Vanguard economic update: Global themes to watch in 2026

The global economy is set for a mixed year in 2026. Some regions are showing signs of steady growth, while others continue to feel the effects of weak demand, shifting demographics and policy uncertainty.

Here’s our take on what’s happening in the world’s major economies:

United States

We expect the Federal Reserve (the US central bank) to take a more cautious approach to cutting interest rates in 2026. This is because rates are now close to what we view as a ‘neutral’ level – meaning a rate that neither stimulates nor restricts economic activity, and because we expect firm growth ahead.

Key points

• Strong business investment remains a major driver of growth, supported by early-stage artificial intelligence (AI) spending.

• Core inflation¹ is likely to rise slightly above 3% early in the year before easing.

• Job creation has cooled, but this is mainly due to demographics and immigration rather than weakening demand.

• We expect the unemployment rate to end 2026 at 4.2%.

United Kingdom

We expect real (after-inflation) income growth to slow further as the labour market remains weak in 2026. Government spending will provide modest support to the economy. However, unlike in the US, we don’t expect a strong AI-related investment boost.

Key points

• We expect the economy to grow by 1% in 2026.

• Inflation should fall sharply as energy measures take effect and unfavourable year-on-year comparisons fade.

• We expect the Bank of England to cut rates twice in 2026, with the next cut likely in March.

• We anticipate interest rates will end the year at 3.25%.

Euro area

Growth in the euro area will be shaped by two opposing forces. Higher US tariffs are likely to weigh on activity, whereas Germany’s infrastructure package and stronger defence spending across the EU will provide support.

Key points

• We expect euro area growth of 1.2% in 2026, but it could be higher due to an upturn in German industry.

• We expect the European Central Bank to hold interest rates at 2%, although cuts are possible because of slowing wage growth and the prospect of cheaper Chinese exports being rerouted to Europe.

Japan

Japan’s economy continues to normalise, supported by strong wage growth, tax cuts and the potential for further government spending.

Key points

• Consumer spending is expected to remain firm.

• We expect underlying inflation to stay steady, though it may fluctuate in the short term.

• The Bank of Japan is expected to increase rates twice this year, taking rates to 1.25% by the end of 2026.

China

China ended 2025 on a softer footing, with year-on-year economic growth slowing to 4.5% in the fourth quarter² – the slowest pace since late 2022. Demographics are adding pressure, with the population falling for a fourth consecutive year and births at their lowest level since records began.

Key points

• We expect economic growth of 4.5% in 2026, with strong exports offset by weak domestic demand.

• Policymakers have introduced targeted support, including selective rate cuts.

• Further measures are likely needed to prevent slower growth, but broad property sector rescue plans appear unlikely for now.

• We expect only a modest rate cut of 0.2 percentage points to 1.2% by year-end.

All facts and figures from Vanguard analysis, February 2026.

¹ Inflation is the rise in prices for goods and services over time, meaning your money buys less than it used to. Core inflation excludes food and energy costs.

² Source: National Bureau of Statistics of China, January 2026.

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