Our investment and economic outlook, December 2024

We expect:

• Another cut to the Fed’s target for short-term rates on December 18, 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.

We have updated our forecasts for the performance of major asset classes, based on the November 8, 2024, running of the Vanguard Capital Markets Model®. Detailed projections, including annualized return and volatility estimates covering both 10- and 30-year horizons, are available in interactive charts and tables.

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

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 realized 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.      
  
   

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.
  
   

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 labor shortages, which will likely support a recovery in domestic consumption and keep core inflation robust at around 2% in 2025. 
  
   

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.
  
   

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 labor 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.
  
   

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.
  
   

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.

• Our economic and markets hub
• Our economic and market outlook for 2025: Global summary (article, issued November 2024)
• Labor market pulse: Firms hiring at lower rates (article, issued November 2024)
• Fed cuts: How far matters more than how fast (article, issued November 2024)