Resilient growth keeps central banks cautious
Global growth remains resilient, supported by AI investment and economies weathering geopolitical and energy shocks. But persistent inflation is keeping central banks cautious.
Key points
- Economic growth remains resilient across major developed economies despite geopolitical uncertainty.
- In the UK and parts of Europe, inflation has moderated but central banks remain cautious.
- AI-related investment continues to support activity, especially in the US and parts of Asia.
United States
Steady growth, stable labour market, sticky inflation
The US economy continues to demonstrate resilience. Growth is tracking above 2%, supported by strong business investment as firms continue to deploy capital in response to AI demand. Consumer spending has also held up broadly in line with expectations, helped by favourable tax policy and elevated household wealth, although softer real income growth could weigh on consumption later this year.
The labour market remains fundamentally healthy. While payroll growth is expected to moderate and unemployment may rise modestly over the coming months, broader indicators continue to point to a labour market operating close to neutral. We do not see current developments as signalling a meaningful deterioration in economic conditions.
Inflation remains stubborn. Although some price pressures reflect measurement issues and temporary factors, underlying inflation appears stuck just below 3%. As a result, we expect the US Federal Reserve to remain on hold, with risks increasingly tilted towards further tightening should inflation fail to moderate or labour market conditions remain firm.
United States economic forecasts
Notes: GDP growth is defined as the fourth-quarter-over-fourth-quarter change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as at December for each year. Core inflation is the year-over-year percentage change in the Personal Consumption Expenditures price index, excluding volatile food and energy prices, as at December for each year. Monetary policy is the rounded midpoint of the US Federal Reserve’s target range for the Federal Funds Rate at year-end.
Source: Vanguard.
Note: All investing is subject to risk, including the possible loss of the money you invest.
United Kingdom
Cooling inflation supports an extended bank rate pause
The UK outlook has improved as inflation pressures have eased, leading us to revise our inflation forecasts lower and reduce our expectations for future policy tightening.
Headline inflation eased to 2.6% in June. While longer-term household inflation expectations remain elevated, recent data suggest inflationary pressures are continuing to ease, leading us to lower our year-end core inflation forecast to 2.6%.
We now expect the Bank of England (BoE) to keep the Bank Rate on hold at 3.75% through 2027.
We expect economic activity to soften through the remainder of the year as elevated energy costs and tighter financial conditions weigh on demand. Growth should remain broadly stable around 1.2% in 2027 as the drag from the energy shock fades.
On fiscal policy, the appointments of a new prime minister and chancellor in July have increased uncertainty, though the government’s commitment to fiscal credibility suggests any changes are likely to be gradual, implying only modest shifts in the UK’s fiscal trajectory.
United Kingdom economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as at December for each year. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food, energy, alcohol and tobacco prices, based on the fourth-quarter average for each year. Monetary policy is the Bank of England’s bank rate at year-end.
Source: Vanguard.
Note: All investing is subject to risk, including the possible loss of the money you invest.
Euro area
Activity proves resilient amid the energy shock
The euro area economy has proved more resilient than expected despite renewed geopolitical tensions and higher energy costs. Growth accelerated in the second quarter, all four major economies expanded and higher-frequency indicators have improved. Manufacturing activity has strengthened while economic sentiment has recovered.
We continue to expect year-end growth of 0.8% in 2026 before activity improves next year as the effects of recent energy and trade shocks fade. German fiscal spending remains supportive, particularly through infrastructure and defense investment.
Inflation has evolved broadly in line with expectations. Although headline inflation is likely to remain above target as energy costs continue to pass through to consumers, we see little evidence that inflation expectations are becoming unanchored. We expect the European Central Bank to deliver one further rate increase this year before policy gradually eases in 2027.
Euro area economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as at December for each year. Core inflation is the year-over-year change in the Harmonized Indexes of Consumer Prices, excluding volatile energy, food, alcohol and tobacco prices, based on the fourth-quarter average for each year. Monetary policy is the European Central Bank’s deposit facility rate at year-end.
Source: Vanguard.
Note: All investing is subject to risk, including the possible loss of the money you invest.
Japan
A hawkish pause as case for normalisation strengthens
Japan's economy continues to expand at a moderate pace. Business sentiment remains positive, wage growth has stayed firm and companies continue to invest despite geopolitical uncertainty. AI-related investment and government support measures should help offset some of the drag from higher energy costs.
Although inflation momentum has softened recently, higher input costs are likely to pass through gradually to consumer prices. The combination of exchange-rate effects, rising services prices and firms' increasing willingness to pass on costs should support inflation over the coming quarters.
The Bank of Japan (BoJ) has maintained a more hawkish tone, raising its growth expectations and highlighting upside inflation risks. We expect two further rate increases by the end of 2026, and the BoJ’s policy rate ending 2027 at 2%.
Japan economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as at December for each year. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile fresh food prices, as at December for each year. Monetary policy is the Bank of Japan’s year-end target for the overnight rate.
Source: Vanguard.
Note: All investing is subject to risk, including the possible loss of the money you invest.
China
Slower growth raises urgency for policy support
China's economy lost momentum in the second quarter, with growth falling short of expectations as weak domestic demand outweighed strength in industrial production and exports. Activity data continue to highlight a widening divergence between robust supply-side performance and softer consumer demand.
One encouraging development has been the return of the GDP deflator to positive territory for the first time in three years, helped in part by higher energy prices. However, we do not believe the recent rise in inflation signals a lasting end to China's structural disinflation pressures.
Exports should continue to benefit from the global AI investment cycle, but policymakers are likely to focus on improving the implementation of existing fiscal and monetary measures rather than introducing a large-scale stimulus package. Stronger domestic demand remains the key missing ingredient for a broader and more durable recovery.
China economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as at December for each year. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as at December for each year. Monetary policy is the People’s Bank of China’s seven-day reverse repo rate at year-end.
Source: Vanguard.
Note: All investing is subject to risk, including the possible loss of the money you invest.
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 30 June 2026.
Our 10-year annualised nominal return projections1, expressed for local investors in local currencies, are as follows:
United Kingdom (British pounds)
Euro area (euro)
Switzerland (Swiss francs)
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.
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