Investment and economic outlook, August 2025

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Australia

Progress on disinflation paves the way for further easing

“The Reserve Bank of Australia is cautiously dovish amid progress on disinflation and diminished uncertainty.”

—Grant Feng, Vanguard Senior Economist 

First-quarter GDP growth came in weak at 0.2% quarter over quarter and 1.3% year over year. Headwinds included falling public demand after two years of strong growth and a limited upswing in private demand. We maintain our forecast for real GDP growth of 2% in 2025, though risks tilt toward the downside.

The quarter ended June 30 represented the second straight quarter that the trimmed mean Consumer Price Index fell within the 2%–3% target range set by the Reserve Bank of Australia (RBA). Previously, the measure had exceeded that level in every quarter since the end of 2021. We anticipate that inflation will moderate further.

Persistent supply-side constraints remain, however. Weak productivity and solid wage growth are keeping unit labor costs high. Combined with a tight labor market, these factors are expected to limit disinflationary momentum.

The combination of some disinflation progress and supply-side constraints is likely to result in the RBA adopting a cautiously dovish stance. After a 25-basis-point rate cut on August 12 brought the cash rate target to 3.6%, we expect one further rate cut by the end of this year. (A basis point is one-hundredth of a percentage point.)

 

Vanguard Capital Markets Model® forecasts

Our 10-year annualised nominal return and volatility forecasts are based on the June 30, 2025, running of the Vanguard Capital Markets Model®.

 

Australia (Australian dollar)

Asset class	Return range	Median volatility
Australian equities	4.8% - 6.8%	20.2%
Global ex-Australia equities (unhedged)	4.7% - 6.7%	16.4%
US equities (unhedged)	4.0% - 6.0%	17.4%
Australian aggregate bonds	3.6% - 4.6%	6.3%
Global ex-Australia aggregate bonds (hedged)	4.1% - 5.1%	5.3%

^{IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class. Simulations as of June 30, 2025. Results from the model may vary with each use and over time. For more information, please see the Notes section below.}

^{Notes: These return assumptions depend on current market conditions and, as such, may change over time. We make our updated forecasts available at least quarterly.} 

^{Source: Vanguard.}

 

Australian economic forecasts

	GDP growth	Unemployment rate	Trimmed mean inflation	Monetary policy
Year-end outlook	2%	4.2%	2.5%	3.35%

^{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 of December 2025. Trimmed mean inflation is the year-over-year change in the Consumer Price Index, excluding items at the extremes, as of the fourth-quarter 2025 reading. Monetary policy is the Reserve Bank of Australia’s year-end cash rate target.} 

^{Source: Vanguard.} 

 

United States

On track, but treading carefully

“The U.S. economy is performing in line with our expectations. Signs of tariff-related pass-throughs are becoming more apparent, and we anticipate the coming months will be pivotal in assessing how well the economy is able to absorb these pressures.”

—Josh Hirt, Vanguard Senior Economist 

Recent trade developments have helped reduce some uncertainty for the U.S. economy, leading us to raise our baseline assumption for the effective tariff rate modestly higher to a range near 17% by year-end. However, the economic impact of offsetting factors such as foreign investment agreements and the delayed pass-through of elevated tariff rates to consumers will need to be evaluated as more information emerges. For now, we see the economy tracking in line with our expectations of a softening labor market, GDP growth of around 1.5%, and core inflation of around 3% by year-end. 

The coming months will be pivotal in assessing how well the economy is able to absorb tariff-related pressures, which will then play a leading role in determining monetary policy. For the first time in this cycle, revisions to the July labor market report showed an economy that added fewer jobs than what we estimate to be the replacement rate (around 75K), a sign that the economy is oscillating around a neutral growth rate. 

Prior to the labor market report, we viewed communication from the July Federal Reserve meeting to be mildly hawkish toward a September rate cut, a stance we expect will now shift toward a renewed focus on the employment side of the Fed’s dual mandate. We see the Fed as on track for two rate cuts this year, given recent softness in the labor market and with monetary policy still a percentage point above our estimate of a neutral stance. 

 

United States economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	1.5%	4.7%	3%	4%

^{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 of December 2025. Core inflation is the year-over-year percentage change in the Personal Consumption Expenditures price index, excluding volatile food and energy prices, as of December 2025. Monetary policy is the upper end of the Federal Reserve’s target range for the federal funds rate at year-end.}

^{Source: Vanguard.} 

 

Canada

Signs of stability in a challenging trade environment 

“Canada’s economy is navigating a difficult trade environment with more stability than we would have expected, though risks remain elevated.”

—Adam Schickling, Vanguard Senior Economist 

While there has been little good news recently regarding U.S.-Canada trade relations, the Canadian economy continues to show signs of resilience. After contracting by 0.1% in May, real GDP is estimated to have grown by 0.1% in June, led by rebounds in retail and wholesale trade. This modest recovery suggests that while trade-related uncertainty remains a drag on sentiment, it has not yet translated into a broad-based pullback in domestic consumption. 

Spending on services such as dining and entertainment has remained relatively strong, and while durable goods purchases have softened, they are holding up better than expected given the macroeconomic backdrop. Crucially, Canada remains well positioned compared with other major U.S. trading partners, thanks largely to tariff exemptions under the United States-Mexico-Canada Agreement. We maintain our expectation of 1.25% real GDP growth in 2025. 

The labor market report for July marked a sharp reversal from June’s strength. The economy shed 41,000 jobs, suggesting firms pulled back on hiring amid renewed trade uncertainty. While the national unemployment rate held steady at 6.9%, the employment rate fell to 60.7%, with younger workers facing the brunt of labor softness. We continue to expect a gradual cooling in Canada’s labor market through the second half of 2025, with the unemployment rate likely to reach 7.5% by year-end. However, because the softness is concentrated among younger workers, the drag on aggregate domestic demand will likely be limited.

At its July meeting, the Bank of Canada (BoC) held its policy rate steady at 2.75%, citing both domestic and global economic resilience as reasons to pause and assess the inflationary implications of evolving trade policy. We expect the BoC to ultimately cut the overnight rate target to 2.25% by year-end, particularly if trade tensions persist and weigh further on growth.

 

Canada economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	1.25%	7.5%	2.5%	2.25%

^{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 of December 2025. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2025. Monetary policy is the Bank of Canada’s year-end target for the overnight rate.} 

^{Source: Vanguard.}

 

Mexico

Growth surprises but risks remain 

“Mexico’s economy is showing signs of stabilisation, but the outlook remains vulnerable to external pressures.”

—Adam Schickling, Vanguard Senior Economist 

Mexico’s economic momentum has recently shown signs of improvement, but growth prospects remain clouded by unresolved trade negotiations with the United States. After a modest 0.2% expansion in the first quarter, real GDP exceeded expectations by growing 0.7% in the second quarter, led by gains in manufacturing and services. Export revenues surged more than 10% in June, driven partly by resilient automobile shipments—reflecting continued strength in U.S. consumer demand and the protective buffer provided by exemptions from the United States-Mexico-Canada Agreement.

Despite the positive growth surprise, broader uncertainty around future trade policy continues to weigh on business sentiment. Public sector spending cuts, along with remittances roughly 5% lower than last year’s, are also acting as headwinds. The peso’s appreciation has further eroded the purchasing power of remittances, compounding near-term pressures on consumption.

Still, Mexico’s longer-term outlook remains constructive. The country continues to benefit from the U.S.-China trade realignment, with nearshoring trends reinforcing Mexico’s role as a key supply-chain hub. Export similarity with China and deep structural integration with the U.S. economy position Mexico well to capture a larger share of North American manufacturing over time. 

On the monetary front, the Bank of Mexico cut its policy rate by 25 basis points to 7.75% on August 7, following a 50-basis-point cut in June. (A basis point is one-hundredth of a percentage point). Even as it marginally increased its 2025 core inflation forecasts, Banxico said its move was consistent with the inflationary outlook. With the peso strengthening and U.S.-Mexico trade policy still unclear, we expect one more 25-basis-point cut before year-end.

 

Mexico economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	<1%	3.2 - 3.6%	3.5%	7.5%

^{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 of December 2025. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2025. Monetary policy is the Bank of Mexico’s year-end target for the overnight interbank rate.} 

^{Source: Vanguard.}

 

United Kingdom

Labor market continues to show signs of softening

“The U.K. labor market continues to soften, reinforcing our view that inflationary pressures will gradually ease.”

—Josefina Rodriguez, Vanguard Economist 

The U.K. labor market continues to weaken. Payroll employment fell for a sixth straight month in July and for the eighth time in nine months. Around 165,000 jobs have been lost over the full period. Vacancies are falling, and the unemployment rate stands at 4.7%, its highest level in four years. 

With the labor market and wage inflation cooling, we expect an easing in services inflation, which has been around 5% in recent months. We anticipate that both headline and core inflation will end 2026 just above 2%.

The U.K. chancellor of the exchequer’s £10 billion fiscal headroom is likely to be wiped out ahead of the autumn budget, driven by policy developments and expected downgrades by the Office for Budget Responsibility to near-term and trend growth. Further tightening in fiscal policy appears inevitable and is a key reason for our below-consensus 2026 growth forecast of around 0.8%. Meanwhile, we expect the Bank of England to maintain a quarterly pace of easing, with the bank rate falling from 4% currently to 3.75% at year-end 2025 and to 3.25% by mid-2026.

 

United Kingdom economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	1.3%	4.8%	3%	3.75%

^{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 of December 2025. Core inflation is the year-over-year change in the Consumer Prices Index, excluding volatile food, energy, alcohol, and tobacco prices, as of December 2025. Monetary policy is the Bank of England’s bank rate at year-end.}

^{Source: Vanguard.} 

 

Euro area

U.S. trade deal raises tariffs, but outlook holds steady 

“The European Union’s trade agreement with the United States marks a step toward de-escalation. While tariff rates will rise, the modest scale of the revision means our euro area outlook remains broadly unchanged.”

—Josefina Rodriguez, Vanguard Economist

Following the European Union’s recent trade agreement with the United States, we have revised our year-end forecast for the effective tariff rate on E.U. goods exports from 15% to 17%, which is higher than the current level of around 10%. While most U.S. tariffs on E.U. goods will increase, the deal reduces the risk of escalation. Given the modest scale of the revision, we do not expect a material impact on the macroeconomic outlook.

We continue to expect growth in the euro area to track around 1% in both 2025 and 2026, slightly below trend. GDP in the second quarter rose 0.1% quarter over quarter and signaled a reversal of the tariff frontrunning seen in the first quarter. We anticipate softening global activity and elevated policy uncertainty to weigh on demand in the second half of the year.

Germany’s fiscal package and increased E.U.-wide defense spending are likely to support growth from 2026 onward. Inflation continues to moderate, with the services index dropping to its lowest reading since early 2022 and wage growth falling meaningfully. We expect headline and core inflation to end 2026 below 2%. Given recent guidance from the European Central Bank, including remarks made at the July press conference that it is in a “good place” at the current policy rate level of 2%, we believe policymakers will keep rates steady at the September meeting. We forecast just one more rate cut this cycle, putting the policy rate at 1.75% at year-end, slightly below our estimate of the neutral rate (2%–2.5%). 

 

Euro area economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	1.1%	6.3%	2.1%	1.75%

^{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 of December 2025. Core inflation is the year-over-year change in the Harmonised Indexes of Consumer Prices, excluding volatile energy, food, alcohol, and tobacco prices, as of December 2025. Monetary policy is the European Central Bank’s deposit facility rate at year-end.}

^{Source: Vanguard.} 

 

Japan

Door opens for next interest rate hikes

“Persistent inflationary momentum and an easing in trade uncertainty warrant the Bank of Japan resuming policy interest rate increases.”

—Grant Feng, Vanguard Senior Economist 

A structural labor shortage in Japan continues to reinforce a virtuous wage-price spiral for a nation that had long struggled with deflation. Inflation remains firmly above target and the labor market is tight, even as growth momentum has weakened. And although capital expenditures have become increasingly volatile and political uncertainty has intensified following the recent Upper House election, improvements in employment and income have supported domestic demand. 

Corporate sentiment is showing signs of recovery in the wake of a July 22 tariff agreement with the United States. Although recent spikes in import prices and food costs are expected to fade, underlying inflationary pressures remain intact.

We expect the Bank of Japan to proceed with monetary policy normalisation, gradually moving from its current 0.5% rate target toward a neutral policy stance closer to 1% as economic conditions evolve in line with its forecasts.

 

Japan economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	0.7%	2.4%	2.4%	0.75%

^{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 of December 2025. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile fresh food prices, as of December 2025. Monetary policy is the Bank of Japan’s year-end target for the overnight rate.} 

^{Source: Vanguard.} 

 

China

Growth momentum to weaken amid deflationary pressures

“Growth looks set to slow in the second half, given weaker exports after a frontloading to get ahead of U.S. tariffs, the fading fiscal impulse of a consumption trade-in program, and a continued deflationary feedback loop.”

—Grant Feng, Vanguard Senior Economist 

We recently increased our 2025 GDP growth forecast to 4.8% from 4.6% thanks to better-than-expected real GDP growth in the second quarter, which lifted first-half growth to 5.3%—well above the government’s official target of “around 5%.”

However, a relatively muted shock from tariff increases and strong growth so far this year may lessen the urgency for additional policy stimulus. We expect growth to slow in the second half, owing to the payback of export and consumption frontloading, a still-ailing property sector, and elevated global uncertainty.

Given these developments, we foresee prevailing deflationary pressures continuing through the rest of 2025. The path toward reflation is likely to be gradual and bumpy.

 

China economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	4.8%	5.1%	0.5%	1.3%

^{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 of December 2025. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2025. Monetary policy is the People’s Bank of China’s seven-day reverse repo rate at year-end.}

^{Source: Vanguard.} 

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