Key points

• In the US, the anticipated impact of tariffs led us to lower our forecast for economic growth and raise our inflation expectations. 

• In the euro area, tariff-related challenges could counteract the anticipated gains from Germany’s fiscal stimulus plans.

• In the UK, the economy is facing challenging domestic forces that are likely to hold greater sway than global trade developments.

• In China, the economy had a robust first quarter, but the global trade environment suggests a challenging path could lie ahead.

Uncertainty around US trade policy has led to significant disruption in markets and economies. In the US, real-time signals point to a material slowing of growth and a contraction in export orders. Similar trends are developing in the euro area and the UK, where business activity is showing signs of losing momentum. The elevated uncertainty has led us to revise our economic forecasts for growth, inflation and employment across the US, the euro area and the UK.

United States

In the US, the anticipated impact of tariffs and related policy uncertainty led us to lower our forecast for economic growth and increase our forecasts for unemployment and inflation.

GDP: Real-time signals point to a material slowdown in economic growth in the first quarter. We now expect full-year economic growth in 2025 to be less than 1% - a decline of one percentage point (pp). 

Inflation: US trade tariffs have led us to materially increase our 2025 inflation forecast to nearly 4%. 

Monetary policy: We expect two rate cuts (of 0.25pp each) by the US Federal Reserve in the second half of 2025, which would leave its target for short-term rates at 3.75%–4%. That’s 0.25-0.50pps higher than most market participants are pricing in for year-end. 

Labour: In March, the unemployment rate stood at 4.2%. We expect this to rise to about 5% by the end of 2025, up from our prior forecast of 4.5%.  

Euro area

The prospect of elevated tariffs and related uncertainty is likely to counteract the economic gains we had anticipated from last month’s announcement of significant German fiscal stimulus. 

GDP: We anticipate the effective tariff rate on euro area goods will rise to around 15% this year, which would pull down economic growth. We now expect growth in 2025 of less than 1% and growth in 2026 of about 1%. 

Inflation: Core prices, which exclude food and energy prices due to their volatility, were up 2.4% on a year-over-year basis in March. We expect core inflation to end 2025 just below 2%. 

Monetary policy: The European Central Bank lowered its deposit facility rate to 2.25% on 17 April, the sixth consecutive quarter-point cut and seventh such cut overall in a rate-cutting cycle that began in June 2024. We foresee two further rate cuts this year, to a 1.75% year-end rate.

Labour: We expect labour market momentum to stall amid a deteriorating growth outlook and the unemployment rate to rise to around 6.5% by year-end from its current record low of 6.1%. 

United Kingdom

The economy is facing challenging domestic forces that are likely to hold greater sway over the UK economy than global trade developments.

GDP: We have lowered our year-end growth outlook to 0.5%, modestly lower than our prior forecast. Our forecast had already reflected a deterioration in forward-looking data, particularly for the labour market. Tax hikes, still-restrictive monetary policy and a softening external environment are all weighing on demand. 

Inflation: Core prices, which exclude items like food and energy, were 3.4% higher in March compared with a year earlier. Looking ahead, we expect core inflation to fall to around the Bank of England’s (BoE’s) 2% target in 2026. 

Monetary policy: We believe the BoE will continue to cut its bank rate by 0.25pps on a quarterly basis, to finish the year at 3.75% (from 4.5% today). 

Labour: We expect the unemployment rate to rise to 4.8% by year-end, from 4.4% (December-February).

Japan

An upward wage-price spiral leaves intact our view that the Bank of Japan (BoJ) will continue its gradual rate-hiking cycle, even amid elevated trade uncertainty.

GDP: We expect declining price competitiveness and weaker US demand for Japanese goods to dent Japan’s economic growth by half a percentage point to less than 1% by 2025 year-end. Steady wage growth on the back of strong corporate profits and structural labour shortages should support a recovery in domestic consumption and keep core inflation robust at around 2% this year. 

Monetary policy: We expect the BoJ to raise its policy rate (currently 0.5%) to 1.0% by year-end. However, amid heightened trade uncertainty, risks of a lower year-end policy rate are growing.

China

China's economy had a strong first quarter, but the global trade environment suggests a challenging path lies ahead.

GDP: We have lowered our economic growth forecast from 4.5% to just above 4%, with further risks to the downside. At its latest meeting, the Politburo announced supportive policy measures - but we don’t expect such measures to fully offset the impact of US tariffs. 

Inflation: We expect full-year core inflation to be about 0.5%, and headline inflation to be even lower. Although food represents about 30% of China’s Consumer Price Index and the price of imported agricultural products could rise, that would likely be offset by lower energy and commodities prices due to slowing global growth.

Monetary policy: We expect to see adjustments aimed at boosting growth - specifically, a 0.3pp cut to the seven-day reverse repo rate and a 0.5pp cut to banks’ reserve requirement ratios.

Asset-class return outlook

Vanguard has updated its 10-year annualised outlooks for broad asset class returns through our most recent running of the Vanguard Capital Markets Model® (VCMM), based on data as at 31 March 2025.

Our 10-year annualised nominal return projections, expressed for local investors in local currencies, are as follows¹.

IMPORTANT: The projections or other information generated by the Vanguard 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 Vanguard 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 US and international equity markets, several maturities of the US Treasury and corporate fixed income markets, international fixed income markets, US 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.

The primary value of the VCMM is in its application to analysing potential client portfolios. VCMM asset-class forecasts—comprising distributions of expected returns, volatilities, and correlations—are key to the evaluation of potential downside risks, various risk–return trade-offs, and the diversification benefits of various asset classes. Although central tendencies are generated in any return distribution, Vanguard stresses that focusing on the full range of potential outcomes for the assets considered, such as the data presented in this paper, is the most effective way to use VCMM output.

The VCMM seeks to represent the uncertainty in the forecast by generating a wide range of potential outcomes. It is important to recognise that the VCMM does not impose “normality” on the return distributions, but rather is influenced by the so-called fat tails and skewness in the empirical distribution of modeled asset-class returns. Within the range of outcomes, individual experiences can be quite different, underscoring the varied nature of potential future paths. Indeed, this is a key reason why we approach asset-return outlooks in a distributional framework.

Investment risk information 

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Important information 

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