Investment and economic outlook, October 2026

Our latest forecasts for investment returns and region-by-region economic outlook

Our economic outlook for Australia

Elevated inflation remains the RBA’s overriding concern

“If inflationary pressure becomes more persistent, the risk of a further rate hike will remain firmly on the table.”
-Grant Feng, Vanguard Senior Economist

Weak productivity remains the economy’s key supply-side constraint. Although real GDP growth remained resilient in the second quarter at 2.1% year over year, labour productivity declined by 0.2%. This suggests that Australia’s potential growth rate may have weakened, contributing to an acceleration in the growth of unit labour costs. The combination of a tight labour market and subdued productivity growth is sustaining domestic cost pressures. As a result, the economy’s disinflationary impulse does not yet appear strong enough to return inflation to the 2%–3% target set by the Reserve Bank of Australia (RBA).

Elevated inflation remains the RBA’s overriding concern. Despite falling housing prices, trimmed mean consumer price inflation remained elevated in the second quarter at 3.6% year over year. Higher oil prices leave near-term inflation risks clearly skewed to the upside, while AI-related data-centre investment is adding a further source of demand and capacity pressure.

More fundamentally, the Australian economy continues to operate beyond its sustainable capacity, with unemployment remaining low by historical standards. Against this backdrop, there is a material risk that above-target inflation becomes embedded in wage- and price-setting behaviour. Preventing such an outcome is arguably a more pressing challenge for the RBA than for many other major central banks.

Our base case is that the RBA pauses for the remainder of the year as it assesses the effects of its latest rate hike, to 4.6%, in September. This outlook is contingent on clearer evidence that demand is slowing, labour market conditions are easing, and underlying inflation is moving sustainably lower. If the economy proves more resilient than expected, or if higher energy prices generate broader and more persistent inflationary pressure, the risk of an additional rate increase will remain firmly on the table.

Australia economic forecasts

Notes: 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 for each year. Trimmed mean inflation is the year-over-year change in the Consumer Price Index, excluding items at the extremes, as of the fourth-quarter reading for each year. Monetary policy is the Reserve Bank of Australia’s year-end cash rate target. Source: Vanguard. All investing is subject to risk, including the possible loss of the money you invest.

Vanguard Capital Markets Model® forecasts

Our 10-year annualised nominal return and volatility forecasts are based on the 30 June 2026 running of the Vanguard Capital Markets Model®.

Australia (Australian dollar)

IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modelled asset class. Simulations as of 30 June 2026. Results from the model may vary with each use and over time. For more information, please see the Notes section below.

Notes: These return assumptions depend on current market conditions and, as such, may change over time. We make our updated forecasts available at least quarterly. Source: Vanguard.

Our economic outlook for the United States

Growth momentum firming amid notable business spending

“Recent upward revisions to income data depict a healthier backdrop for consumer spending and underscore an economy that is accelerating as we move into year-end.”
-Josh Hirt, Vanguard Senior U.S. Economist

Growth continues to demonstrate resilience, with activity tracking at a pace consistent with our 2.3% outlook for 2026. Business investment remains a notable source of strength: Through the second quarter, investment ran at a 9.4% pace, exceeding our already strong expectations coming into the year by more than two percentage points. We expect this capital expenditure cycle to remain an important contributor to growth through 2027. Consumer spending is evolving broadly in line with expectations, supported by tax policy tailwinds and the continued benefits of elevated household wealth.

September payrolls rose by 29,000, reinforcing our view that monthly payroll growth will remain unusually volatile, as revised figures show payrolls grew by 133,000 in August and fell by 10,000 in July. We continue to characterise the labour market as resilient but not accelerating. Hiring activity remains extremely subdued, with historically low layoffs being the saving grace in keeping the unemployment rate low. The low-hire, low-fire environment, combined with slower labour supply growth, means relatively modest changes in participation dynamics can generate surprisingly strong or weak payroll prints from one month to the next. We therefore expect the recent seesaw pattern in payroll growth to persist.

A somewhat hotter-than-expected Consumer Price Index (CPI) reading released October 14 doesn’t materially change our inflation outlook. However, we are now tracking core inflation as measured by the Personal Consumption Expenditures (PCE) price index at 3.1%, above our 3% forecast for 2026 (fourth quarter over fourth quarter). The balance of risks continues to skew to the upside, reflecting inflationary effects from higher energy prices. The CPI report increases the risk of a previously unexpected Federal Reserve rate increase in October. We continue to view one additional hike this year as most likely. However, the risk has risen for hikes at each of the Fed’s two remaining meetings this year.

United States economic forecasts

Notes: 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 for each year. 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 for each year. Monetary policy is the rounded midpoint of the Federal Reserve’s target range for the federal funds rate at year-end. Source: Vanguard. All investing is subject to risk, including the possible loss of the money you invest.

Our economic outlook for Canada

Canada’s resilience is being tested again

“Canada has repeatedly absorbed external shocks better than expected. Trade uncertainty remains a headwind, but resilient domestic demand should keep growth on a positive, if modest, path.”
-Adam Schickling, Vanguard Senior Economist

Canada’s economic resilience in the face of external trade pressures has been a recurring theme since early 2025. Exemptions under the United States-Mexico-Canada Agreement originally provided Canada with a significant relative tariff advantage compared with other U.S. trading partners, but the renewal of U.S.-Canada trade tensions and tariff escalation have tempered the advantage. The persistent trade uncertainty remains a headwind, but we expect growth to settle near 1.5% through 2027 as resilient domestic demand offsets some of the external pressure.

Labour market conditions remain stable but uninspiring. Unemployment has hovered around the mid-6% range, with weakness concentrated among younger workers and recent labour-force entrants. Slower population growth and moderating wage growth have helped bring labour demand and supply into better balance. We expect unemployment to remain near current levels through 2027, consistent with an economy growing at a positive but modest pace.

Geopolitical developments and higher energy prices have pushed headline inflation higher since February. Beneath these pressures, however, underlying inflation trends are more encouraging. Core inflation remains anchored around 2%, suggesting domestic inflation pressures are not an immediate concern for policymakers. That leaves the Bank of Canada in a relatively comfortable position domestically, even as the global policy backdrop has become less supportive. A more hawkish shift by the Federal Reserve and other central banks makes significant policy divergence harder to sustain. We therefore expect one 25-basis-point rate increase before the end of 2026 and another in 2027, which would bring the policy rate to 2.75%.

Canada economic forecasts

Notes: 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 for each year. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December for each year. Monetary policy is the Bank of Canada’s year-end target for the overnight rate. Source: Vanguard. All investing is subject to risk, including the possible loss of the money you invest.

Our economic outlook for Mexico

Competing forces influence Mexico’s recovery

“Strong external demand is supporting growth in Mexico, but tighter financial conditions and trade uncertainty are constraining domestic momentum.”
-Thiago Ferreira, Vanguard Senior Economist

We continue to expect Mexico’s economic outlook to improve in 2027, supported by a solid U.S. economy. However, the external environment has become more challenging, with rising U.S. interest rates contributing to tighter global financial conditions and a stronger dollar. Geopolitical tensions and elevated commodity prices add further uncertainty, creating downside risks to growth and upside risks to inflation.

Demand from the U.S. should continue to support Mexico’s economy, particularly through export-related manufacturing. Recent data remain consistent with an uneven recovery: AI-related exports and capital goods imports continue to support economic activity, but growth appears to have moderated in the third quarter and consumption remains subdued.

Trade policy uncertainty also remains a meaningful headwind. The United States-Mexico-Canada Agreement remains in force, but negotiations over a long-term extension are proceeding slowly. Mexico is seeking relief from U.S. tariffs on autos, steel, and aluminum, while the U.S. is pressing for tighter rules of origin and restrictions on non-North American inputs. Progress toward a partial tariff agreement could provide some near-term relief, but continued uncertainty over the broader agreement is weighing on investment planning and business confidence.

Inflation has continued to moderate broadly in line with our expectations. Headline inflation rose to 3.5% year over year in September, driven by noncore prices, but is well below its 2026 peak of 4.6%. Core inflation declined to 3.8% year over year in September. We continue to expect disinflation to proceed gradually. Economic slack and moderating underlying price pressures should support further progress, but services inflation remains elevated and risks from food prices, trade disruptions, and geopolitical developments remain tilted to the upside.

The Bank of Mexico (Banxico) unanimously kept its policy rate unchanged at 6.5% in September. Policymakers are caught between rising U.S. interest rates, which call for tighter policy, and economic slack in Mexico, which argues for softer policy. Additionally, moderating core inflation reduces the need for a rate increase, but elevated services inflation and risks to the peso and food prices argue against easing. While Banxico has emphasised that it does not need to follow the steps of the Federal Reserve, we expect these competing forces to keep policy on hold for now. We maintain our forecast that the policy rate will remain at 6.5% through 2027.

Mexico economic forecasts

Notes: 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 for each year. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December for each year. Monetary policy is the Bank of Mexico’s year-end target for the overnight interbank rate. Source: Vanguard. All investing is subject to risk, including the possible loss of the money you invest.

Our economic outlook for Brazil

Moderating growth opens door for additional easing

“Brazil’s economy is slowing from a resilient level, creating room for further rate cuts, but persistent inflation and fiscal uncertainty should keep the easing cycle cautious.”
-Thiago Ferreira, Vanguard Senior Economist

Geopolitical developments and AI are shaping the global backdrop for Brazil, while fiscal policy remains the key domestic risk. Geopolitical effects are more immediate, reflecting U.S. tariffs on some Brazilian goods and higher energy prices. Over time, Brazil could benefit from AI-related investment through its clean energy base, relatively neutral geopolitical position, and role as a major producer of copper and iron ore.

Domestically, elevated public debt remains an important risk to the outlook. The first round of the October election sent the presidential contest to an October 25 runoff and prompted markets to price in a greater prospect for fiscal consolidation. However, the eventual policy direction remains uncertain, and the next administration will face a difficult trade-off between supporting activity and stabilising the public-debt trajectory.

Near-term data continue to point to an expanding economy, but momentum has weakened. While GDP grew 2% year over year in the second quarter, recent indicators suggest slowing economic activity in the third quarter, with softer consumer spending, industrial activity, and business confidence. The labour market remains a source of resilience: Unemployment held at a historically low 5.3% in August and formal job creation rebounded, although broader hiring indicators suggest that labour demand is gradually cooling. We continue to expect 2.2% GDP growth in 2026, but the weaker flow of activity data and the fading fiscal impulse leave risks tilted to the downside.

Inflation has declined from 2025’s peak of 5.5%, but the disinflation process remains incomplete. Headline inflation was 4.6% in September, above the 3% target of the Central Bank of Brazil (BCB). While the appreciation of the real has helped disinflation by moderating tradable-goods inflation, services inflation remains elevated. Additionally, medium-term inflation expectations have generally fluctuated within the BCB’s tolerance interval but have not settled at the 3% target, offering limited support for further disinflation. Energy-price volatility and a tight labour market should keep inflation persistent, leading to only a gradual return to target.

The BCB lowered the Selic rate to 13.75% in September, in line with our expectations. Subsequent communications left the size of the easing cycle open and emphasised growing evidence that restrictive monetary policy is weighing on activity and credit. The BCB also lowered its 2026 growth forecast, although it continues to project inflation above the tolerance range by year-end and sees expectations for longer horizons as elevated. We therefore maintain our 13.75% year-end forecast for the Selic rate, though risks are tilted toward additional cuts if activity and inflation data provide sufficient room, and should fiscal consolidation become more likely.

Brazil economic forecasts

Notes: 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 for each year. Inflation is the year-over-year change in the headline broad national consumer price index (IPCA) as of December for each year. Monetary policy is the year-end target for the Selic rate as set by the Central Bank of Brazil. Source: Vanguard. All investing is subject to risk, including the possible loss of the money you invest.

Our economic outlook for the United Kingdom

Elevated energy prices support the case for rate hikes

“Energy prices have moved higher, and core inflation appears likely to remain above target for some time. These factors support the case for the Bank of England to tighten monetary policy.”
-Shaan Raithatha, Vanguard Senior Economist

U.K. real GDP continues to grow faster than expected. GDP increased by 0.4% month over month in July (compared with expectations of no growth) as information and communications boosted the services sector. First- and second-quarter GDP data were robust. This, combined with firm purchasing managers’ index prints, poses an upside risk to our expectation of 1.1% GDP growth for the full year.

The labour market, on the other hand, is showing signs of weakness. Payrolls fell in August, continuing a year and a half of softness as the labour market has adjusted to tax hikes on firm-level national insurance contributions. Survey data indicate that permanent placements are stable, but vacancies appear to be falling. We expect an increase in the unemployment rate to a year-end level around 5.3% from the current 4.9% as the adjustment continues.

Inflationary pressures are rising, with oil prices still elevated. Headline inflation has increased, and supply chain and input cost indicators have rebounded. However, we expect the dominant services measure to remain anchored as wage growth continues to stabilise at broadly target-consistent levels. Accordingly, we anticipate that the key signal of core inflation will remain around 2.6%, above the 2% headline inflation target set by the Bank of England (BoE), through the end of 2027.

The BoE announced on September 17 that it would keep the bank rate on hold at 3.75%, but the tone shifted to being hawkish, with several voters indicating they could support a rate hike if energy costs remain elevated. This shift, combined with our view that core inflation will remain elevated in the medium term, underpins our forecast of a rate hike before the end of 2026 and another in 2027.

United Kingdom economic forecasts

Notes: 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 for each year. Core inflation is the year-over-year change in the Consumer Prices Index, excluding volatile food, energy, alcohol, and tobacco prices, based on the fourth-quarter average for each year. Monetary policy is the Bank of England’s bank rate at year-end. Source: Vanguard. All investing is subject to risk, including the possible loss of the money you invest.

Our economic outlook for the euro area

Energy shock’s second wave implies additional ECB hikes

“A resurgence in energy prices is adding to inflationary pressures, and that’s likely to keep the European Central Bank in a rate-hike mode.”
-Shaan Raithatha, Vanguard Senior Economist

Despite the energy shock stemming from conflict in the Middle East, economic activity in the euro area has proved resilient. Growth is tracking above our 0.8% forecast for 2026, with stellar performance from Spain and strong growth in Germany and Italy offsetting continued poor data out of France.

That said, we see only modest pass-through of German fiscal stimulus in industrial production data so far. Prominent sectors that should be exposed to infrastructure-related spending—including construction, basic metals, and machinery and equipment—have yet to experience a material upswing. Further, bond market downturns are putting pressure on government finances ahead of key elections in France, Italy, and Spain next year, exacerbating fiscal risks.

Gas prices have risen, while crude oil prices have moved back toward recent peaks amid tight refining capacity. This is raising the risks of second-round effects building into the system, with survey data suggesting firms are experiencing stronger underlying price pressures. We anticipate that this will keep the key signal of core inflation elevated around 2.5% through 2027, higher than the 2% headline inflation target set by the European Central Bank (ECB), even amid signs of stabilising wage growth.

The ECB announced a quarter-percentage-point increase of its policy interest rate to 2.5% on September 10, its second hike of 2026. Given our expectation of elevated inflation in the near term, we expect a further hike this year and another in early 2027.

Euro area economic forecasts

Notes: 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 for each year. Core inflation is the year-over-year change in the Harmonised Indexes of Consumer Prices, excluding volatile energy, food, alcohol, and tobacco prices, based on the fourth-quarter average for each year. Monetary policy is the European Central Bank’s deposit facility rate at year-end. Source: Vanguard. All investing is subject to risk, including the possible loss of the money you invest.

Our economic outlook for Japan

Japan’s economy shifts into a higher gear

“The Bank of Japan’s policy focus isn’t whether to raise rates, but rather when to raise rates, and at what pace.”
-Grant Feng, Vanguard Senior Economist

Japan’s economy is well placed to absorb a further rate increase, with domestic demand proving more resilient and cost pass-through becoming stronger than previously anticipated. GDP continued to expand in the second quarter despite higher interest rates, elevated energy prices, and considerable global uncertainty. Exports have remained resilient, supported by the global AI investment boom, while business investment has been solid amid healthy corporate profits and strong capital expenditure. Real wages have recorded seven consecutive months of growth, supporting household demand and giving firms greater confidence to pass higher labour costs on to consumers.

Inflation is becoming more broad-based and increasingly demand-driven, which strengthens the case for monetary policy action. Consumer price inflation remains around the 2% target set by the Bank of Japan (BoJ), while renewed energy price pressures and earlier yen depreciation have increased the risk of further cost pass-through. More importantly, revised BoJ estimates suggest the economy has been operating with greater demand pressure than previously recognised, consistent with persistent labour shortages, rising wages, and a gradual broadening of inflationary pressures. A continued increase in inflation expectations could introduce the risk of inflation overshooting the BoJ’s price-stability target.

Against this backdrop, a sharp rise in market pricing of further rate hikes is likely to encourage the normally cautious BoJ to shorten its interval between increases to just three months. Our assessment remains finely balanced between December 2026 and January 2027 for the next hike, although we see December as more likely. This would take the policy rate to 1.5% by the end of 2026.

Japan economic forecasts

Notes: 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 for each year. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile fresh food prices, as of December for each year. Monetary policy is the Bank of Japan’s year-end target for the overnight rate. Source: Vanguard. All investing is subject to risk, including the possible loss of the money you invest.

Our economic outlook for China

Entrenched K-shaped economy highlights fiscal role

“Resilient exports are becoming increasingly insufficient to offset the drag from weak domestic demand, raising the urgency for a policy push.”
-Grant Feng, Vanguard Senior Economist

China’s economy remains increasingly K-shaped. Resilient exports, supported by demand for AI-related goods, helped industrial production recover in August. But consumption weakened and investment remained a substantial drag, particularly in infrastructure and property sectors. Modest home-price gains in the largest cities have not spread nationwide, with housing sales and real estate investment continuing to contract.

We expect exports to remain a near-term source of support, but they’re unlikely to fully offset domestic weakness. Household deleveraging, property-related wealth losses, and a soft labour market are weighing on consumption, while the property downturn and constrained local government finances continue to restrain investment. Trade barriers and a potential moderation in global AI investment add to the risks of relying on external demand. We expect growth to have remained subdued in the third quarter before improving modestly in the fourth quarter as fiscal support begins to reach the real economy.

Policymakers have begun to accelerate fiscal deployment and introduce targeted lending and housing support. These are positive steps, but their narrow scope and implementation lags make them unlikely to deliver a broad-based recovery on their own. More effective fiscal execution and stronger follow-through will be critical, particularly for stabilising the property sector. We expect the People’s Bank of China to maintain ample liquidity and favour structural tools that direct credit to priority sectors, with broad-based policy rate cuts less likely in the near term.

China economic forecasts

Notes: 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 for each year. Core inflation is the year-over-year change in the Consumer Price Index, excluding volatile food and energy prices, as of December for each year. Monetary policy is the People’s Bank of China’s seven-day reverse repo rate at year-end. Source: Vanguard. All investing is subject to risk, including the possible loss of the money you invest.

By: Vanguard | 28 October 2026 | vanguard.com.au