Investment and economic outlook, September 2025
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Australia
Solid growth confirms private sector recovery
“Policy support is clearly acting as a catalyst, and we expect the recovery to broaden in coming quarters.” Grant Feng, Vanguard Senior Economist
Australia’s economy grew by 0.6% in the second quarter, a solid print that confirms a private sector recovery from the very soft conditions of the past two years. Policy support is clearly acting as a catalyst, and we expect the recovery to broaden in coming quarters as the lagged impact of rate cuts flows through the economy. We maintain our 2025 forecast for full-year growth of real GDP at 2%. However, risks tilt toward the downside because weak productivity growth continues to restrict the effect of monetary policy easing.
A pickup in consumer spending is underway against the backdrop of rate cuts, gradually falling inflation, and a related increase in real household disposable income. Meanwhile, supply-side constraints remain. As weak productivity is coupled with solid wage growth, unit labor costs remain too high for the Reserve Bank of Australia to sustainably achieve its 2%–3% inflation target. Given a tight labor market as well, Australia’s disinflation process is likely to be slow.
A continued normalisation in monetary policy will be required to ensure a sustainable rebalancing in growth toward the private sector. We expect one further quarter-point rate cut this year, to 3.35%.
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
Labor market takes on renewed focus at the Fed
“As labor supply and demand moderate simultaneously, policymakers are facing increased uncertainty in evaluating the market’s underlying health. We expect some further softness in the months ahead.” Josh Hirt, Vanguard Senior Economist
The subdued job creation observed in recent labor market reports has shifted monetary policy sentiment toward a renewed focus on the employment side of the Federal Reserve’s dual mandate of ensuring price stability and promoting maximum sustainable employment. We expect mandate tensions to be a continuing factor as inflation accelerates amid tariff-related pass-through to consumer prices.
The number of monthly job creations required to keep the unemployment rate steady, or the breakeven rate, has shifted downward from roughly 150,000 a year ago toward a level we anticipate being near 50,000 by year-end. Domestic demographics and a slowdown in immigration continue to be headwinds to labor force growth. We expect the unemployment rate to soften to 4.5% by year-end. More broadly in the economy, we continue to see growth slowing but still maintaining healthy momentum.
In this environment, markets are virtually unanimous in pricing in at least a 25-basis-point interest rate cut at the Fed’s September 17 meeting. (A basis point is one-hundredth of a percentage point.) However, we expect the Fed will remain cautious. We don’t expect a preset course of sequential rate cuts to be communicated, given a great deal of uncertainty and a desire to be data-dependent. Overall, we see the economy tracking in-line with our expectations of a softening labor market, with 1.4% GDP growth and 3.1% core inflation by year-end.
United States economic forecasts
|
| GDP growth | Unemployment rate | Core inflation | Monetary policy |
|---|---|---|---|---|
| Year-end outlook | 1.4% | 4.5% | 3.1% | 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
Canada’s outlook steady despite external pressures
“While global trade uncertainty remains elevated, Canada’s relative tariff advantage should help cushion the economic impact.” Adam Schickling, Vanguard Senior Economist
After months of frozen progress in U.S.-Canada trade negotiations, recent developments suggest a tentative thaw. On September 1, Canada removed its retaliatory tariffs on U.S. goods, a gesture aimed at easing tensions and reopening the door to broader talks. Recognition that the effective tariff rate paid by Canadian exporters remains modest underpinned the gesture. At approximately 6%, this rate is the lowest among major U.S. trading partners. More than 85% of bilateral trade continues to flow tariff-free under provisions of the United States-Mexico-Canada Agreement.
In this context, the steep drop in Canadian exports that resulted in second-quarter GDP contracting by an annualised 1.6% likely reflects a hiatus of foreign purchases following first-quarter tariff frontrunning and will ultimately be short-lived. Domestic consumption remained resilient in the second quarter, but there are signs that households are starting to draw on savings to support consumption in the face of slowing income growth.
The August employment report also disappointed, with the Canadian economy shedding about 66,000 jobs and the unemployment rate rising to 7.1%. We continue to expect a gradual cooling in the labor market through the second half of 2025, with the unemployment rate likely reaching 7.5% by year-end.
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. The removal of retaliatory tariffs should ease the BoC’s inflationary concerns, and the soft August employment report sets the stage for a 25-basis-point cut to the overnight rate target at its next meeting on September 17. We then expect another 25-basis-point cut at either the October or December meeting.
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
Mexico navigates headwinds with structural tailwinds
“Mexico’s deep role in North American supply chains is helping cushion the economy against external shocks and support cyclical momentum.” Adam Schickling, Vanguard Senior Economist
Recent signs of improvement reflect Mexico’s steady resilience in 2025, but lingering trade uncertainties with the U.S. still cloud the outlook. After a modest 0.2% expansion in the first quarter, real GDP exceeded expectations by growing 0.6% in the second quarter, led by gains in manufacturing and services. Export orders face pressure from softer U.S. demand and higher tariffs, but the rate of decline has slowed. Nevertheless, trade uncertainty and global growth prospects continue to stifle business sentiment and fixed investment. We have refined our full-year growth forecast to a range of 0.5%–0.75%.
Mexico’s longer-term outlook remains constructive. The country continues to benefit from U.S.-China trade realignment, with nearshoring trends reinforcing Mexico’s role as a key supply-chain hub. With United States-Mexico-Canada Agreement exemptions, nearly 80% of Mexico’s exports to the U.S. are duty-free, translating to an overall effective tariff rate near 7%—one of the lowest among U.S. trading partners. 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 (Banxico) cut its policy rate by 25 basis points to 7.75% in August, emphasising the need for a less restrictive stance while also signaling that the easing cycle is nearing its end. (A basis point is one-hundredth of a percentage point). With core inflation remaining above target despite easing headline inflation pressures, we expect Banxico to deliver just one more rate cut this year.
Mexico economic forecasts
|
| GDP growth | Unemployment rate | Core inflation | Monetary policy |
|---|---|---|---|---|
| Year-end outlook | 0.5% - 0.75% | 3% - 3.5% | 4% | 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
Fiscal tightening in the autumn budget likely to weigh on U.K. growth
“Despite a stronger-than-expected GDP print in the second quarter, the government’s fiscal headroom is eroding and spending pressures are mounting, making higher household taxes increasingly likely.” Josefina Rodriguez, Vanguard Economist
The U.K. economy remains fundamentally fragile despite a stronger-than-expected GDP print in the second quarter. GDP grew by 0.3% quarter-on-quarter, outperforming consensus expectations. However, this upside surprise was largely driven by a temporary spike in government-related expenditures, while consumer spending remained subdued. In response, we recently mechanically upgraded our 2025 growth forecast by 0.2 percentage points to 1.3%, though we continue to expect the economy to remain weak in the second half of the year.
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 to near-term and trend growth by the Office for Budget Responsibility. Further tightening in fiscal policy appears inevitable and is a key reason for our below-consensus 2026 growth forecast of around 0.8%.
With signs of the labor market cooling and wage inflation easing, we expect a gradual decline in services inflation, which has hovered around 5% in recent months. We anticipate that both headline and core inflation will end 2026 just above 2%.
Additionally, 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
ECB to cut only once more this cycle, if at all
“The European Central Bank held its deposit facility rate steady at 2% at its September meeting. We expect it to cut once more in this cycle, although with inflation at target and recent guidance signaling a higher bar for easing, the likelihood of no further cuts is increasing.” Josefina Rodriguez, Vanguard Economist
We continue to expect euro area growth to remain slightly below trend, tracking around 1% in both 2025 and 2026. GDP grew by 0.1% in the second quarter, having increased by 0.6% in the first quarter with the supportive effects of tariff frontrunning. Softer global activity, elevated policy uncertainty, and higher tariffs are likely to weigh on demand in the second half of the year.
Following the European Union’s recent trade agreement with the United States, the effective tariff rate on E.U. exports is set to rise from the current level of 13% to a range of 15%–17% by year-end. We expect Germany’s fiscal package and increased E.U.-wide defense spending to support growth from 2026 onward.
Inflation continues to hover around 2%, with services inflation dropping to its lowest reading since early 2022. We expect headline and core inflation to end 2026 below 2%. The European Central Bank (ECB) held its deposit facility rate steady at 2% at its September 11 meeting. We forecast just one more rate cut in this cycle, which would leave the policy rate at 1.75% at year-end.
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.
Japan
Bank of Japan still on track to hike rates
“Persistent inflationary momentum and an upside surprise related to economic growth in the second quarter warrant a resumption of a policy rate-hiking cycle.” Grant Feng, Vanguard Senior Economist
Japan’s GDP growth surprised to the upside in the second quarter, despite U.S. tariff threats, which should allay any fears the Bank of Japan (BoJ) may have of a sharp economic slowdown. GDP grew by 0.5% in the quarter and by 1.7% year over year.
Private capital spending has been a notable growth driver, and consumption continues to recover despite elevated inflation. The impact of U.S. tariffs on the real economy has been limited so far. Net exports contributed 0.3 percentage points to headline growth, which may reflect export frontloading. Corporate sentiment is additionally showing signs of recovery, as agreement with the U.S. over tariffs has significantly reduced uncertainty.
Although the impact of earlier shocks such as elevated import prices and food costs is expected to fade, underlying inflationary pressures remain intact. These are driven by persistent structural labor shortages, which are exerting upward pressure on wages and reinforcing a virtuous cycle between wage growth and price increases.
We expect the BoJ to proceed with its 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 likely to moderate despite stock rally
“The economy could remain unbalanced in September. We expect industrial production and exports to remain robust while domestic demand may be lackluster. A campaign to stop companies from engaging in price wars can’t by itself reflate the economy without demand recovery.” Grant Feng, Vanguard Senior Economist
Growth momentum is likely to moderate in September despite a 13% stock market rally in the third quarter through September 10. We expect export resilience to continue in the near term, albeit moderately, as tariff uncertainty fades out.
With the economy steadily on track for the year and a lower comparative base for the third quarter, we see limited urgency for the government to take stimulative measures soon. We expect growth to slow in the second half, owing to the payback of consumption frontloading, a still-ailing property sector, and elevated global uncertainty.
Given these developments, we foresee prevailing deflationary pressures continuing for the rest of 2025. 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 | 4.8% | 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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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 analyzing 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 modeled 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.
24 September 2025
Vanguard