this article are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Forward-looking statements including projections, indications or guidance on future earnings or financial position and estimates are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. There can be no assurance that actual outcomes will not differ materially from these statements. To the full extent permitted by law, Vanguard Investments Australia Ltd (ABN 72 072 881 086 AFSL 227263) and its directors, officers, employees, advisers, agents and intermediaries disclaim any obligation or undertaking to release any updates or revisions to the information to reflect any change in expectations or assumptions.
© 2024 Vanguard Investments Australia Ltd. All rights reserved.
Vanguard
May 2024
vanguard.com.au
Hot Issues
April - June 2024 archive