Our investment and economic outlook, July 2026
By Vanguard
Markets and economy
Our latest forecasts for investment returns and region-by-region economic outlook
Our economic outlook for Australia
Rate hike on hold, but a hawkish bias remains
“The combination of still-elevated inflation and weakening economic activity argues for patience rather than an immediate policy shift.”
-Grant Feng, Vanguard Senior Economist
Economic activity has softened since the May meeting of the Reserve Bank of Australia (RBA). Quarterly GDP growth slowed to 0.3% in the first quarter, down from 0.9% in the fourth quarter, with private investment doing much of the heavy lifting, including through data centre buildout. Household spending was subdued, suggesting greater consumer caution in response to higher oil prices and the cumulative impact of a higher cash rate. In short, cooling growth momentum should give the RBA some reassurance that the economy is moving towards better balance.
Australia’s supply side remains weak, however, largely reflecting persistent productivity challenges. GDP per hour worked fell by 0.6% quarter over quarter and was up only 0.3% year over year. Annual productivity growth of 0.3% is broadly in line with the average pace of the past decade but remains low by historical standards. The balance between aggregate demand and aggregate supply matters most for the inflation outlook. Even with sluggish productivity growth and limited supply-side momentum, the pullback in demand appears sufficient to guide the economy gradually into balance.
Inflation remains well above target and may rise further in coming months as higher energy prices pass through the broad economy. These persistent inflation pressures argue against any dovish shift in the RBA’s communication. In June, the RBA paused after a series of rate hikes that began in February. But the central bank remains hawkish in its broader policy stance and is likely to retain a tightening bias until clearer evidence emerges that demand is slowing sufficiently to bring inflation sustainably back to target.
The RBA has already tightened financial conditions materially in a short period, and the full effects of that tightening are yet to be felt. Early evidence suggests that higher rates are weighing on domestic demand. The oil-price shock and recent significant tax changes are also contributing to weaker real household purchasing power and softer spending momentum. We continue to expect the RBA to remain on hold for the foreseeable future.
Australia economic forecasts
| GDP Growth | Unemployment rate | Trimmed mean inflation | Monetary policy | |
| Year-end 2026 outlook | 1.8% | 4.3% | 3.6% | 4.35% |
| Year-end 2027 outlook | 1.7% | 4.6% | 3% | 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 for each year. Trimmed mean inflation is the year-on-year change in the Consumer Price Index, excluding items at the extremes, as of the fourth-quarter reading for each year. Monetary policy is the Reserve Bank of Australia’s year-end cash rate target.
Source: Vanguard.
Note: All investing is subject to risk, including the possible loss of the money you invest.
Vanguard Capital Markets Model® forecasts
Our 10-year annualised nominal return and volatility forecasts are based on the 30 June 2026 running of the Vanguard Capital Markets Model®.
Australia (Australian dollar)
| Asset class | Return range | Median volatility |
| Australian equities | 4.6%–6.9% | 20.4% |
| Global ex-Australia equities (unhedged) | 5.0%–7.0% | 16.0% |
| US equities (unhedged) | 5.0%–7.0% | 17.1% |
| Australian aggregate bonds | 4.6%–5.6% | 6.4% |
| Global ex-Australia aggregate bonds (hedged) | 5.1%–6.1% | 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 30 June 2026. 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
Policy on hold as inflation lingers and hiring slows
“In the near term, we expect conditions to keep the Fed holding rather than hiking.”
-Josh Hirt, Vanguard Senior U.S. Economist
Price pressures have reemerged as a factor in the outlook and will be a leading determinant of the policy trajectory. The recent significant and rapid easing of energy prices is a welcome factor that will mitigate growth headwinds and concerns of significant pass-through into prices this year.
June’s softer labour market data aligned with our expectations for a summer slowdown in hiring activity, which will bias the unemployment rate modestly upward over the next several months. However, we continue to view the labour market as fundamentally healthy. We expect the unemployment rate to stabilise in the mid-4% range and be consistent with full employment through 2027.
In this environment, we anticipate that the Federal Reserve will be constrained. Inflation remains uncomfortably above target, and while price pressures should ease and the labour market should soften modestly over the coming months, we view policy on hold through 2026 as the most likely outcome.
United States economic forecasts
| GDP Growth | Unemployment rate | Core inflation | Monetary policy | |
| Year-end 2026 outlook | 2.3% | 4.6% | 3% | 3.6% |
| Year-end 2027 outlook | 3% | 4.4% | 2.5% | 3.6% |
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 for each year. Core inflation is the year-on-year percentage change in the Personal Consumption Expenditures price index, excluding volatile food and energy prices, as of December for each year. 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
Growth reaccelerates as Canada shakes off early-year slowdown
“While uncertainty continues to weigh on investment decisions, stronger growth data and improving activity across several industries suggest the economy remains on firmer footing than headline GDP figures implied just a few months ago.”
-Adam Schickling, Vanguard Senior Economist
Recent data suggest the Canadian economy is regaining momentum after a brief slowdown around the turn of the year. While real GDP contracted in both the fourth quarter of 2025 and first quarter of 2026, it rose 0.5% month over month in April, challenging the narrative that Canada has entered a more sustained downturn. Household spending and underlying economic activity have remained more resilient than headline GDP figures suggest, supported by lower interest rates, solid income growth, and improving momentum across several manufacturing and trade-sensitive industries.
Higher oil prices are beginning to generate economic tailwinds as anticipated, supporting activity across Canada’s mining, quarrying, and energy sectors. At the same time, firms outside the broader natural resources sector increasingly report that rising energy costs and uncertainty surrounding the North American trade outlook are weighing on investment plans and business sentiment. Even so, the stronger-than-expected recent data have reduced the likelihood of a more pronounced slowdown, and we continue to expect growth to gradually improve through the remainder of 2026.
The labour market remains broadly uninspiring. Unemployment has fluctuated within a relatively wide range over the past year, reflecting a labour market that continues to struggle with insufficient hiring rather than excessive layoffs. Weakness continues to be concentrated among younger workers and recent labour force entrants, while job losses among prime-age and higher-tenure workers remain limited.
Inflation has evolved in a constructive direction despite renewed energy price pressures. While higher oil prices have lifted headline inflation, underlying measures continue to suggest that broader price pressures are gradually easing. This should allow the Bank of Canada (BoC) to look through much of the energy-driven inflation impulse, provided broader inflation expectations remain anchored. With the economy still operating with modest excess supply and core inflation trends moving in the right direction, we expect the BoC to remain on hold through year-end 2027.
Canada economic forecasts
| GDP Growth | Unemployment rate | Core inflation | Monetary policy | |
| Year-end 2026 outlook | 1.5% | 6.5% | 2.2% | 2.25% |
| Year-end 2027 outlook | 1.6% | 6.4% | 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 for each year. Core inflation is the year-on-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December for each year. 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
Growth to improve in 2027 despite near-term uncertainty
”A protracted review of the important United States-Mexico-Canada Agreement would weigh on Mexican companies’ confidence.”
-Thiago Ferreira, Vanguard Senior Economist
We continue to expect the Mexican economic outlook to improve in 2027 on the back of a strong U.S. economy led by AI-related investment and productivity. Negotiations around a peace deal in the Middle East have contributed to a marked decline in oil prices, reducing one important source of near-term uncertainty. Moreover, Mexico’s exposure to the conflict is mainly indirect, operating through higher global energy costs—particularly refined petroleum products and natural gas—rather than through direct supply links to the region.
Demand from the U.S. should help offset Mexico’s recent lackluster domestic performance in the longer term. Recent data point to weak investment, mixed activity indicators, and continued caution among firms as United States-Mexico-Canada Agreement (USMCA) negotiations move beyond their original July 1 renewal deadline. The continuation of current USMCA rules and tariff exemptions should prevent a more disruptive outcome, but a drawn-out negotiation process would likely weigh on confidence. A renewed agreement would be supportive in the longer term.
Headline inflation has improved a bit since last month, while core inflation has eased more slowly. We still expect disinflation to proceed gradually, as services and core inflation remain sticky and risks from trade disruptions, energy prices, and weather shocks remain tilted to the upside. Contained real wage growth, stable long-run expectations, and earlier peso strength should help the pace of inflation decline over time.
The Bank of Mexico (Banxico) has moved from easing to holding. After cutting the policy rate by 25 basis points to 6.5% in May and signaling the end of the easing cycle, the central bank kept rates unchanged in June in a unanimous decision. The pause reflects a somewhat better headline inflation backdrop, but also persistent core inflation, upside risks to the inflation outlook, and a still-uncertain external environment. We expect the policy rate to remain at 6.5% through 2027 as Banxico waits for clearer evidence that disinflation is durable.
Mexico economic forecasts
| GDP Growth | Unemployment rate | Core inflation | Monetary policy | |
| Year-end 2026 outlook | 1.3% | 3% | 4.1% | 6.5% |
| Year-end 2027 outlook | 2% | 3.5% | 3.8% | 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 for each year. Core inflation is the year-on-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December for each year. 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
Bank of England to hike twice amid Middle East inflation risks
“We continue to expect the Bank of England to raise rates twice this year as it seeks to prevent higher inflation expectations from becoming entrenched. We anticipate that policy will then reverse in 2027 as the energy shock fades.”
-Shaan Raithatha, Vanguard Senior Economist
The energy shock from the conflict in the Middle East remains the key driver of our U.K. outlook, although developments have evolved broadly in line with our base case. Following a strong first quarter, driven by private and public consumption, we leave our 2026 growth forecast unchanged at 1.1%. We expect activity to soften through the remainder of the year as higher energy costs and tighter financial conditions weigh on demand. Growth should remain broadly stable around 1.2% in 2027 as the drag from the energy shock fades and monetary policy gradually eases.
Inflation dynamics remain at the centre of our outlook. While headline inflation has eased in recent months, this masks a sharp pickup in energy and food inflation linked to the Middle East conflict, offset by softer services inflation. We remain concerned that inflation expectations have not fully reset following the inflation surge of recent years, and there is evidence that firms may pass higher input costs on to consumers rather than absorb them in profit margins. These factors underpin our expectations for two Bank of England rate hikes this year. That said, moderating wage growth and softer labour market conditions suggest the risks around our forecast skew towards a less hawkish policy response.
The outlook for fiscal policy has become more uncertain following the recent change in political leadership. Although our base case assumes little change to the current fiscal trajectory, fiscal policy is likely to be a key source of uncertainty for the U.K. economy over the coming year.
United Kingdom economic forecasts
| GDP Growth | Unemployment rate | Core inflation | Monetary policy | |
| Year-end 2026 outlook | 1.1% | 5.3% | 2.8% | 4.25% |
| Year-end 2027 outlook | 1.2% | 5.3% | 2.6% | 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 for each year. Core inflation is the year-on-year change in the Consumer Prices Index, excluding volatile food, energy, alcohol, and tobacco prices, based on the fourth-quarter average for each year. 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
ECB to lean against inflation risks with additional hike
“We expect the European Central Bank to follow up its June rate hike with one additional hike this year. However, with inflation expectations well anchored and second-round effects likely to remain limited, we believe the need for restrictive policy should gradually diminish as the impact of the energy shock fades.”
-Shaan Raithatha, Vanguard Senior Economist
Our euro area outlook has improved modestly as oil prices below their recent peaks have reduced downside risks to growth and upside risks to inflation. High-frequency indicators suggest the peak impact of the energy shock is now behind us. June’s flash Purchasing Managers’ Index (PMI) survey showed easing input cost pressures, improving supply chains, and signs that growth momentum is stabilising. We remain attentive to developments in the Middle East.
The shock has evolved broadly in line with our base-case scenario, leaving our 2026 GDP growth forecast unchanged at 0.8%. However, risks remain skewed to the downside given the weak first-quarter GDP print (–0.2% quarter over quarter) and contractionary PMI signals in the second quarter. A technical recession remains possible before growth recovers later in the year, supported by stronger domestic demand and German fiscal stimulus. We expect growth to rise to 1.3% in 2027 as energy and trade-related headwinds fade.
Inflation increased as expected following the energy shock. We expect headline inflation to remain around current levels and end 2026 at 3.3%, while core inflation moderates to 2.2%. Despite the rise in energy prices, we continue to view the risk of inflation expectations becoming de-anchored as low, reflecting a credible European Central Bank (ECB), moderating wage growth, and a less tight labour market than during the pandemic-era inflation surge of 2022. We expect headline inflation to fall back to 1.9% by year-end 2027, while core inflation will remain slightly elevated at around 2.3% due to persistent services pressures. Overall, we see limited evidence that the Middle East shock will generate material or persistent second-round inflation effects.
The ECB raised its deposit facility rate by one-quarter of a percentage point to 2.25% at its June meeting. We foresee it raising the rate to 2.5% before the end of the year.
Euro area economic forecasts
| GDP Growth | Unemployment rate | Core inflation | Monetary policy | |
| Year-end 2026 outlook | 0.8% | 6.4% | 2.2% | 2.5% |
| Year-end 2027 outlook | 1.3% | 6.3% | 2.3% | 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 for each year. Core inflation is the year-on-year change in the Harmonized Indexes of Consumer Prices, excluding volatile energy, food, alcohol, and tobacco prices, based on the fourth-quarter average for each year. 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 Japan
A policy rate hike, with another to come
“The Bank of Japan is not declaring victory on inflation, but it is becoming more confident that the economy can absorb further normalisation, provided the baseline outlook remains intact.”
-Grant Feng, Vanguard Senior Economist
Japan’s economy has continued to recover moderately, despite some weakness related to developments in the Middle East and the drag from higher crude oil prices. Corporate profits remain strong, labour market conditions and household income continue to improve, and the risk of a significant slowdown has declined. Government measures to cushion household energy costs and progress in securing alternative supplies of Middle East-dependent raw materials have mitigated downside risks. Beyond that, fiscal expansion through energy subsidies and the AI investment cycle should help offset energy-related growth headwinds.
Japan’s inflation fundamentals remain firm. According to a measure that the Bank of Japan (BoJ) watches closely, core inflation is running well above the BoJ’s 2% target, even as headline inflation has fallen below target due to government measures including food-price controls. (That measure of core inflation excludes fresh food and certain tax and policy-related factors.) The BoJ is attentive to signs of faster pass-through from higher crude oil prices into business-to-business transactions, the risk of broader consumer price increases, and continued increases in medium- to long-term inflation expectations.
The BoJ raised its policy rate to a 31-year high of 1% at its June meeting. We expect an additional quarter-point rate hike this year, though we anticipate that financial conditions will remain accommodative. The timing will hinge on incoming inflation, wage, and activity data. The extent of yen weakness and its implications for import prices and inflation expectations will also be important.
Japan economic forecasts
| GDP Growth | Unemployment rate | Core inflation | Monetary policy | |
| Year-end 2026 outlook | 0.8% | 2.4% | 2.1% | 1.25% |
| Year-end 2027 outlook | 1.2% | 2.4% | 2.2% | 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 for each year. Core inflation is the year-on-year change in the Consumer Price Index, excluding volatile fresh food prices, as of December for each year. 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.
Our economic outlook for China
A deepening K-shaped economy
“China’s activity data continue to reflect an increasingly K-shaped recovery, characterised by robust production due to the global AI investment cycle and green-transition-related demand, but subdued domestic demand.”
-Grant Feng, Vanguard Senior Economist
China’s activity data continue to highlight an increasingly uneven recovery. Strong external demand, supported by the global AI investment cycle and green-transition-related demand, is helping keep growth broadly on track towards the government’s target range of 4.5%–5%. However, domestic demand remains far from a meaningful turnaround and continues to lag the manufacturing and export sectors. Without a sustained recovery in household spending and private-sector confidence, the economy is likely to remain vulnerable to deflationary pressure, even if easing energy and shipping risks provide some relief to previous uncertainty.
The two-speed nature of the economy suggests that a recent reflation impulse lacks a strong domestic driver. Energy price pressures and persistent supply-chain strains have placed some upward pressure on producer and input prices, supporting China’s price recovery at the margin. However, pass-through to consumer inflation remains limited given subdued household demand and still-weak income expectations.
We do not expect a broad-based stimulus package in the near term. Policymakers are likely to focus on accelerating the implementation of existing fiscal measures and making fuller use of already-announced policy space. Still, if domestic softness proves more persistent, additional easing measures could be deployed later in the year, particularly to stabilise household demand and private-sector confidence.
China economic forecasts
| GDP Growth | Unemployment rate | Core inflation | Monetary policy | |
| Year-end 2026 outlook | 4.7% | 5.1% | 1.2% | 1.4% |
| Year-end 2027 outlook | 4.8% | 5% | 1.3% | 1.4% |
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 for each year. Core inflation is the year-on-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December for each 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.
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.