Vanguard economic update: Global markets face renewed uncertainty

Global markets are facing renewed uncertainty as conflict in the Middle East pushes energy prices higher and weighs on growth, making the outlook for interest rates more uncertain.

Below, we set out our current thinking on how these developments are affecting the world’s major economies.

United States

The US economy is currently in a relatively strong position, although growth is expected to slow slightly as higher energy prices and tariffs put pressure on inflation¹ and spending.

Key points

• Our current analysis suggests US economic growth of around 2.3% in 2026, down from our previous forecast of 2.5%.

• Consumers are still spending, although higher energy prices and tariffs may place pressure on household budgets.

• The overall jobs market is in good shape but is slowing down a bit. We have increased our year-end unemployment rate forecast to 4.6% from 4.2%.

• Inflation is coming down, but at a slower pace than previously anticipated. We have increased our year-end forecast for core inflation (excluding food and energy prices) to 2.8% from 2.6%.

• We still think there will be one interest‑rate cut in 2026, but risks have shifted towards rates staying unchanged for longer.

United Kingdom

The outlook for the UK has weakened as higher oil and gas prices linked to the conflict in the Middle East increase the risk of weak growth alongside elevated inflation.

Key points

• We now expect the Bank of England to keep interest rates on hold in 2026, rather than cutting rates as previously expected.

• Higher energy prices are expected to push inflation higher in the near term, slowing progress towards the Bank of England’s target.

• We expect headline and core inflation to be around 2.8% by the end of 2026 – up from our previous forecasts of 2.2% and 2.6% respectively – reflecting the UK’s sensitivity to energy price shocks.

• We have reduced our forecast for UK economic growth in 2026 from 1.0% to 0.6%.

Euro area

The outlook for the euro area has become more uncertain, as higher energy prices weigh on growth and inflation.

Key points

• Rising oil and gas prices are expected to increase inflation and reduce household purchasing power.

• We have reduced our forecast for euro area economic growth in 2026 from 1.2% to 0.8%, mainly because of higher energy prices.

• We have increased our forecasts for headline and core inflation to 2.5% and 2.1%, respectively.

• The euro area remains highly exposed to energy price shocks because it imports a large share of its energy.

• The European Central Bank is expected to keep interest rates on hold, but there’s a risk of rate hikes if energy prices rise further or the Middle East conflict is prolonged.

Japan

Japan’s economy continues its gradual shift away from the ultra‑low inflation and interest rates that defined the past few decades.

Key points

• Higher energy prices are the main factor that could slow economic growth, given Japan’s reliance on energy imports.

• We have reduced our forecast for economic growth in 2026 to 0.8% from 1.0%.

• Higher oil prices have partly offset the effects of government price‑relief measures, pushing headline inflation higher in the near term, although underlying inflation is expected to remain close to 2%.

• The Bank of Japan is getting ready to slowly move interest rates back towards normal levels and is expected to raise interest rates twice in 2026, taking the policy rate to around 1.25% by the end of the year.

China

China’s economy has started 2026 more strongly than expected, but growth is likely to slow as longer‑term challenges persist.

Key points

• Economic growth was stronger than expected early in the year, leading us to increase our 2026 growth to 4.7% from 4.5%.

• This momentum is expected to slow later in the second quarter as government support is scaled back, global demand weakens and uncertainty remains around the property market.

• Inflation remains low and higher global energy prices are having only a small impact on consumer prices.

• We expect only a small interest‑rate cut in 2026, bringing rates to 1.3% by the end of the year.

All facts and figures from Vanguard analysis, April 2026.
 

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

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