Vanguard’s Latest 10-Year Forecast Pits Global Debt vs. AI 

The global economy just ain’t what it used to be. Probably.

Expanding levels of debt and the emergence of artificial intelligence are two issues that are expected to go head-to-head in world markets over the next decade, according to a new forecast of probabilities from Vanguard. The research found the traditional view on growth — namely, 2% increases to GDP annually combined with a 2% inflation rate — isn’t that likely to pan out. Instead, long-standing deficits are expected to pull down spending, while new AI business models could supercharge growth, said Joe Davis, Vanguard’s global chief economist. Which scenario actually plays out is anybody’s guess.

“I focused 10 years out, but we do this at every horizon,” Davis told Advisor Upside at a bell-ringing event at Nasdaq last week. “The diagnosis was very eye-opening.”

Disarm the Alarm

The forecast is pointing to two likely outcomes. The first is a deficits-dominated world where long-term, structural debt leads to higher interest rates, lower growth, and poor equity performance. High deficits of about 8% of GDP could push 10-year Treasury yields to as high as 9%, he said. There’s more than an 80% chance that yields top 7% if deficits continue to rise. “I would not want to be alarmist,” Davis said. “But I also don’t want policymakers to be complacent on it, and investors not to think that that’s not possible.”

We like the second scenario a lot better: an AI-driven productivity boom. While we’re still in the early innings, the technology could reshape entire industries and offset those economic headwinds, improve productivity, and support moderate inflation and growth, he said. “Even though we still have debt issues, we’ve kicked the can for another 10 years, just like we’ve done for the past 10.”

Other prominent issues Davis cited include:

• Aging global populations that could become less productive and more costly to governments. 
• A shift toward de-globalization that could impact trade.
• Geopolitical tensions that could upend supply chains, and much more.

Send Help. The equity market is particularly vulnerable in a deficits-dominated scenario meaning financial advisors may want to lay off the growth stocks, especially in tech-heavy sectors. On the other hand, they may consider recommending that clients overweight value stocks and non-U.S. equities. But if AI wins out, Davis recommended buying non-growth stocks as the technology will help everyone increase productivity. 

“There’s a way you can hedge these risks a little bit better,” Davis said. “You don’t have to be clairvoyant.”