Vanguard economic update: Challenges and opportunities for global economy

As we enter the final quarter of the year, the global economy continues to navigate a mix of challenges and opportunities. In the US, the jobs market remains sluggish. The euro area economy is growing at a healthy rate, but growth in 2026 could be threatened by the impact of US tariffs, despite a boost from increased government spending. Growth has been good for the UK, but we expect a more muted outlook for 2026 following the Autumn Budget.

Here’s a quick look at what’s going on in key regions.

United States

The outlook for the US looks promising, largely due to a surge in business investment, particularly in artificial intelligence (AI). This technology-driven spending has been a crucial factor in supporting economic growth this year, which may have been much weaker without it. If this trend continues alongside favourable financial conditions, limited tariff impacts and government support, the US economy could see more growth. 

However, there are some concerns, particularly in the jobs market where job creation has been sluggish. The rapidly changing economic landscape, influenced by factors such as immigration and AI-driven productivity gains, adds to the uncertainty about the sustainability of recent growth. 

We expect interest rates to end the year at 4%.

Euro area

The euro area faces both challenges and opportunities. Higher US tariffs are expected to weigh on growth, whereas increased government spending, notably Germany’s infrastructure package and higher EU-wide defence spending, are expected to provide a boost. 

Inflation¹ remains under control, hovering around 2%. We no longer expect the European Central Bank to lower interest rates further and instead expect rates to stay at 2% until the end of 2026. However, if inflation falls below expectations, additional cuts might be considered.

United Kingdom

The UK’s economy was healthy during the first half of the year, driven by consumer and government spending. Solid business investment also played a part, which is an encouraging signal for the second half of the year. We expect 1.3% growth for 2025.

However, we think growth in 2026 could be more muted, slowing down to just 0.8%. This is because the government will need to increase taxes in this year’s Autumn Budget. We estimate the chancellor will need to raise between £20 billion and £30 billion to meet the fiscal rules to which she’s committed. 

We no longer expect the Bank of England to cut interest rates again this year. The jobs market is softening rather than collapsing and broader economic activity shows no signs of material weakness yet. We anticipate the next cut to happen in 2026, with interest rates ending 2026 at 3.25%.

Japan

Japan's economy is still expanding, thanks to consistent domestic spending and stronger-than-expected exports. Large manufacturers are reporting improved sentiment and the activity of non-manufacturers remains high. Smaller businesses, however, are experiencing pressure on margins, which is keeping sentiment fragile. 

Although the impact of earlier economic shocks, including elevated import prices and food costs, is expected to fade, underlying inflationary pressures remain, driven by structural labour shortages. 

With the peak of trade uncertainty likely behind us and the economy proving resilient, we expect the Bank of Japan to keep gradually raising interest rates.

China

China is still on track to meet its annual growth target of 5%, but there are signs of moderation. To help boost domestic demand, policymakers are considering some fiscal support measures, though these are expected to be modest. We expect a mild interest rate cut of 0.1 percentage points, which would leave rates at 1.3% at the end of 2025. The upcoming 15th five-year plan will provide strategic guidance for China’s long-term policy agenda.

¹ Inflation is the rate of increase in prices for goods and services.

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