Investment and economic outlook, November 2025
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Australia
Stalling disinflation keeps monetary policy on hold
“A stronger-than-expected third-quarter inflation print diminishes the likelihood that inflation will serve as a catalyst for further policy easing in the near term.” Grant Feng, Vanguard Senior Economist
Australia’s economic challenge lies in its constrained supply side and weak productivity growth, which have lowered the economy’s potential growth rate. Consequently, even a modest rebound in GDP growth of 1.8% year over year in the second quarter has been sufficient to stall the disinflationary momentum observed earlier in the year. This is reflected in the reemergence of inflation pressure. Headline inflation rose to 3.2% year over year in the third quarter, the highest since mid-2024. Trimmed mean inflation also surprised to the upside, increasing to 3.0% year over year, at the upper bound of the target range set by the Reserve Bank of Australia (RBA).
Labor market conditions remain tight, although there are signs of softening. The unemployment rate edged up to 4.5% in September, its highest level in nearly four years. Despite this increase, unemployment remains low by historical standards and continues to reflect a relatively robust labour market.
Given that the economy appears to be operating near its full capacity, and with core inflation rising, we now see limited scope for further rate cuts. The RBA is likely to place greater emphasis on its price-stability mandate amid mounting evidence that disinflation is stalling.
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% | 19.7% |
| Global ex-Australia equities (unhedged) | 4.6% - 6.6% | 16.2% |
| US equities (unhedged) | 4.5% - 5.5% | 17.3% |
| Australian aggregate bonds | 3.9% - 4.9% | 6.4% |
| Global ex-Australia aggregate bonds (hedged) | 3.7% - 4.7% | 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 modelled asset class. Simulations as of October 31, 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 2025 outlook | 2% | 4.2% | 3% | 3.6% |
| Year-end 2026 outlook | 2.2% | 4.3% | 2.8% | 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 for each year. Trimmed mean inflation is the year-over-year change in the Consumer Price Index, excluding items at the extremes, as of the fourth-quarter reading for each year. Monetary policy is the Reserve Bank of Australia’s year-end cash rate target.
Source: Vanguard.
Note: All investing is subject to risk, including the possible loss of the money you invest.
United States
Flying blind but straight ahead, with growing momentum
“In the absence of official data during the U.S. government shutdown, our analysis suggests that the economy has picked up momentum from earlier in the year and labour market conditions have remained stable.” Josh Hirt, Vanguard Senior U.S. Economist
With the U.S. government shutdown having ended after 43 days, the most notable effect for policymakers and markets may be the absence of official government data releases—and the added uncertainty this has created during a period of heightened attention to economic conditions.
We anticipate that the shutdown’s effects will be temporary and largely reversed now that the government has reopened; the fourth quarter will experience a drag on growth that should be offset by a boost in the first quarter of 2026. In the absence of official data during the shutdown, our analysis suggests that the economy has picked up momentum from earlier in the year, and we have raised our full-year 2025 growth estimate to 1.9% as a result.
We expect forthcoming official data to confirm that labour market conditions have remained stable. Combined with a more constructive outlook for growth into 2026 and the Federal Reserve’s policy rate cut in October, we anticipate that the Fed will shift from emphasising the employment side of its mandate to a more neutral stance. We do not expect any additional easing at the Fed’s December meeting and anticipate one rate cut during the first half of 2026.
United States economic forecasts
|
| GDP growth | Unemployment rate | Core inflation | Monetary policy |
|---|---|---|---|---|
| Year-end 2025 outlook | 1.9% | 4.4% | 3.1% | 4% |
| Year-end 2026 outlook | 2.25% | 4.2% | 2.6% | 3.75% |
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 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 of December for each year. Monetary policy is the upper end of the Federal Reserve’s target range for the federal funds rate at year-end.
Source: Vanguard.
Canada
Consumers carry on while trade talks loom
“We believe that the Bank of Canada’s rate-cutting cycle has ended, with policy now positioned near neutral and no further moves anticipated through 2026.” Adam Schickling, Vanguard Senior Economist
Canada’s economy continues to face meaningful challenges, but resilient consumer fundamentals and favourable tariff positioning have helped maintain a modest growth trajectory. Trade-sensitive sectors including autos, steel, and lumber remain challenged and, with United States-Mexico-Canada Agreement (USMCA) renegotiations set to commence in July 2026, trade policy uncertainty is likely to remain elevated for the foreseeable future.
USMCA exemptions have played a pivotal role in 2025, keeping the effective tariff rate on Canadian exports to the U.S. in the mid-to-high single digits, well below that of other U.S. trading partners. This relative trade advantage has supported our above-consensus GDP growth forecasts for 2025 and 2026. Additionally, Canada’s new budget proposal aims to bolster public investment and support key sectors affected by trade developments, contributing to a more stable economic outlook.
The Canadian consumer has been a bright spot in 2025, buoyed by consistent rate cuts, positive real wage growth, and low rates of job losses. Similar to the U.S., unemployment has edged higher, driven by low hiring activity and an influx of younger workers and new labour force entrants. However, this dynamic poses less risk to consumption than broad-based layoffs. The October employment report reflected labour market resilience as employment increased by 67,000, driven by part-time work, and the unemployment rate fell from 7.1% to 6.9%. We expect the unemployment rate to end 2025 at 7.3% before modestly improving in 2026 as slower labour supply growth supports new-entrant hiring.
The Bank of Canada lowered its policy rate by 25 basis points to 2.25% in late October, citing continuing economic concerns, but indicated a bias toward holding the rate steady for the indefinite future. With core inflation still above target, labour market conditions stabilising, and policy rates aligned with our neutral estimate, we do not anticipate further rate changes in 2026.
Canada economic forecasts
|
| GDP growth | Unemployment rate | Core inflation | Monetary policy |
|---|---|---|---|---|
| Year-end 2025 outlook | 1.25% | 7.3% | 2.5% | 2.25% |
| Year-end 2026 outlook | 1.5% | 7% | 2.2% | 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
Navigating economic crosscurrents with caution
“Mexico’s economy is walking a fine line, supported by exports and policy easing but weighed down by investment hesitation and caution among consumers.” Adam Schickling, Vanguard Senior Economist
Mexico’s economy has demonstrated resilience in 2025 despite considerable trade uncertainty with the United States. Real GDP growth exceeded expectations in the first half of the year, but headwinds have gathered in the second half in the form of lacklustre private investment and a cautious domestic consumer. While uncertainty surrounding trade and the 2026 United States-Mexico-Canada Agreement (USMCA) review weighs on consumer and business sentiment, we expect a modest boost in the coming quarters as Mexico prepares to cohost the world soccer championship tournament in the summer of 2026.
Longer-term growth prospects remain constructive. Nearshoring trends are reinforcing Mexico’s role as a key North American manufacturing hub. Competitive labour costs, geographic proximity, and deep structural integration with U.S. industry position Mexico favourably for the future. Mexico retains a competitive edge under the USMCA, with roughly 82% to 85% of its exports to the U.S. duty-free, keeping its effective tariff rate near 8%, among the lowest globally.
On the monetary front, the Bank of Mexico (Banxico) on November 6 cut its policy rate by 25 basis points to 7.25%, emphasising downside risks from a slowing global economy and confidence that headline inflation would gradually converge to target in 2026. We expect one more quarter-point cut this year, followed by another cut in early 2026 before Banxico pauses amid sticky core inflation and global economic downside risks abating.
Mexico economic forecasts
|
| GDP growth | Unemployment rate | Core inflation | Monetary policy |
|---|---|---|---|---|
| Year-end 2025 outlook | 0.75% | 3.2% | 4% | 7% |
| Year-end 2026 outlook | 1.5% | 3.2% | 3.7% | 6.5% |
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 for each year. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December for each year. Monetary policy is the Bank of Mexico’s year-end target for the overnight interbank rate.
Source: Vanguard.
United Kingdom
All eyes on the autumn budget and its policy implications
“We expect a fiscal consolidation of at least £30 billion to be announced in the autumn budget. This will shave 0.2 percentage points off growth and strengthens the case for additional monetary easing.” Shaan Raithatha, Vanguard Senior Economist
The U.K. economy has grown close to its potential over the past year, with economic activity balanced across consumer spending, government spending, and business investment. The resilience in activity is encouraging given the uncertain global trade environment and a weakening labour market.
However, we expect a downshift in growth in 2026, driven by tighter fiscal policy, as taxes rise to meet the government’s fiscal rules. We expect a fiscal consolidation of at least £30 billion to be announced in the autumn budget, driven by tax increases. We believe this will detract around 0.2 percentage points from growth and, as such, we forecast U.K. GDP growth of just 0.8% in 2026.
The main challenge for the Bank of England (BoE) is to balance this weakening growth outlook with still-elevated inflation. Annual headline inflation is expected to end 2025 at 3.8%, almost double that of the euro area as well as the BoE’s target (both 2%). However, more than 70% of the U.K. inflation gap with the euro area can be explained by the contributions of administered or index-linked prices, including electricity, water, and telecommunications bills. An additional 20% of the gap can be attributed to U.K.-specific dynamics in the rental market, package holidays, and food prices.
We forecast that the total U.K. inflation gap with the euro area will narrow by around half in 2026 as announced policy measures directly lower energy prices and as base effects, or challenging year-earlier comparisons, for some of these components unwind.
United Kingdom economic forecasts
|
| GDP growth | Unemployment rate | Core inflation | Monetary policy |
|---|---|---|---|---|
| Year-end 2025 outlook | 1.3% | 4.8% | 3.7% | 4% |
| Year-end 2026 outlook | 0.8% | 4.8% | 2.6% | 3.25% |
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 for each year. Core inflation is the year-over-year change in the Consumer Prices Index, excluding volatile food, energy, alcohol, and tobacco prices, as of December for each year. Monetary policy is the Bank of England’s bank rate at year-end.
Source: Vanguard.
Euro area
Soft landing achieved as fiscal policy takes centre stage
“Inflation is set to end 2025 close to the European Central Bank’s 2% target, while the economy remains healthy and the unemployment rate remains historically low.” Shaan Raithatha, Vanguard Senior Economist
The euro area has experienced a soft landing. Annual inflation is set to end 2025 close to the 2% target set by the European Central Bank (ECB) after peaking at above 10% in late 2022. Meanwhile, the economy is growing close to its potential and the unemployment rate is at its lowest sustained level since the creation of the euro in 1999. The ECB halted its easing cycle in June 2025, leaving the deposit facility rate at 2%, down from a peak of 4% in 2024. We expect it to stay at 2% throughout 2026.
Meanwhile, fiscal policy is taking centre stage. Germany is now set to run annual budget deficits of close to 4% of GDP over the next decade. This will increase its debt-to-GDP ratio by between 20 and 30 percentage points. But with a current debt ratio of less than 65%, strong external fundamentals, and a solid track record of prudence, there is little concern over Germany’s medium-term fiscal health.
The same is not true for France. Investors have become concerned about France’s debt trajectory given projected budget deficits of 5% to 6% of GDP over the next few years, a debt-to-GDP ratio of 110%, and little political appetite to reduce spending. With the decision to freeze pension reform until 2027, we don’t see a clear path for fiscal consolidation in the near term. Expect political and fiscal uncertainty to pin back the French economy in 2026.
Euro area economic forecasts
|
| GDP growth | Unemployment rate | Core inflation | Monetary policy |
|---|---|---|---|---|
| Year-end 2025 outlook | 1.3% | 6.3% | 2.2% | 2% |
| Year-end 2026 outlook | 1% | 6.3% | 1.8% | 2% |
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 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, as of December for each year. Monetary policy is the European Central Bank’s deposit facility rate at year-end.
Source: Vanguard.
Japan
A cautious pause to lay the foundation for the next hike
“Solid inflationary momentum, resilient domestic demand, and fading political turmoil should pave the way for policy normalisation.” Grant Feng, Vanguard Senior Economist
Despite a seasonal hiccup, Japan’s economy remains resilient, supported by solid domestic demand and a limited impact of higher U.S. tariffs. However, signs of strain are emerging, particularly in the form of declining profits among large manufacturers.
On the inflation side, although food price growth is moderating, recent yen depreciation may exert upward pressure on prices in the near term. While the impact of earlier cost shocks, such as elevated import prices and rising food costs, is expected to fade, underlying inflationary pressures remain intact. These are driven by persistent structural labour shortages, which are pressuring wages upward and reinforcing what for Japan is a virtuous cycle between wage growth and price increases.
We do not expect the new administration’s priority of combating inflation to interfere with independent policy decisions by the Bank of Japan (BoJ). The BoJ remains focused on wage growth and its transmission to household consumption, and the persistence of household spending improvements will be key to future policy actions. We maintain our base case scenario of a BoJ rate hike in December. However, the timing will depend on wage and consumption trends. Should micro-level wage data fail to demonstrate sufficient momentum, the next rate hike could be deferred beyond 2025.
Japan economic forecasts
|
| GDP growth | Unemployment rate | Core inflation | Monetary policy |
|---|---|---|---|---|
| Year-end 2025 outlook | 0.7% | 2.4% | 2.4% | 0.75% |
| Year-end 2026 outlook | 1% | 2.4% | 2% | 1% |
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 for each year. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile fresh food prices, as of December for each year. Monetary policy is the Bank of Japan’s year-end target for the overnight rate.
Source: Vanguard.
China
A challenging 2035 target amid declining trend growth
“The 2035 modernisation objective set in China’s 15th five-year plan, which aims to raise GDP per capita to the level of moderately developed countries, is challenging. Achieving this goal implies compound annual growth of 6% to 8% in U.S. dollar terms, necessitating robust nominal GDP growth and a stable or appreciating renminbi over the next decade.” Grant Feng, Vanguard Senior Economist
While China’s third-quarter real GDP growth remained firm, nominal GDP growth slowed to 3.7% year over year, down from 3.9% in the second quarter and its lowest level since the fourth quarter of 2022. Still, China’s full-year growth target appears largely on track, given that real GDP grew by 5.2% year over year during the first three quarters and exports remain resilient.
But structural challenges, especially a soft labour market, a prolonged property downturn, and fragile private sector sentiment, remain significant and will require incremental and targeted support to counteract. Policymakers have tapped fiscal space to support investment. Such steps should be able to help stabilise domestic demand in the fourth quarter and early in 2026, albeit modestly.
A trade truce with the U.S. scaled back China’s effective tariff rate from 42% to 32%, which should support China’s near-term export growth. The truce also reduces policy uncertainty, potentially encouraging corporate capital expenditures. Planned high-level visits signal a mutual willingness to compromise, reducing the likelihood of poor trade outcomes in the near term. However, the risk of renewed trade tensions cannot be ruled out.
Broad-based policy stimulus is unlikely in the near term. We expect only modest cuts from the current 1.4% monetary policy rate to facilitate fiscal expansion.
China economic forecasts
|
| GDP growth | Unemployment rate | Core inflation | Monetary policy |
|---|---|---|---|---|
| Year-end 2025 outlook | 5% | 5.1% | 0.5% | 1.3% |
| Year-end 2026 outlook | 4.5% | 5.1% | 1% | 1.2% |
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 for each year. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December for each year. Monetary policy is the People’s Bank of China’s seven-day reverse repo rate at year-end.
Source: Vanguard.
About the Vanguard Capital Markets Model
The asset-return distributions shown here are in nominal terms—meaning they do not account for inflation, taxes, or investment expenses—and represent Vanguard’s views of likely total returns, in U.S. dollar terms, over the next 10 years; such forecasts are not intended to be extrapolated into short-term outlooks. Vanguard’s forecasts are generated by the VCMM and reflect the collective perspective of our Investment Strategy Group. Expected returns and median volatility or risk levels—and the uncertainty surrounding them—are among a number of qualitative and quantitative inputs used in Vanguard’s investment methodology and portfolio construction process. Volatility is represented by the standard deviation of returns.
IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model (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. 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 importantly, 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 U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, U.S. municipal bonds, 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 time. Forecasts represent the distribution of geometric returns over different time horizons. Results produced by the tool will vary with each use and over time.
The VCMM’s primary value is its utility in analysing potential investor portfolios. VCMM asset-class forecasts—comprising distributions of expected returns, volatilities, and correlations—are key to the evaluation of potential downside risks, 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 is the most effective way to use VCMM output. The VCMM seeks to represent the uncertainty inherent in forecasting by generating a wide range of potential outcomes. The VCMM does not impose “normality” on expected return distributions but rather is influenced by the so-called fat tails and skewness of modelled asset-class returns. Within the range of outcomes, individual experiences can be quite different, underscoring the varied nature of potential investment outcomes. Indeed, this is a key reason why we approach asset-return outlooks in a distributional framework.
This article contains certain 'forward looking' statements. Forward looking statements, opinions and estimates provided in this article are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Forward-looking statements including projections, indications or guidance on future earnings or financial position and estimates are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. There can be no assurance that actual outcomes will not differ materially from these statements. To the full extent permitted by law, Vanguard Investments Australia Ltd (ABN 72 072 881 086 AFSL 227263) and its directors, officers, employees, advisers, agents and intermediaries disclaim any obligation or undertaking to release any updates or revisions to the information to reflect any change in expectations or assumptions.
