Vanguard has released its 2017 Economic and Market Outlook report which, due to global and domestic challenges, offers its most guarded forecast for the performance of global stocks and bonds in ten years.

Peter Westaway, Vanguard Chief Economist, Europe.

The expected ten-year median return of the global fixed income market is centred in the 1.5-2.5% range, resembling the historical bond returns of the 1950s and 1960s, while the median outlook for global equities is in the 5-7% range, a significant departure from returns experienced since the market bottomed in March of 2009.

In Vanguard’s view, the seminal themes of globalisation, headwinds from an aging global workforce, and rapid advances in technology are the pervasive structural drivers of the global economy over the long term. The paper rejects the 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” said 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.”

Noting that the effectiveness of monetary policy in boosting economic growth has reached its limit, the report suggests a shift towards meaningful fiscal policy is needed to counter current economic conditions.

Amidst persistent global weakness, Vanguard believes Europe’s economic performance in 2017 will be determined largely by the political response to Brexit. Considerable uncertainty remains about the terms of the United Kingdom’s departure, while general elections in France and Germany will indicate whether there is a serious risk of further countries breaking away from the EU.

Vanguard does however note that the immediate short-run effects of the Brexit vote will likely be negative for both the UK and Europe to the tune of approximately 2-3% of UK GDP, as uncertainty leads firms and households to delay spending plans. While this may reflect up to $80bn in absolute terms, the prediction is notably muted compared to some pre-vote analysis. According to Vanguard, the improved outlook reflects the marked depreciation of sterling, the robust past and anticipated monetary policy response by the Bank of England, and expected fiscal loosening from the UK government.