We expect economic growth in the US to remain solid over the coming months, supported by a productive workforce and lower interest rates. The new administration doesn’t immediately change our economic outlook.

The outlook for the euro area economy, however, is weak, meaning the European Central Bank (ECB) is more likely to cut rates at a faster pace. But if the price of natural gas goes up or the euro gets weaker, this could change. In the UK, the risk is also that the economy grows more slowly than we expect.

Despite a strong end to 2024 for China, its economy could face new challenges this year, such as new tariffs from the US on Chinese goods.

United States

Economic growth: We expect economic growth to remain above 2%, which includes the effect of potential changes to trade and immigration policies, such as additional 10% tariffs on imports from China. However, the proposed 25% tariffs on Canada and Mexico imports are risks to US growth and inflation. 

Interest rates: In December, the Federal Reserve (Fed), the US central bank, cut rates by 0.25 percentage points to a range of 4.25%–4.5% and signalled two more cuts in 2025. That would bring rates to 3.75%–4% by the end of the year, which is in line with our forecast. 

Inflation: We expect core inflation, which excludes volatile food and energy prices, to fall to 2.5% by the end of 2025. 

Employment: The latest jobs data showed unemployment fell in December to 4.1%, though we believe it is likely to rise marginally to around the mid-4% over the coming year.

Euro area

Economic growth: We expect the euro area to slow down in 2025, due to the prospect of new tariffs from the US on goods, which are likely to weigh on consumer and business sentiment. This is heightened by continued weakness in the manufacturing sector.

Interest rates: The ECB cut its interest rate in December to 3% and we expect the central bank to continue cutting rates in 2025 by 0.25 percentage points at each of its meetings up to July. Thereafter we expect the central bank will hold interest rates at 1.75%. 

Inflation: Prices increased for a third consecutive month in December, rising 2.4% over the previous 12 months. This was the fastest increase since July 2024, though we expect inflation to fall by the end of the year due to the slowing economy.

Employment: The unemployment rate could rise towards 7% by the end of 2025 given the economic slowdown and broader growth challenges.

United Kingdom

Economic growth: We expect the UK’s economy to grow by about 1.4% in 2025, though growth could be lower, especially if it becomes harder for businesses to borrow money and if the job market continues to show signs of weakness.

Interest rates: We expect the Bank of England to lower interest rates every quarter in 2025, ending the year at 3.75%, which is lower than the market expects.

Inflation: We expect core inflation to drop to 2.4% by the end of 2025. However, there are risks that inflation could rise again, coming from potential trade tensions around the world and companies passing on higher costs to consumers. A weaker pound could also make things more expensive and challenge the Bank’s plan to keep interest rates low.

Employment: We see some early signs that the jobs market might be getting a bit weaker. Higher wages and other costs are making it more expensive for companies to hire new workers. The unemployment rate rose to 4.4% between September and November 2024. We expect it to end 2025 at around this level.

Japan

Economic growth: We expect Japan’s economy to grow above trend in 2025, around 1.2%. This is largely due to wages outpacing the rising cost of goods and services, meaning consumers have more money to spend. However, there are some risks from the global economy, like potential US tariffs. But overall, the impact on Japan is likely to be limited.

Interest rates: We continue to expect the Bank of Japan (BoJ) to raise interest rates to 1% by the end of 2025. The exact timing and size of these increases will depend on several factors, including wage negotiations, potential US tariffs, market turbulence and domestic politics.

Inflation: In November, inflation increased to 2.9%. With steady wage growth due to strong company profits and a shortage of workers, we expect domestic spending to pick up, keeping core inflation around 2% in 2025.

Employment: Japan’s unemployment rate held steady at 2.5% in November. The country is facing a shortage of workers, which is likely to keep pushing wages up.

China

Economic growth: China met its economic growth target for 2024 but could face challenges this year because of uncertainty around how much support the government will provide and the potential impact of new US tariffs. We expect China’s economic growth will slow down to around 4.5% in 2025.

Interest rates: We anticipate that the People’s Bank of China (PBOC) will cut interest rates to 1.2% in 2025. They may also make it easier for banks to borrow to help boost the economy. 

Inflation: Despite the potential for a weaker currency due to higher tariffs, we expect core inflation to remain low at around 1.5% in 2025.

Employment: The unemployment rate is expected to remain unchanged in 2025 after December’s slight increase to 5.1% from 5% in November.

Emerging markets

We expect more interest rate cuts in 2025, but rates will still be relatively high. A strong US dollar could lead to higher inflation in emerging markets, which means rates won’t drop as much as they might otherwise.

Trade issues will be a major focus throughout 2025. Developments in trade policies and agreements will be important to watch, as they can have a big impact on the global economy.

 

The points above represent the house view of the Vanguard Investment Strategy Group’s (ISG’s) global economics and markets team as at 24 January 2025.

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