Global Economic Outlook for 2025: Trade Wars, Sluggish Growth, and Geopolitical Risks Ahead
The world economy in 2025 will face significant challenges, including trade wars, sluggish growth, and ongoing geopolitical risks, following a year marked by monetary easing and declining inflation. Many nations that previously implemented monetary easing measures have started to increase policy rates in the second half of 2024 to combat inflation, setting the stage for a more complex economic landscape in 2025.
In December 2024, the US Federal Reserve lowered its policy rate by 25 basis points, marking a total of 100 basis points in cuts for the year. This brought the policy rate to a range of 4.25% to 4.5%. Similarly, the European Central Bank (ECB) finished the year with four rate cuts, the most recent being a 25-basis-point reduction, bringing the deposit rate to 3% and its refinancing and marginal lending facility rates to 3.15% and 3.40%, respectively. The Bank of England (BoE) also reduced its rates by 25 basis points in August and another 25 basis points in December, ending the year with a total of 50 basis points in cuts, bringing the rate to 4.75%.
Despite these efforts to control inflation, weak growth in many countries, the potential for escalating trade wars, and persistent geopolitical risks will continue to exert pressure on the global economy. Economists warn that these factors will contribute to a slowdown in global GDP growth, with an estimated growth rate of 2.6% in 2025, down from 2.8% in 2024.
Impact of Trade Wars and Protectionist Policies on Growth
Economists are particularly concerned about the potential impact of US President-elect Donald Trump’s promised tariff hikes on global growth. Brian Coulton, Chief Economist at Fitch Ratings, noted that tariff hikes could significantly affect trade, with US exports to China likely to decelerate. However, Coulton also pointed out that US consumer spending might gain momentum beyond expectations, potentially boosting growth. Despite this, he warned that retaliatory tariffs from China, Europe, and other trading partners could hurt US growth and exacerbate inflationary pressures globally.
Trump’s protectionist policies, including tax cuts and immigration restrictions, are expected to influence the economic landscape, with potential consequences for global trade. Coulton’s revised forecast for the US growth rate in 2025 was raised from 1.6% to 2.1%, though the rising tariff rate could lead to an overall slowdown in global growth.
The eurozone is expected to experience a slight recovery in consumer spending in 2025 due to rising real wages, but the impact of Trump’s tariff policies, particularly on Germany, is likely to weigh on growth. While the ECB is expected to cut rates further, the outlook for China remains uncertain due to the ongoing trade tensions. The Chinese economy is anticipated to slow, with revisions to growth forecasts for 2025 and 2026.
Debt, Fiscal Consolidation, and Geopolitical Risks in Developed Nations
In developed nations, inflation is expected to remain under control in 2025 as interest rates decline steadily. Ahmet Ihsan Kaya, Principal Economist at the National Institute of Economic and Social Research (NIESR), forecasts that the Fed will cut its policy rate to between 3.25% and 3.50%, the ECB will reduce its main policy rate to 2.25%, and the BoE will lower its rate to 3.75% by the end of 2025. However, Kaya warned that Trump’s protectionist trade policies could significantly harm international trade and global growth.
The rise in public deficits following the coronavirus pandemic has left many developed countries grappling with high levels of debt. In the EU, fiscal consolidation efforts are necessary to reduce the debt burden, though these measures are expected to face resistance due to the social and political instability they may trigger. Kaya pointed to the political turmoil in France as an example of the challenges faced by EU nations as they implement austerity measures.
Challenges for China and Developing Nations
Looking ahead, attention will focus on the structural challenges facing the Chinese economy, which continues to experience a slowdown. Additionally, developing countries will face mounting pressures from trade policies, particularly as they struggle to cope with the repercussions of global trade tensions and rising tariffs.
S&P Global Market Intelligence recently highlighted concerns over economic uncertainty, domestic discontent, and trade issues that are expected to dominate the global economic landscape in 2025. With geopolitical risks, protectionist policies, and economic instability, the year ahead presents a complex and challenging environment for the global economy.
