World economic growth is likely to remain frustratingly fragile for some time, says Vanguard’s Economic and Investment Outlook.

It sees the world as not in a secular stagnation but in the midst of a structural deceleration.

“This distinction, however, varies meaningfully across major economies and will likely lead to divergent policy responses and periodic growth scares,” says the report. “The U.S. economy will likely remain resilient to the global slowdown, yet the nation’s recent cyclical thrust above its 2% trend growth is not immune to the downside (and growing) risks in Europe and China.

The economic outlook for the euro area is characterized by elevated recession and deflation risks as policymakers struggle to arrest such concerns.

Meanwhile, China’s economic growth is in a protracted but gradual downward shift; yet, Vanguard does not see an emerging-market-style hard landing as likely. However, it predicts select emerging-market economies can be expected to continue to struggle to adjust to evolving global growth dynamics.

Read: U.S. economy expected to grow faster than Canada’s

Global bonds and equities
The return outlook for global fixed income is positive but muted. The expected long-run median return of the broad taxable fixed income market is centred in the 2% to 3.5% range.

“It is important to note that we expect the diversification benefits of investment-grade fixed income in a balanced portfolio to persist under most scenarios,” the report states. “Given the macroeconomic backdrop, the increased ‘reach for yield’ in the bond market, and compressed credit spreads, we view credit risk as a potentially greater risk than duration risk in the near term.”

Read: 2015 outlook: Sunny with a chance of recession

After several years of suggesting that strong equity returns were possible despite a prolonged period of subpar economic growth, Vanguard’s medium-term outlook for global equities has become even more guarded.

Centred in the 5% to 8% return range, the long-term median nominal return for global equity markets is below historical averages. For select “frothy” segments of the equity market (i.e., small-caps, dividend- or income-focused equity strategies), the returns may be even lower.

That said, Vanguard’s outlook for the global equity risk premium is closer to historical averages when adjusted for the muted expectations for global inflation and interest rates.

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