Vanguard economic update: Global economy shows signs of stability

As we settle into 2026, the global economy is showing signs of stability, even as different regions face their own challenges.

Strong investment, especially in artificial intelligence (AI), is keeping US growth solid, while UK inflation¹ should fall sharply this year thanks to lower energy costs.

Here’s our take on what’s happening in the world’s major economies.

United States

Strong business investment has been a key driver of US economic growth over the past year. We expect it to stay strong in the year ahead, helping to keep overall economic growth above 2%. A major contributor is the surge in AI-related investment.

Although the government has introduced new tariffs on imported goods, their immediate impact has been limited. Companies prepared by bringing in goods early, which means price increases are taking longer to show up. We expect ‘core’ inflation – which excludes food and energy costs – to peak at just over 3% before falling as the year goes on.

Because the economy is holding up well, the US central bank (the Federal Reserve) is likely to be cautious about lowering interest rates. We expect only one rate cut in 2026, early in the year.

United Kingdom 

The UK Budget, released in November 2025, was generally positive for growth and inflation. Most of the £26 billion worth of tax increases won’t begin until 2028, and government spending will rise modestly in the near term. We recently increased our outlook for UK growth in 2026 by 0.2 percentage points to 1%.

A big part of the gap between current inflation and the Bank of England’s 2% target is due to regulated prices, like energy and water bills. We expect inflation to fall sharply in 2026 as the government’s announced policy measures directly reduce energy costs.

The Bank of England cut interest rates in December to 3.75%². We expect two more cuts in 2026, with the next cut likely in April. This would bring rates down to 3.25% by the end of the year.

Euro area 

The euro area has experienced a so-called ‘soft landing’: inflation ended 2025 at the European Central Bank’s (ECB) 2% target; economic growth is steady; and unemployment is the lowest it has been since 1999.

The ECB finished lowering rates in mid‑2025³ and is expected to keep its main rate at 2% throughout 2026.

Defence spending across the European Union will increase this year and is expected to meaningfully contribute towards growth. However, investment linked to AI is not expected to be as strong as in the US. European tech companies plan to invest about $250 billion to $300 billion over the next two years, much less than the more than $2 trillion expected in the US.

Japan

We expect Japan’s economy to grow by about 1% in 2026. Consumers are spending more, helped by rising wages and permanent cuts to income tax. Business investment should remain solid, supported by strong company earnings. Exports should also hold up, helped by strong demand from the US and a weaker Japanese yen.

Japan’s central bank raised interest rates to 0.75% in December⁴, showing its commitment to continue returning rates to more normal levels after being extremely low for many years. We expect the rate to rise to around 1% by the end of 2026, and eventually to about 1.5%.

China

China begins its new Five‑Year Plan in 2026, with a major focus on technological innovation and manufacturing upgrades. We expect economic growth to slow modestly to 4.5% in 2026. Tariffs are putting pressure on growth, but a rebound in manufacturing and infrastructure investment should help offset some of this.

China is developing AI quickly, but its economic impact is likely to be smaller than in the US. China’s strong infrastructure means it doesn’t need to invest as heavily in AI, and many Chinese jobs – in farming, construction and manufacturing – are less affected by AI automation.

We expect only small rate cuts in 2026, totalling around 0.20 percentage points.

All facts and figures from Vanguard analysis, January 2026.

¹ Inflation is the rise in prices for goods and services over time, meaning your money buys less than it used to.

² Source: Bank of England. December 2025.

³ Source: European Central Bank. December 2025.

⁴ Source: Bank of Japan. December 2025.

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