Our mid-year investment and economic outlook, June 2025

By Vanguard

Markets and economy

 

An improved outlook despite continued policy uncertainty.

 

Australia

Hovering uncertainty warrants a dovish central bank.

“Given still-elevated levels of global uncertainty, the Reserve Bank of Australia is likely to adopt a cautiously dovish stance toward further rate cuts.” Grant Feng, Vanguard Senior Economist.

Some easing of U.S.-China trade tensions has reduced external uncertainty and growth concerns. However, downside risks remain as there have been some disruptions in trade, and tariffs on China are still higher than they were prior to the April 2 announcement of broad U.S. tariffs on global trading partners. Moreover, weaknesses in private demand persist. Overall, we expect the Australian economy to grow around 2% over 2025, with policy easing partly offsetting the impact of uncertainty.

We anticipate that inflation will stay within the 2%–3% band targeted by the Reserve Bank of Australia (RBA), though it is likely to be in the upper half of that range. Supply-side weakness, especially lacklustre productivity growth, will continue to hold back progress on disinflation. Another hindrance is that the labour market remains tight, which will continue to exert upward pressure on unit labour costs.

Given still-elevated levels of global uncertainty, the RBA is likely to adopt a cautiously dovish stance toward further rate cuts, with the magnitude of easing expected to be mild throughout the rest of the year.

 

Vanguard Capital Markets Model® forecasts

Australia (Australian dollar)

Asset class	Return range	Median volatility
Australian equities	5.0% – 7.0%	20.2%
Global ex-Australia equities (unhedged)	4.8% – 6.8%	16.4%
US equities (unhedged)	4.2% – 6.2%	17.5%
Australian aggregate bonds	3.7% – 4.7%	6.3%
Global ex-Australia aggregate bonds (hedged)	4.1% – 5.1%	5.3%

^{IMPORTANT: The 10-year projections above regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Simulations as of May 31, 2025. For more information, please see the Notes section below.}

 

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

“Federal Reserve interest rate policy is likely on hold for now, and recent positive tariff developments should mitigate worst-case dual-mandate challenges for the Fed.” Josh Hirt, Vanguard Senior Economist.

The U.S. economy has remained resilient despite significant economic policy uncertainty through the first half of 2025. The labour market has cooled but remains stable, and inflation data has come in better than expected. The recent de-escalation of tariff policy with China was a pivotal development, and we have made meaningful, positive revisions to our outlook as a result. Overall, we see a less stagflationary impact to the economy and view the risk of further escalation in trade policy as having been materially reduced. We expect the focus to shift toward fiscal policy in the second half of the year.

Federal Reserve (the Fed) interest rate policy is likely on hold for now, and recent positive tariff developments should mitigate worst-case dual-mandate challenges for the Fed. If the labour market remains on the trajectory we expect, the Fed can afford to be patient. We anticipate that the Fed will be able to make two more rate cuts later this year in this environment. However, policy nuance will be crucial, and uncertainty remains high. Inflation expectations and the persistence of tariff-related inflation are likely to play a central role.

 

United States economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	1.5%	4.7%	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 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

Growth slows as trade and labour risks mount. 

“The Canadian economy remains under pressure amid trade tensions and a cooling labour market.” Adam Schickling, Vanguard Senior Economist.

Although GDP surprised with 2.2% growth in the first quarter of 2025 due to tariff frontrunning from U.S. firms, Canada’s outlook is increasingly uncertain. We expect the doubling of U.S. tariffs on steel and aluminum imports from Canada, along with expanded U.S. measures targeting the auto sector, to weigh heavily on business investment, consumer spending, and employment.

Canada’s unemployment rate rose to 7% in May, and we anticipate it will reach 7.5% by year-end. Consumer and business sentiment has weakened, with firms delaying investment amid trade uncertainty. Despite starting the year with a 1.7% GDP forecast for 2025, we now expect growth of just 1.25%, with risks tilted to the downside.

The Bank of Canada (BoC) held its policy rate at 2.75% at its June meeting, citing persistent uncertainty around U.S. trade policy and the mixed economic signals at home, including firmer-than-expected core inflation and a softening labour market. Given these growth headwinds, we anticipate that the BoC will resume easing later this year, cutting the overnight rate to 2.25% by year-end.

 

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

Growth on hold amid trade policy jitters. 

“Trade turbulence is slowing Mexico’s 2025 momentum. We expect GDP growth below 1%, as U.S. tariffs have hit earlier and harder than expected.” Adam Schickling, Vanguard Senior Economist.

Mexico’s economic momentum has shifted into a lower gear in 2025. We’ve trimmed our GDP growth forecast to below 1%, down from about 1.5% at the start of the year, as trade-related headwinds intensify. U.S. tariffs on Mexican imports arrived earlier than expected, with a damaging concentration on the automobile sector. While Mexico narrowly avoided a technical recession in the first quarter by growing just 0.2%, thanks to strength in the agricultural sector, signs are already surfacing of manufacturing weakness stemming from U.S. tariffs.

We expect U.S. tariffs on Mexican imports—particularly in the auto sector—to ease over time, with resilient U.S. consumer demand continuing to support Mexican exports. Over the longer term, Mexico could also benefit from the announced U.S. tariffs on Chinese goods, as Mexico has already gained U.S. market share since 2017 and shares a high degree of U.S. export similarity with China. Yet, this nearshoring optimism remains tempered by uncertainty around renegotiations of the United States-Mexico-Canada Agreement, domestic governance concerns, and global macroeconomic volatility.

On the monetary front, the Bank of Mexico (Banxico) cut its policy rate by 50 basis points to 8.5% in May, shifting focus from inflation to economic stability (a basis point is one-hundredth of a percentage point). While inflation remains above the central bank’s 3% target, Banxico’s messaging that “the inflationary episode has been left behind” suggests further easing is likely. We expect the policy rate to end the year near 8%.

 

Mexico economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	< 1%	3.2% – 3.6%	3.5%	8%

^{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

Softening labour market paves the way for more rate cuts.

“A softening labour market and further fiscal policy tightening are likely to persuade the Bank of England that inflationary pressures will soon subside.” Shaan Raithatha, Vanguard Senior Economist.

We continue to expect GDP growth of around 1% in 2025 and 2026. Relative to our expectations at the start of the year, activity was stronger than anticipated in the first quarter. However, this was likely driven by exporters frontloading orders. We expect slower growth from the second quarter onward, both as a subsequent effect of the initial frontloading and because of lower demand as uncertainty weighs on household and corporate spending.

Employment growth is softening materially, due partly to the government raising taxes for employers as of April 6, 2025. Forward-looking surveys on both economic activity and the labour market point to deterioration ahead. With the labour market and wage inflation showing signs of cooling, services inflation is likely to soon follow suit.

Services disinflation, coupled with an expectation that fiscal policy will be tightened further in the autumn budget, will give the Bank of England (BoE) conviction that inflationary pressures will subside despite current stickiness. We continue to expect the BoE to maintain a quarterly cadence of monetary policy easing that would put the bank rate at 3.75% at the end of 2025.

 

United Kingdom economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	1.1%	4.8%	2.9%	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

A rising risk of an inflation undershoot.

“The chances of undershooting the European Central Bank’s 2% inflation target are rising. Soft global growth, a stronger euro, and lower energy prices all point to further disinflation ahead.” Shaan Raithatha, Vanguard Senior Economist.

We expect growth in the euro area to track around 1% in both 2025 and 2026, slightly below trend. Softening global activity, driven partly by elevated policy uncertainty and higher tariffs, is expected to weigh on final demand. The tailwinds from Germany’s fiscal package and greater defense spending throughout the European Union are more of a 2026 story. Risks are skewed toward a slower implementation or smaller package than our current baseline.

The chances of undershooting the 2% inflation target set by the European Central Bank (ECB) are rising. Both wage growth and services inflation are now falling meaningfully. And a weakening global growth outlook, stronger euro, and lower energy prices all point to further disinflation ahead.

Following the messaging at the ECB’s June press conference, in which the president of the ECB repeatedly stated that the central bank was in a “good position” at the current policy rate level (2%), we think a pause at the July meeting is now likely. We forecast just one more rate cut this cycle, likely in September, which would leave the policy rate at 1.75%, a touch below our estimate of neutral (2%–2.5%). The balance of risks is skewed toward further easing.

 

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.} 

 

China

Deflationary pressure persists even as tariff shocks subside. 

“We expect growth to moderate in the second half of the year, given diminished exports after a first-half frontloading, a continued downturn in property values, and elevated trade policy uncertainty.” Grant Feng, Vanguard Senior Economist.

China’s economy has maintained steady growth so far in 2025, with key activity data for the first five months remaining robust. The consumer goods trade-in program and a frontloading of existing policy measures have supported economic momentum. Despite higher U.S. tariffs, exports have remained resilient, supported by frontloading and shipment rerouting. The recent 90-day trade truce with the U.S. may prompt another wave of frontloaded exports, and we expect trade volatility to ease in the near term, providing temporary relief to the export sector. However, tariff-related uncertainty remains elevated and continues to pose downside risks to growth.

We recently raised our 2025 GDP growth forecast for China to 4.6% from 4.2%, primarily due to the de-escalation of trade tensions with the U.S. As tariff shocks subside, policymakers are likely to adopt a more measured and reactive approach, with a modest policy rate cut of 10 basis points to 1.3% expected by year-end. (A basis point is one-hundredth of a percentage point.) Further stimulus is likely to be deferred, with a near-term focus on policy implementation. In addition, we expect growth to moderate in the second half of this year, given export and consumption frontloading, a persistent downturn in property values, and elevated trade policy uncertainty.

The policy response remains modest, targeted, and reactive, prioritizing investment and production over consumption. As a result, subdued domestic demand and a challenging external environment will likely sustain deflationary pressures for the rest of 2025. Our outlook for core inflation remained unchanged, and 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	4.6%	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, compared with the previous year. Monetary policy is the People’s Bank of China’s seven-day reverse repo rate at year-end.} 

^{Source: Vanguard.} 

 

Japan

Global trade uncertainty warrants cautious stance by BoJ.

“The Bank of Japan will likely take a more cautious stance, given the elevated level of trade uncertainty and capital market volatility concerns.” Grant Feng, Vanguard Senior Economist.

Domestic demand was robust in the first quarter, with private consumption increasing for the fourth consecutive quarter, but real GDP growth turned negative due to a deterioration in net exports.

Looking ahead, we expect private consumption to remain resilient. Wages continue to rise steadily, and as inflation—primarily driven by food prices—gradually stabilizes, consumer confidence and real incomes are poised to improve. While there is a risk that companies may delay investment decisions amid tariff-related uncertainties in the near term, the structural labour shortage will continue to prompt more investments to enhance productivity.

The Bank of Japan (BoJ) left its policy rate target unchanged at 0.5% on June 17. It noted that Japan’s economic growth is likely to moderate amid global uncertainty related to trade and other policies. But it said it expects accommodative financial conditions to lend support. We have lowered our expectations for the year-end policy rate from 1% to 0.75%, suggesting the BoJ will raise the rate target once more this year. Inflation remains above the BoJ’s target, though risks to both growth and inflation skew to the downside owing to tariff developments.

 

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.} 

 

^{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.}

^{Indexes for VCMM simulations}

^{The long-term returns of our hypothetical portfolios are based on data for the appropriate market indexes as of April 30, 2025. We chose these benchmarks to provide the most complete history possible, and we apportioned the global allocations to align with Vanguard’s guidance in constructing diversified portfolios.}

^{Asset classes and their representative forecast indexes are as follows:}

^{Australia (Australian dollar)}

^Equities

• ^{Australian equities: MSCI Australia Total Return Index}
• ^{Global ex-Australia equities (unhedged): MSCI All Country World ex Australia Total Return Index}
• ^{US equities (unhedged): MSCI US Broad Market Index} 
• ^{Fixed income}
• ^{Australian aggregate bonds: Bloomberg Australian Aggregate Index}
• ^{Global ex-Australia aggregate bonds (hedged): Bloomberg Global Aggregate ex AUD Index AUD Hedged} 

^{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.}

^{© 2025 Vanguard Investments Australia Ltd. All rights reserved.}