*Updated* Our investment and economic outlook, March 2026

By Vanguard

Markets and economy

 

Our latest forecasts for investment returns and region-by-region economic outlook

 

Our economic outlook for Australia

Energy shock reinforces “higher‑for‑longer” outlook

“An economy near its capacity and sticky inflation are likely to keep the Reserve Bank of Australia focused on price stability and committed to a ‘higher‑for‑longer’ stance.”

—Grant Feng, Vanguard Senior Economist 

Higher oil prices stemming from the Middle East conflict are a negative supply shock across most regions, lifting headline inflation while constraining global growth. For Australia, the impact is more nuanced because its status as a large net energy exporter should mean that higher commodity prices boost its national income through trade. Still, Australia’s economic challenge remains predominantly supply‑driven, with limited petroleum reserves and tighter financial conditions.

While Q4 2025 GDP was an upside surprise based on modest supply improvements, productivity growth remains weak, causing capacity constraints to bind even at moderate rates of expansion. On balance, we have downgraded our 2026 GDP growth forecast by 20 basis points (bps) to 2%. (A basis point is one-hundredth of 1 percent.)

Headline inflation reached 3.8% year-on-year in January. On March 17, the Reserve Bank of Australia (RBA) raised its cash rate target by 25 bps to 4.1%, based on its judgment of a material risk that inflation will remain above its target range of 2%–3%.

We expect the RBA to place greater weight on its price‑stability mandate, further pushing policy into restrictive territory to curb aggregate demand and keep inflation expectations anchored. We also anticipate that the RBA will maintain a “higher‑for‑longer” policy stance. We have revised our assessment of the year-end policy rate to 4.35%, suggesting one further RBA rate hike this year.

Australia economic forecasts

	GDP Growth	Unemployment rate	Trimmed mean inflation	Monetary policy
Year-end 2026 outlook	2.0%	4.3%	3.2%	4.35%

^{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 2026. Trimmed mean inflation is the year-over-year change in the Consumer Price Index, excluding items at the extremes, as of the fourth-quarter 2026 reading. Monetary policy is the Reserve Bank of Australia’s year-end cash rate target.} 

^{Source: Vanguard.} 

Vanguard Capital Markets Model® forecasts

Our 10-year annualised nominal return and volatility forecasts are based on the 31 December 2025 running of the Vanguard Capital Markets Model®.

 

Australia (Australian dollar)

Asset class	Return range	Median volatility
Australian equities	4.9%–6.9%	20.3%
Global ex-Australia equities (unhedged)	4.9%–6.9%	16.1%
US equities (unhedged)	4.6%–6.6%	17.3%
Australian aggregate bonds	4.4%–5.4%	6.4%
Global ex-Australia aggregate bonds (hedged)	4.2%–5.2%	5.4%

^{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 31 December, 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.}

Our economic outlook for the United States

Constructive momentum amid inflation and uncertainty

“The U.S. labour market remains fundamentally resilient, albeit transitioning towards a slower growth phase.”

—Josh Hirt, Vanguard Senior U.S. Economist

The U.S. economic outlook remains constructive, supported by continued strength in business investment and generally resilient household demand. That said, recent developments have led us to modestly recalibrate our expectations. We have downgraded our 2026 real GDP growth forecast by 0.2 percentage points to 2.3%, reflecting firmer energy prices and emerging tariff pass‑through effects. While these headwinds are likely to weigh modestly on consumption, they are not expected to fundamentally alter the expansionary backdrop created by the One Big Beautiful Bill Act, particularly as robust AI‑related capital expenditures continue to provide an important offset and remain a central pillar of growth momentum in 2026.

We continue to view the labour market as fundamentally resilient, albeit transitioning towards a slower growth phase, and we have thus revised our year‑end 2026 unemployment rate forecast to 4.6% from 4.2%. Heavily concentrated job creation in health care continues to reflect structural demand in health care services, a trend we expect to persist over the coming years. Even with the upward revision, our outlook remains consistent with a healthy labour market, given the unemployment rate stood at 4.4% in February 2026. We continue to see AI‑related displacement as a limited risk in 2026, although those risks are likely to build in 2027–28 as adoption broadens.

Inflation has resumed its uneven deceleration, though at a slower pace than previously anticipated. We have revised our year‑end 2026 core inflation forecast up by 0.2 percentage points, driven by renewed firmness in non‑housing services, incremental tariff pass‑through, and higher energy prices amid escalating geopolitical tensions involving Iran.

We continue to monitor energy markets and geopolitical developments in the Middle East for their potential to push headline inflation higher or tighten financial conditions. Against this backdrop, we assess monetary policy to be near neutral. While we retain our expectation for a single policy rate cut in 2026—consistent with the Federal Reserve’s willingness to look through energy‑driven price shocks—the principal risk has shifted towards a longer period of policy inertia, particularly if labour market cooling remains gradual and inflation progress proves uneven.

United States economic forecasts

	GDP Growth	Unemployment rate	Core inflation	Monetary policy
Year-end 2026 outlook	2.3%	4.6%	2.8%	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 2026. 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 2026. Monetary policy is the rounded midpoint 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 Canada

Resilience amid geopolitical crosscurrents

“Geopolitical uncertainty remains a headwind for Canada in 2026, yet domestic demand and policy stability are helping contain the economic fallout.”

—Adam Schickling, Vanguard Senior Economist

As the first quarter of 2026 unfolds, Canada finds itself navigating a familiar but evolving set of geopolitical and trade-related headwinds that continue to complicate its domestic economic outlook. While most Canadian exports to the U.S. remain tariff‑exempt under United States-Mexico-Canada Agreement rules, the persistence of trade policy uncertainty has reinforced a cautious stance among firms, suppressing business confidence and nonresidential investment.

Despite these disruptions, the Canadian consumer appears poised to maintain the strength that anchored much of the economy’s resilience in 2025. Recent labour force data showed the unemployment rate edging lower to 6.5%, driven less by a resurgence in hiring than by lower labour force participation, an early sign of the demographic slowdown expected to shape the next few years. Rising full-time employment, real wage growth, limited job losses, and positive wealth effects from the financial markets should keep a solid floor under consumption, helping offset soft business investment. Elevated oil prices linked to the Iran‑related conflict should also provide a mild boost for Canada as a net energy exporter.

Fiscal policy will add a modest tailwind through targeted sectoral initiatives and ongoing infrastructure programmes. Considering these factors along with expectations for above‑trend global growth, we forecast Canadian real GDP to expand by 1.8% in 2026. Core inflation eased through late 2025, giving the Bank of Canada (BoC) room to cut rates cumulatively by a full percentage point last year. However, with inflation still slightly above target and underlying wage growth proving sticky, policy now appears firmly set at neutral. The BoC held its policy rate at 2.25% in January 2026, and we see little rationale for additional rate moves in either direction this year, barring an unforeseen shock.

Canada economic forecasts

	GDP Growth	Unemployment rate	Core inflation	Monetary policy
Year-end 2026 outlook	1.8%	6.2%	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 2026. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2026. Monetary policy is the Bank of Canada’s year-end target for the overnight rate.} 

^{Source: Vanguard.}

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

Our economic outlook for Mexico

Structural strengths to anchor a cyclical upswing

“We expect Mexico’s economy to experience a cyclical upswing in 2026, anchored by its structural strengths in North America.”

—Thiago Ferreira, Vanguard Senior Economist

Mexico enters 2026 recovering from cyclical challenges and facing longer-term economic opportunities. Recent data for year-end 2025, such as GDP growth and retail sales, show that an upswing is taking hold. Indeed, we expect GDP to rebound in 2026, supported by strong demand from the U.S. and a resilient labour market. Recent trade data also support our view that nearshoring trends continue to strengthen Mexico’s role as a North American manufacturing hub, supported by competitive labour costs, geographic proximity, and deep integration with U.S. industry.

We expect that the midyear review of the United States-Mexico-Canada Agreement (USMCA) on trade will boost business and consumer sentiment, although it is likely to generate bouts of uncertainty. The U.S. implemented tariff policy changes following a recent U.S. Supreme Court ruling, but goods covered by the USMCA remain exempt.

While inflationary pressures remain uneven, we expect a gradual decline in inflation. Core inflation has increased in recent months, reaching 4.5% in January, reflecting lingering cost pressures that include new taxes and tariffs in select categories and rebounding domestic consumption. This continued strength has led us to nudge up our year-end 2026 core inflation forecast to 3.9%, but contained real wage growth, stable long-run inflation expectations, and the past appreciation of the peso should help push inflation lower than it stands now. We are monitoring the oil market and events in the Middle East for their potential to push inflation higher.

On the monetary policy front, the Bank of Mexico (Banxico) is in an easing cycle that should bring the policy rate to 6.5% by year‑end, supporting credit‑sensitive sectors and household consumption. With disinflation proceeding only gradually, the approach to cuts remains cautious rather than aggressive. Banxico maintained the policy overnight interbank rate at 7% in early February, signaling a data‑dependent approach to normalisation.

With the U.S.-Mexico policy rate gap expected to remain relatively stable and the peso’s growing role in global carry-trade dynamics, we anticipate the peso ending 2026 with an exchange rate between 17.5 and 18.5 against the U.S. dollar, which would be weaker than current levels but stronger than its levels for much of 2025.

Mexico economic forecasts

	GDP Growth	Unemployment rate	Core inflation	Monetary policy
Year-end 2026 outlook	1.5%	3.2%	3.9%	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 2026. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2026. 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

Stagflation a key risk amid Middle East conflict

“Higher energy prices linked to the Middle East conflict have tilted risks towards a stagflationary outcome, leading us to raise inflation forecasts, lower growth expectations, and expect the Bank of England to remain on hold for longer.”

—Shaan Raithatha, Vanguard Senior Economist

The impact of heightened tensions in the Middle East on the U.K. outlook will depend on the magnitude and persistence of the energy shock and the policy response. Elevated uncertainty and financial market volatility leave the outlook highly sensitive to developments in energy prices and inflation expectations.

We have revised our policy outlook and now expect the Bank of England (BoE) to maintain its bank rate at 3.75% rather than make two cuts in 2026. While the BoE had previously adopted a more dovish tone, the initial impact of the energy shock has complicated the policy trade‑off. Against this backdrop, policymakers are likely to take a wait-and-see approach until there is greater clarity on the evolution of energy prices and inflation expectations.

On growth, we have downgraded our 2026 GDP forecast by 0.4 percentage points to 0.6%, based on a scenario in which oil prices average $90–$100 per barrel and gas prices average €60/MWh for one to two quarters. Roughly half of the downgrade reflects the direct drag from higher energy prices, with the remainder driven by tighter financial conditions. Early signs of spillovers are already visible in the data: The flash composite Purchasing Managers’ Index slipped to 51.0 in March from 53.7 in February, while forward-looking components such as new orders and future output have softened.

Higher oil and gas prices are expected to elevate inflation in the near term. We have raised our 2026 headline Consumer Prices Index (CPI) forecast by 0.6 percentage points to 2.8% and our core CPI forecast by 0.2 percentage points to 2.8%. The U.K. is more exposed to energy shocks than the US. given its status as a net energy importer, while regulated prices add to inflation persistence—as highlighted during the 2022–23 energy crisis.

United Kingdom economic forecasts

	GDP Growth	Unemployment rate	Core inflation	Monetary policy
Year-end 2026 outlook	0.6%	5.1%	2.8%	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 2026. Core inflation is the year-over-year change in the Consumer Prices Index, excluding volatile food, energy, alcohol, and tobacco prices, as of December 2026. 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

Middle East conflict skews outlook towards rate hikes

“Sharply higher energy prices stemming from tensions in the Middle East risk a significant stagflationary shock to the European economy. If the increase persists, or accelerates, the European Central Bank may be forced to reassess its policy stance.”

—Shaan Raithatha, Vanguard Senior Economist

The escalation of tensions in the Middle East has led to a renewed surge in oil and natural gas prices, introducing a material downside risk to the euro area outlook. The macroeconomic consequences will hinge on how large and persistent the energy shock proves to be, but uncertainty has risen sharply and confidence indicators have begun to soften.

Under a scenario in which oil prices average $90–$100 per barrel and gas prices average €60/MWh for one to two quarters, we have reduced our 2026 GDP growth forecast by 0.4 percentage points to 0.8%. Most of the downgrade reflects the direct hit to real incomes and production costs from higher energy prices, with a smaller contribution from tighter financial conditions. Recent survey data are consistent with this narrative, with the flash composite Purchasing Managers’ Index falling close to stagnation and forward‑looking components weakening.

Higher energy prices also have clear implications for the inflation outlook. We have revised our 2026 headline inflation forecast upward to 2.5%, while lifting core inflation more modestly to 2.1%. The euro area remains particularly sensitive to energy shocks given its reliance on energy imports and the relatively large weight of energy in the inflation basket. Even so, inflation expectations remain broadly anchored, reflecting a more favourable starting point than during previous shocks.

The policy stance of the European Central Bank (ECB) is on a knife edge and firmly data dependent. We continue to expect policy rates to remain on hold, with the Governing Council attempting to look through an energy‑driven inflation shock. The case for holding rates is supported by the fact that the ECB comes into this shock in a relatively good place: Headline inflation has been close to target for the past two years, and inflation expectations remain well anchored. That said, risks are skewed towards hikes, particularly if energy prices rise further and/or the Middle East conflict proves prolonged.

Euro area economic forecasts

	GDP Growth	Unemployment rate	Core inflation	Monetary policy
Year-end 2026 outlook	0.8%	6.4%	2.1%	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 2026. Core inflation is the year-over-year change in the Harmonised Indexes of Consumer Prices, excluding volatile energy, food, alcohol, and tobacco prices, as of December 2026. 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

A robust start to 2026 amid high uncertainty

”China’s economy remains two-speed, with tech‑led strength alongside persistent housing weakness. Even with a firmer start to 2026, subdued domestic demand continues to weigh on the outlook.”

—Grant Feng, Vanguard Senior Economist

The spillover from Middle East tensions should be more manageable for China compared with many other countries. Its diversified energy mix—including coal‑heavy supplies, rapid renewable-energy expansion, and rising electrification supported by domestic generation—helps cushion the impact of higher global energy prices. Inflation is already minimal and the government can limit pass-through to consumers to mitigate potential inflationary effects.

The Chinese economy entered 2026 on firmer footing than expected. Industrial production rebounded after stronger signals of policy support from the National People’s Congress, while investment recovered meaningfully on frontloaded fiscal expansion.

The strong start to the year reduces the urgency for further near‑term stimulus. The emphasis is likely to shift towards policy implementation rather than rapid escalation. Additional support would likely be deployed later in the year only if growth weakens materially, particularly amid an adverse external shock. Fiscal easing has come through frontloaded government spending, while monetary support has focused on targeted rate cuts, expanded liquidity quotas for priority sectors, and lower down‑payment requirements for commercial mortgages.

The People’s Bank of China remains on hold for now, signaling that any further easing will be selective rather than broad‑based. By year-end, we expect only a modest policy rate cut of 20 basis points—primarily to facilitate fiscal expansion—which would bring the policy rate to 1.2%. (A basis point is one-hundredth of a percentage point.)

Despite China’s relative strengths, we remain cautious about the economy’s outlook. Middle East tensions still pose external risks, the government’s anti‑involution campaign is likely to weigh on near‑term investment in sectors with overcapacity, and domestic demand remains subdued amid a prolonged property downturn—despite the tech sector’s continued outperformance.

China economic forecasts

	GDP Growth	Unemployment rate	Core inflation	Monetary policy
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 2026. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2026. 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.}

Our economic outlook for Japan

BoJ laying the groundwork for gradual rate increases

“The Bank of Japan appears to be transitioning from a highly cautious posture to one that favours steady and incremental policy normalisation.”

—Grant Feng, Vanguard Senior Economist

The Middle East conflict poses the greatest growth headwind for Japan, given its heavy energy dependence. Its sizeable strategic oil reserves—equivalent to around 254 days of consumption—should cushion domestic supply, but a prolonged blockade could prove detrimental. We have downgraded our 2026 GDP growth forecast by 0.2 percentage points to 0.8%. While the potential economic impact is not negligible, it still appears to be within a manageable range, reflecting improved energy efficiency and structural resilience. However, risks could rise materially because of weaker global demand or sustained supply disruptions.

Japan’s inflation had been easing because of government price‑relief measures, but they have been partially offset by higher oil prices and a weakened yen, pushing headline CPI higher in the near term.

Meanwhile, Shunto wage negotiations point to a third straight year of roughly 5% hikes, highlighting acute labour shortages and a strengthening wage-price cycle. This has reinforced confidence at the Bank of Japan (BoJ) that underlying inflation will remain close to 2%, with inflation expectations increasingly anchored on the upside.

Amid sustained wage growth, the BoJ is laying the groundwork for a gradual resumption of policy tightening this year. Mindful of yen volatility and energy‑price risks, we expect the BoJ to raise rates twice in 2026, taking the policy rate to 1.25% by year‑end, provided progress towards price stability remains intact.

Japan economic forecasts

	GDP Growth	Unemployment rate	Core inflation	Monetary policy
Year-end 2026 outlook	0.8%	2.4%	2%	1.25%

^{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 2026. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile fresh food prices, as of December 2026. Monetary policy is the Bank of Japan’s year-end target for the overnight rate.} 

^{Source: Vanguard.} 

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

^{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.}