Este artículo está disponible sólo en inglés.

Our economic outlook for the United States

Tariff reprieve strengthens our 2025 outlook 

Positive trade developments with China have lowered our assessment of where the United States’ effective tariff rate on its trading partners will stand at year-end, to a range just above 10%. Although elevated compared with last year, it is significantly lower than our assessment of around 20% immediately after the broad U.S. tariff announcement on April 2.

A trade truce on May 12 with China specifically, which included the lowering of U.S. tariffs on Chinese goods to 30% for 90 days, informs our revised outlooks for the U.S. economy. We now expect GDP growth of around 1.5% this year, or double our previous estimate. Although we anticipate the unemployment rate increasing from current levels, we no longer see it rising as high as 5%.

We expect the pace of inflation to increase too, though not to the levels we had envisioned pre-truce. We anticipate that goods prices will spike into the U.S. summer as tariff-induced price increases take effect. Leading indicators suggest some modest relief for shelter inflation later in the year, though potential developments with lumber tariffs present an upside risk.

The recent tariff developments should mitigate the severity of the challenges to the Federal Reserve’s dual mandate of ensuring price stability and supporting maximum sustainable employment. We continue to expect two quarter-point Fed rate cuts in the second half of the year. The Fed will have room to be patient with rate cuts if the labor market remains resilient.

 

United States economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	1.5%	4.7%	3%	4%

_{Notes: Values are approximate. GDP growth is defined as the fourth-quarter-over-fourth-quarter change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2025. Core inflation is the year-over-year percentage change in the Personal Consumption Expenditures price index, excluding volatile food and energy prices, as of December 2025. Monetary policy is the upper end of the Federal Reserve’s target range for the federal funds rate at year-end.}

_{Source: Vanguard.}

_{Note: All investing is subject to risk, including the possible loss of the money you invest.}

 

Our economic outlook for Mexico

Challenges, opportunities for Mexico amid tariffs

We recently revised our 2025 GDP growth forecast for Mexico to below 1% due to headwinds from trade developments and the uncertainty surrounding trade policy, which are affecting business investment and manufacturing employment. The Bank of Mexico (Banxico) cut the overnight interbank rate by 50 basis points to 8.5% on May 15, citing increased global risks amid escalating trade tensions and stable inflation. We expect the rate to end 2025 from 8% to 8.25%.

The recent announcement of U.S. tariffs on the Mexican automobile sector is particularly significant, given that sector’s importance to the Mexican economy. The automotive industry accounts for about 4% of Mexico’s GDP and employs approximately 1 million workers. Despite these challenges, the potential for U.S.-Mexico trade negotiations to occur relatively soon could mitigate some of the adverse effects.

Additionally, Mexico may benefit from high U.S. tariffs on Chinese imports. This situation could create upside potential for growth as Mexico positions itself as an alternative manufacturing hub, leveraging its strategic location and skilled workforce. The evolving trade landscape offers both challenges and opportunities for Mexico’s economy in the coming year.

Mexico economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	<1%	3.2–3.6%	3.5%	8%–8.25%

_{Notes: Values are approximate. GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2025. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2025. Monetary policy is the Bank of Mexico’s year-end target for the overnight interbank rate.}

_{Source: Vanguard.}

_{Note: All investing is subject to risk, including the possible loss of the money you invest.}

Our economic outlook for the United Kingdom

Conditions are favorable for progress on inflation

An improved global outlook and greater-than-expected growth in the first quarter have led us to raise our forecast for full-year GDP growth to just above 1% from around 0.5%. Progress in U.S.-U.K. and U.S.-China trade relations underpin the more optimistic global view. First-quarter growth of 0.7% was driven by net exports and business investment, suggesting frontloading ahead of U.S. tariffs. We expect materially softer growth in the second quarter as an aftereffect of the frontloading and amid continued trade uncertainty.

Core inflation remains elevated, with little progress made on services inflation or wage growth in recent months. That said, employment growth has softened materially, partly due to the government’s decision in October 2024 to raise taxes for employers. Surveys point to some labor-market deterioration ahead. Expectations of further fiscal tightening and long-term inflation expectations that remain well anchored are likely to give the Bank of England (BoE) conviction that inflationary pressures will subside.

We continue to expect the BoE to cut the bank rate by 25 basis points each in the third and fourth quarters. That would leave the policy rate at 3.75% at year-end, a touch above our assessment of the neutral rate, or the policy rate that would neither stimulate nor inhibit growth.

United Kingdom economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	1.1%	4.8%	2.9%	3.75%

_{Notes: Values are approximate. GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2025. Core inflation is the year-over-year change in the Consumer Prices Index, excluding volatile energy, food, alcohol, and tobacco prices, as of December 2025. Monetary policy is the Bank of England’s bank rate at year-end.}

_{Source: Vanguard.}

_{Note: All investing is subject to risk, including the possible loss of the money you invest.}

 

Our economic outlook for the euro area

Global trade developments brighten prospects for Europe

Global trade developments have been positive for the euro area growth outlook. A U.S.-China tariff truce boosts global growth prospects and eases financial conditions, while initial U.S. agreements with the U.K. and China raise hopes for similar U.S.-euro area progress. We have increased our 2025 euro area growth outlook to just above 1%.

The improved growth prospects and reduced risk of Chinese exports being rerouted to Europe decrease the risk of a material undershoot of the 2% inflation target set by the European Central Bank (ECB). Domestic inflationary pressures remain subdued, with target-consistent progress being made on the most stubborn parts of services inflation.

Modest upgrades to our growth and inflation forecasts don’t change our view on the ECB policy rate. We continue to foresee two more quarter-point cuts this year, which would leave the deposit facility rate at 1.75% at year-end from its current 2.25%. That would be slightly below our estimate of the euro area’s neutral rate, or the interest rate level that would neither stimulate nor inhibit an economy.

Euro area economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	1.1%	6.3%	2.1%	1.75%

_{Notes: Values are approximate. GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2025. Core inflation is the year-over-year change in the Harmonized Indexes of Consumer Prices, excluding volatile energy, food, alcohol, and tobacco prices, as of December 2025. Monetary policy is the European Central Bank’s deposit facility rate at year-end.}

_{Source: Vanguard.}

_{Note: All investing is subject to risk, including the possible loss of the money you invest.}

 

Our economic outlook for China

Progress on trade improves prospects for China’s growth

Positive U.S.-China trade developments make us more optimistic about China’s growth prospects. After the U.S. and China agreed on May 12 to lower tariffs on each other’s goods for 90 days, we have increased our forecast for China’s 2025 economic growth to 4.6%. However, risks to the downside remain significant, given the disruption to China’s exports that has already occurred and an effective U.S. tariff rate on China that remains well above the rate before the April 2 U.S. tariff announcements.

Although a renewal of heightened tensions can’t be ruled out, progress on trade negotiations to date reduces the urgency for additional policy support. We expect policymakers to adopt a more reactive stance to further stimulus. Such an approach is also reflected in our monetary policy view. We foresee China’s policy rate—the seven-day reverse repo rate—ending 2025 at 1.3%, higher than our previous forecast of 1.2%. The People’s Bank of China announced a 10-basis-point cut to its policy rate, to 1.4%, on May 7. (A basis point is one-hundredth of a percentage point.)

We have lowered our forecast for headline inflation at year-end to just above zero as progress in trade talks eases pressure on prices of imported food, most notably U.S. soybeans. Meanwhile, uncertainty continues to weigh on energy prices. Our outlook for core inflation remains unchanged at 0.5%.

China economic forecasts

	GDP growth	Unemployment rate	Core inflation	Monetary policy
Year-end outlook	4.6%	5%	0.5%	1.3%

_{Notes: Values are approximate. GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2025. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December 2025. Monetary policy is the People’s Bank of China’s seven-day reverse repo rate at year-end.}

_{Source: Vanguard.}

_{Note: All investing is subject to risk, including the possible loss of the money you invest.}