Key points

• In the US, policy uncertainty could weigh on the economy, leading us to downgrade our growth forecast and raise our inflation forecast. 

• The announcement of Germany’s fiscal expansion plans has led us to upgrade our euro area growth and inflation forecasts. 

• The UK economy has been characterised by sluggish growth and moderating but elevated price and wage pressures. 

• While China’s economy has appeared robust in Q1 2025, headwinds suggest slower growth for the rest of the year.
   

In the US, uncertainty around tariffs, immigration and other policy is likely to weigh on the economy in 2025. Real-time signals point to a material slowing of growth in the first quarter. This elevated uncertainty has negatively affected our US growth forecast.

We’ve seen a hawkish tone from central banks. The US Federal Reserve (Fed) can afford to wait and see how the US economy evolves. We expect less cuts from the European Central Bank (ECB) after the improved prospects for the euro area economy.

The fiscal narrative in Europe is shifting, with a regime change expected to boost growth. Trade policy, though, presents a potentially major risk to this improved outlook.

United States

GDP: Amid increased policy uncertainty, we expect full-year 2025 economic growth of 1.7%, down from our previous forecast of 2.1%.

Monetary policy: We believe the Fed will cut its target for short-term interest rates twice in the second half of the year, to a range of 3.75%–4% at year-end. The current target is 4.25%–4.5%.

Inflation: We expect the core rate of inflation, which excludes food and energy prices due to their volatility, to register about 2.7% this year, up from our previous forecast of 2.5%, both on a year-on-year basis. These forecasts are based on the Fed’s preferred inflation measure, the Personal Consumption Expenditures price index.

Labour market: We anticipate a softer labour market report for March. The report will reflect recently announced government layoffs, and we expect little employment growth in private-sector industries that are sensitive to government spending. Tariff uncertainty likely has curbed hiring in construction and manufacturing.

Euro area

GDP: We expect economic growth of 1% in 2025, up from our previous forecast of 0.5%, and a 1.6% expansion in output next year, up from our previous forecast of 0.8%. The upgrade is driven by a likely significant increase in government spending as part of Germany’s announced infrastructure and defence program, a broader increase in defence spending across Europe and the prospect of a ceasefire in Ukraine. Significant tariffs on US imports of European Union goods could largely offset the gains from expansionary fiscal policy in 2025 and 2026.

Monetary policy: We anticipate one final interest rate cut by the ECB, which would bring its deposit facility rate to 2.25%. We previously expected a terminal rate of 1.75%.

Inflation: The headline and core rates of inflation could end 2025 below 2%, though we have lifted our estimate of core inflation for 2026 by 0.2 percentage points to 2.1% given the higher growth expectations.

Labour market: We expect the unemployment rate to rise only modestly, instead of the previously forecasted rise to near 7% in 2025, from the current record low of 6.2%.

United Kingdom

GDP: We anticipate economic growth this year of 0.7%, down from our previous forecast of 1.4%, reflecting base effects from late 2024 and deteriorating forward-looking data.

Monetary policy: In our view, the Bank of England (BoE) is likely to reduce its policy interest rate from 4.5% to 3.75% by year-end.

Inflation: We expect the headline rate of inflation to rise towards 3.5% in the near term (due to higher energy prices) and then to fall to about 2.5% by year-end, both on a year-on-year basis. The core inflation rate, which excludes volatile food, energy, alcohol and tobacco prices, is expected to fall to about 2.7% by year-end.

Labour market: We believe the unemployment rate is likely to end the year around 4.7%, up from 4.4% for the November 2024 to January 2025 period, reflecting recent signs of labour market softening.

Japan

GDP: We expect economic growth in 2025 of 1.2%, supported by upward momentum in wages. The impact of global economic uncertainty, such as potential US tariff hikes, is expected to be limited, with positive spillover from policy stimulus in China.

Monetary policy: The Bank of Japan (BoJ) looks poised to gradually raise its current 0.5% policy rate to 1.0% by year-end.

Inflation: Steady wage growth and structural labour shortages lead us to believe that the “core core” rate of inflation, which excludes fresh food and energy, will stay robust at about 2% this year.

Labour market: Japan’s structural labour shortage, which has been partially alleviated by increased labour force participation from women, older people and foreign workers, could continue exerting upward pressure on wages.

China

GDP: We expect full-year economic growth of about 4.5%, a bit less than the growth target of “about 5%” set for the third consecutive year by the National People’s Congress.

Monetary policy: We may see adjustments aimed at boosting growth – specifically, a 0.3 percentage point cut to the seven-day reverse repurchase rate and 0.5 percentage points of cuts to banks' reserve requirement ratios. 

Inflation: We anticipate a core rate of inflation of about 1.5% in 2025, on a year-on-year basis. Supply-centric policies have reinforced a negative feedback loop between weak demand and low prices.

Labour market: We believe the unemployment rate, which was 5.4% in the January–February 2025 period, may finish 2025 around 5%.

Emerging markets

Recent economic conditions in emerging markets have been mixed. Mexico's economy contracted by 0.6% in the fourth quarter of 2024 on a quarter on quarter basis and inflation has slowed down, leading to an interest rate cut from Banxico (Bank of Mexico). In Brazil, however, inflation has risen significantly, leading the country’s central bank to raise its policy interest rate to 14.25% to combat rising prices.

Asset-class return outlook

Vanguard has updated its 10-year annualised outlooks for broad asset class returns through the most recent running of the Vanguard Capital Markets Model® (VCMM), based on data as at 31 December 2024.

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

¹ The figures are based on a 2-point range around the 50th percentile of the distribution of return outcomes for equities and a 1-point range around the 50th percentile for fixed income. Numbers in parentheses reflect median volatility.
 

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.

Past performance is not a reliable indicator of future results. The performance data does not take account of the commissions and costs incurred in the issue and redemption of shares.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

Important information

For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). In Switzerland for professional investors only. Not to be distributed to the public.

The information contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.

The information contained in this document is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

Issued in EEA by Vanguard Group (Ireland) Limited which is regulated in Ireland by the Central Bank of Ireland.

Issued in Switzerland by Vanguard Investments Switzerland GmbH.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2025 Vanguard Group (Ireland) Limited. All rights reserved.

© 2025 Vanguard Investments Switzerland GmbH. All rights reserved.

© 2025 Vanguard Asset Management, Limited. All rights reserved.