Vanguard economic update: Mixed picture for the global economy

The global economy continues to send mixed signals. US job growth has slowed recently, Europe is battling subdued demand and the UK’s growth outlook is fragile. Central banks are adjusting interest rates to manage inflation, shaping the investment landscape for the year ahead.

Here’s a quick look at what’s going on in key regions.

United States

The number of job creations in the US has slowed recently and the Federal Reserve (the US central bank) is now focusing more on employment. A year ago, the economy needed to add about 150,000 jobs a month to keep unemployment steady. That number is expected to drop to 50,000 by the end of this year. 

More broadly, economic growth continues to slow but it is still maintaining a healthy momentum. We expect full-year economic growth of 1.4%, with core inflation¹ ending the year at 3.1%. The Federal Reserve cut rates by 0.25 percentage points in September and we expect it to remain cautious with one further 0.25-percentage-point cut this year. 

Euro area

We expect growth in the euro area to remain slightly below trend, at around 1% in both 2025 and 2026. Growth was just 0.1% in the second quarter. Tariff-related uncertainty and weaker global activity are likely to weigh on demand in the second half of the year. We expect Germany’s spending package and increased EU-wide defence spending to support growth from 2026 onwards.

With inflation hovering around 2%, we expect the European Central Bank to cut rates just once more this year, ending 2025 at 1.75%.

United Kingdom

The UK economy remains fragile. It grew by a stronger-than-expected 0.3% between the first and second quarters, but this was largely due to a temporary increase in government spending. Consumer demand stayed weak. 

The chancellor’s £10 billion budget cushion is likely to be wiped out before the Autumn Budget due to lower economic growth forecasts. This means that further fiscal policy tightening (increasing taxes and/or cutting government spending) is likely, which is why we expect UK economic growth of just 0.8% for 2026 – lower than many other forecasts. 

Inflation has been more persistent than anticipated in recent months and we now expect headline and core inflation to finish the year at 3.8% and 3.7%, respectively. We no longer believe the Bank of England will cut interest rates again in 2025, which would leave rates at 4% by year-end. However, with fiscal policy almost certain to tighten in the Autumn Budget, we foresee rates being cut to 3.25% by the end of 2026. 

Japan

Japan’s economy performed better than expected in the second quarter, growing by 0.5% from the previous quarter and by 1.7% compared with a year ago. This comes despite US tariff threats and should allay any fears the Bank of Japan may have of a sharp economic slowdown.

Although the impact of earlier shocks, such as high import prices and food costs, is expected to fade, labour shortages are pushing up wages and prices. 

We expect the Bank of Japan to raise rates from 0.5% to 0.75% by the end of the year.

China

In China, industrial production and exports are likely to remain robust in September, but domestic demand could be weak. We expect economic growth to slow in the second half of the year due to global uncertainty, a still-struggling property sector and the impact of companies bringing forward imports after the tariff announcements. Our full-year growth forecast remains at 4.8%.

¹ Inflation is the rate of increase in prices for goods and services. Core inflation excludes volatile food and energy prices.

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