We have updated our forecasts for the performance of major asset classes, based on the 8 November, 2024, running of the Vanguard Capital Markets Model®. Equity returns reflect a range of 2 percentage points around the 50th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50th percentile. More extreme returns are possible.

Region-by-region outlook

The views are those of the global economics and markets team of Vanguard Investment Strategy Group as of 4 December, 2024.

Australia

An economy poised to recover in 2025 nonetheless continues to face sticky inflation and stagnant productivity.

We expect:

Full-year 2025 GDP growth of around 2%, underpinned by rising real household incomes, a rebounding housing market and rate-cut expectations.
Given low productivity growth and its resulting higher unit labour costs, we don’t foresee headline or core inflation falling sustainably to the midpoint of the RBA’s 2%–3% target range until 2025.
The Reserve Bank of Australia to begin an easing cycle in the second quarter of 2025, and to cut rates at a gradual pace.
The unemployment rate to rise to around 4.6% in 2025.

America

The U.S. economy has achieved a favourable balance of strong GDP growth, low unemployment, and cooling inflation. We attribute this confluence to recent supply dynamics—labour force and productivity growth—that have shaped the economic landscape over the past two years.

We expect:

Another cut to the Fed’s target for short-term rates on 18 December, 2024, putting its policy rate at 4.25%–4.5% for year-end. We anticipate the Fed will reduce its rate target further in 2025 to a range of 3.75%–4%. Cuts beyond that would prove difficult as any weakening in growth would have to be weighed against a potential inflation revival.
Full-year 2024 GDP growth of around 2.3%, with growth remaining above 2% in 2025.
Inflation (core PCE) rising to 2.9% by year-end because of challenging comparisons with year-earlier data but falling to 2.5% by the end of 2025.

The unemployment rate increasing marginally in 2025 to around the mid-4% range.

United Kingdom

The U.K. economy recovered in 2024, but growth has been uninspiring, and productivity has been weak. We expect growth to accelerate above trend, driven by fiscal stimulus, in 2025.

We expect:

Much of the spending in the autumn budget announced in October 2024 to be realised in 2025 and 2026, setting the stage for GDP growth of around 1.4% in 2025.
Subdued progress on inflation, with core inflation falling to a 2.4% pace by the end of 2025. Services inflation remains elevated and is more stubborn, and fiscal easing would be expected to support demand.
The Bank of England to leave its policy rate at 4.75% in December, followed by quarterly cuts next year that reduce it to 3.75% by year-end 2025.
The unemployment rate to be 4%–4.5% at the end of 2024 and to finish 2025 toward the upper end of the same range.

Euro area

The euro area economy has struggled amid a deep downturn in manufacturing and restrictive monetary and fiscal policies weighing on services demand. In 2025, we expect growth to remain below trend and the European Central Bank (ECB) to cut rates below neutral.

We expect:

The ECB to cut its policy rate to 1.75% by the end of 2025, although an intensification of trade tensions and a significant slowdown in global growth would each likely result in a more dovish monetary policy stance.
GDP growth of around 0.5% in 2025, with a potential slowdown in global trade representing a key risk. Manufacturing faces headwinds from the lingering effects of the energy crisis and from weakening external demand. Restrictive fiscal and monetary policies are slowing the services sector.
Headline and core inflation to end 2025 below 2%.
The unemployment rate to rise to the high-6% range through 2025 given the pronounced slowdown in Germany and broader growth pressures.

Japan

After decades of economic and market stagnation, Japan may be on the path of a sustainable rebound, as this recent article in our econ and markets hub discusses.

We expect:

Above-trend GDP growth at around 1.2%, with the driver shifting from exports to a pickup in domestic demand. Risks from the global economy may increase uncertainty, with potential U.S. tariffs offsetting China’s policy stimulus, though the overall impact for Japan is likely to be limited.
The Bank of Japan to raise its policy rate to 1% by the end of 2025.
Steady wage growth on the back of strong corporate profits and structural labour shortages, which will likely support a recovery in domestic consumption and keep core inflation robust at around 2% in 2025.

China

China’s economy has regained some ground, buoyed by improved domestic demand on the strength of recent fiscal stimulus. The outlook for 2025 will hinge on the degree of policy support and potential U.S. tariff increases.

We expect:

Full-year GDP growth to decelerate in 2025 to around 4.5%, which would be below the government’s 5% target of recent years. Growth momentum should improve in the coming months, but structural and external headwinds will persist, including a prolonged housing downturn, deepening supply-demand imbalances, and global trade developments.
The People’s Bank of China to allow for some currency depreciation in 2025.
Core inflation of around 1.5% in 2025, with only a modest inflationary thrust from currency depreciation in the face of higher tariffs.
The unemployment rate to remain around 5% in 2025.

Canada

We foresee softer growth and continued Bank of Canada (BOC) rate cuts amid monetary policy that remains restrictive and a slowing pace of inflation.

We expect:

The BOC to continue easing monetary policy in 2025, though we expect rates to settle higher than in the pre-pandemic period. We expect a terminal rate around 2.5%,
GDP growth to remain below 2% in 2025 despite monetary policy that we anticipate will turn accommodative.
Core inflation ending 2024 in a year-over-year range of 2.1%–2.4% and remaining in that range in 2025, just above the midpoint of the BOC’s 1%–3% target.
The unemployment rate rising to the high-6% range in 2025 as the economy grows below its potential.
Emerging markets

In many emerging markets, proactive policymaking has led to significant progress in reducing inflation. Indeed, most central banks in these markets felt comfortable enough to start easing policy from restrictive levels ahead of their developed markets counterparts. In 2025, we expect the easing cycle across emerging markets to both continue and broaden, with rates remaining in restrictive territory.

The central bank in Brazil raised its policy Selic rate again in November to 11.25%, accelerating the pace of its rate increases amid renewed inflationary pressures. Year-over-year headline inflation jumped to 4.76% in October, above the upper end of a 1.5-percentage-point tolerance band around the bank’s 3% inflation target.

The economy in Mexico surged in the third quarter, but restrictive interest rates and U.S.-related policy uncertainty make us bearish on Mexico, where we expect growth in a range of 1.25%–1.75% in 2025.The pace of core inflation, which excludes volatile food and energy prices, fell for a 21st straight month, to 3.8% year over year. We expect core inflation to fall to 3.25%–3.5% in 2025, above the midpoint of the 2%–4% target range set by the Bank of Mexico.

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^{Investments in bonds are subject to interest rate, credit, and inflation risk.}

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^{IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model 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 important, 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, 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 several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.}

^{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.}

By Vanguard
18 December 2025
vanguard.com.au