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Our economic outlook for the United States

An improved outlook despite continued policy uncertainty

The U.S. economy has remained resilient despite significant economic policy uncertainty through the first half of 2025. The labor market has cooled but remains stable, and inflation data has come in better than expected. The recent de-escalation of tariff policy with China was a pivotal development, and we have made meaningful, positive revisions to our outlook as a result. Overall, we see a less stagflationary impact to the economy and view the risk of further escalation in trade policy as having been materially reduced. We expect the focus to shift toward fiscal policy in the second half of the year.

Federal Reserve interest rate policy is likely on hold for now, and recent positive tariff developments should mitigate worst-case dual-mandate challenges for the Fed. If the labor market remains on the trajectory we expect, the Fed can afford to be patient. We anticipate that the Fed will be able to make two more rate cuts later this year in this environment. However, policy nuance will be crucial, and uncertainty remains high. Inflation expectations and the persistence of tariff-related inflation are likely to play a central role.

 

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.}

_{Note: All investing is subject to risk, including the possible loss of the money you invest.}

 

Our economic outlook for Mexico

Growth on hold amid trade policy jitters 

Mexico’s economic momentum has shifted into a lower gear in 2025. We’ve trimmed our GDP growth forecast to below 1%, down from about 1.5% at the start of the year, as trade-related headwinds intensify. U.S. tariffs on Mexican imports arrived earlier than expected, with a damaging concentration on the automobile sector. While Mexico narrowly avoided a technical recession in the first quarter by growing just 0.2%, thanks to strength in the agricultural sector, signs are already surfacing of manufacturing weakness stemming from U.S. tariffs.

We expect U.S. tariffs on Mexican imports—particularly in the auto sector—to ease over time, with resilient U.S. consumer demand continuing to support Mexican exports. Over the longer term, Mexico could also benefit from the announced U.S. tariffs on Chinese goods, as Mexico has already gained U.S. market share since 2017 and shares a high degree of U.S. export similarity with China. Yet, this nearshoring optimism remains tempered by uncertainty around renegotiations of the United States-Mexico-Canada Agreement, domestic governance concerns, and global macroeconomic volatility.

On the monetary front, the Bank of Mexico (Banxico) cut its policy rate by 50 basis points to 8.5% in May, shifting focus from inflation to economic stability. (A basis point is one-hundredth of a percentage point.) While inflation remains above the central bank’s 3% target, Banxico’s messaging that “the inflationary episode has been left behind” suggests further easing is likely. We expect the policy rate to end the year near 8%.

Mexico economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	<1%	3.2–3.6%	3.5%	8%

_{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.}

_{Note: All investing is subject to risk, including the possible loss of the money you invest.}

Our economic outlook for the United Kingdom

Softening labor market paves the way for more rate cuts

We continue to expect GDP growth of around 1% in 2025 and 2026. Relative to our expectations at the start of the year, activity was stronger than anticipated in the first quarter. However, this was likely driven by exporters frontloading orders. We expect slower growth from the second quarter onward, both as a subsequent effect of the initial frontloading and because of lower demand as uncertainty weighs on household and corporate spending.

Employment growth is softening materially, due partly to the government raising taxes for employers as of April 6, 2025. Forward-looking surveys on both economic activity and the labor market point to deterioration ahead. With the labor market and wage inflation showing signs of cooling, services inflation is likely to soon follow suit.

Services disinflation, coupled with an expectation that fiscal policy will be tightened further in the autumn budget, will give the Bank of England (BoE) conviction that inflationary pressures will subside despite current stickiness. We continue to expect the BoE to maintain a quarterly cadence of monetary policy easing that would put the bank rate at 3.75% at the end of 2025. 

United Kingdom economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	1.1%	4.8%	2.9%	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.}

_{Note: All investing is subject to risk, including the possible loss of the money you invest.}

 

Our economic outlook for the euro area

A rising risk of an inflation undershoot

We expect growth in the euro area to track around 1% in both 2025 and 2026, slightly below trend. Softening global activity, driven partly by elevated policy uncertainty and higher tariffs, is expected to weigh on final demand. The tailwinds from Germany’s fiscal package and greater defense spending throughout the European Union are more of a 2026 story. Risks are skewed toward a slower implementation or smaller package than our current baseline.

The chances of undershooting the 2% inflation target set by the European Central Bank (ECB) are rising. Both wage growth and services inflation are now falling meaningfully. And a weakening global growth outlook, stronger euro, and lower energy prices all point to further disinflation ahead.

Following the messaging at the ECB’s June press conference, in which the president of the ECB repeatedly stated that the central bank was in a “good position” at the current policy rate level (2%), we think a pause at the July meeting is now likely. We forecast just one more rate cut this cycle, likely in September, which would leave the policy rate at 1.75%, a touch below our estimate of neutral (2%–2.5%). The balance of risks is skewed toward further easing.

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 Harmonized 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.}

_{Note: All investing is subject to risk, including the possible loss of the money you invest.}

 

Our economic outlook for China

Deflationary pressure persists even as tariff shocks subside 

China’s economy has maintained steady growth so far in 2025, with key activity data for the first five months remaining robust. The consumer goods trade-in program and a frontloading of existing policy measures have supported economic momentum. Despite higher U.S. tariffs, exports have remained resilient, supported by frontloading and shipment rerouting. The recent 90-day trade truce with the U.S. may prompt another wave of frontloaded exports, and we expect trade volatility to ease in the near term, providing temporary relief to the export sector. However, tariff-related uncertainty remains elevated and continues to pose downside risks to growth.

We recently raised our 2025 GDP growth forecast for China to 4.6% from 4.2%, primarily due to the de-escalation of trade tensions with the U.S. As tariff shocks subside, policymakers are likely to adopt a more measured and reactive approach, with a modest policy rate cut of 10 basis points to 1.3% expected by year-end. (A basis point is one-hundredth of a percentage point.) Further stimulus is likely to be deferred, with a near-term focus on policy implementation. In addition, we expect growth to moderate in the second half of this year, given export and consumption frontloading, a persistent downturn in property values, and elevated trade policy uncertainty.

The policy response remains modest, targeted, and reactive, prioritizing investment and production over consumption. As a result, subdued domestic demand and a challenging external environment will likely sustain deflationary pressures for the rest of 2025. Our outlook for core inflation remained unchanged, and the path toward broader reflation is expected to be gradual and bumpy.  

China economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	4.6%	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, compared with the previous 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.}