Economy
Global Economy Outlook For 2025 Isn’t Exactly Steller. Here Are All The Factors That Contribute To The Gloom.
The global economy in 2025 isn’t shaping up to be a blockbuster. Growth is pegged at a modest 2.5%, as the world continues to shake off the lingering effects of the pandemic. Adding to the gloom are expectations of higher import taxes in the U.S., especially for goods tied to Chinese supply chains.
Developed vs. Emerging Economies. The Divide
Developed economies are expected to grow between 1.25% and 1.75%, while emerging markets could hit a healthier 3.5% to 4%. The heavy lifting for global growth will come from emerging markets, driven by steady—but not stellar—commodity exports.
The Risks for Emerging Markets
However, it not entirely all smooth sailing for emerging economies. Many rely on China’s appetite for commodities, and any dip in Chinese demand—especially if trade tensions escalate—could throw a wrench in their growth plans.
Europe’s Challenges
Over in the eurozone, the story isn’t much better. Higher energy costs from the shift away from Russian oil and gas are biting, and industrial overcapacity is becoming a problem, especially in sectors like autos. Add in potential U.S. tariffs and the slowdown in China, and Europe’s outlook is looking pretty bleak, with growth forecasted at a sluggish 0.5%.
On the bright side, global inflation is expected to cool to around 4%, which is a relief given the high debt levels many countries are struggling with. Lower inflation and easing interest rates could offer some breathing room, but for emerging economies with hefty debts, there’s no escaping the need for tighter fiscal policies and stronger reserves to ride out the storm of rising tariffs.
The Dollar’s Rise and Its Ripple Effects
One wildcard in all of this is the surging U.S. dollar, which has jumped about 7.5% over the past year. A stronger dollar means higher import costs for many emerging markets, especially those reliant on oil. That, in turn, could stoke inflation and pile on financial stress.
As mentioned before, global inflation, which went haywire post-pandemic, is finally settling down. After peaking at a whopping 9.4% in late 2022, it’s now expected to ease to a more manageable 4% by 2025.
Why Is Inflation Slowing?
The synchronized tightening of monetary policies by central banks over the past few years is paying off. Those higher interest rates slowed down growth just enough to take the edge off price surges. Plus, the supply chain chaos that drove pandemic-era price hikes has mostly sorted itself out, thanks to better labor market conditions and steady demand.
Still What Could Go Wrong?
The path to stable inflation isn’t entirely clear, though. Here are a few hurdles –
Protectionist Trade Policies: The U.S. is leaning toward more protectionism, and that’s going to cost. Expect higher prices on Chinese imports and potential trade spats with Europe and Mexico to ripple through global inflation.
Stronger Dollar Woes: The U.S. dollar is flexing its muscles, and for economies that import oil, that means pricier fuel and higher inflation. Slower growth in India, uncertainty in China, and the rising cost of oil in dollar terms will keep the pressure on.
China’s Deflation Export: China’s overproduction is flooding global markets, driving down prices and sparking trade tensions. The country’s strategy to dominate global manufacturing is likely to fan the flames of protectionism, which could end up pushing inflation higher worldwide.
What Are Central Banks Doing About It?
The good news? Central banks are ready to hit the brakes on their restrictive policies. With inflation growth slowing, nearly 75% of central banks are expected to ease their rates.
- The Federal Reserve is projected to lower its policy rate to 4% and likely to trim its policy rate by 50 basis points.
- The Bank of England, European Central Bank, and Bank of Canada are also likely to follow suit, moving toward less restrictive levels. Each expected to slash rates by at least 100 basis points. While Bank Of Canada might look at a deeper cut of 150 basis points.
These reductions are designed to spur investment and growth, giving economies a much-needed boost.
Asia’s Balancing Factor
In China, the People’s Bank of China is poised for aggressive rate cuts. With growth dipping below the official 5% target, and property markets alongside consumer demand in the doldrums, there’s little choice but to ease.
Japan, however, is taking the opposite approach. It’s likely to tread cautiously, slowly raising rates instead of cutting them.
Meanwhile, in Australia, the Reserve Bank is expected to lower its terminal rate to 3.35% by the end of 2025, with steady quarter-point reductions. If they delay easing, a half-point cut midyear might set the stage for smaller cuts later in the year.
The Dollar’s Rise
The U.S. dollar is stealing the spotlight, climbing to a real trade-weighted adjusted index of 117.2 by late 2025—a multidecade high.
While this might sound great for the U.S., it’s creating ripples elsewhere – a stronger dollar is already fueling protectionist policies in the U.S., putting trading partners and emerging markets under pressure.
Some are suggesting a managed devaluation of the dollar, but that’s easier said than done. Unlike the 1980s, when such moves were more feasible, today’s multipolar political and economic framework makes it nearly impossible. Plus, the Fed is laser-focused on inflation, not exchange rates.
What this would mean for businesses and investors – if the dollar overshoots reasonable valuations, expect more protectionist measures. For global investors and companies with significant exposure to the U.S. market, hedging strategies will be crucial to mitigate the headwinds.
Trade and Tariffs
The global trade dynamics could get pretty stormy in 2025, with the U.S. gearing up for another round of tariff hikes. If history is any indicator, the ripple effects will be widespread and messy.
The U.S. is expected to slap tariffs ranging from 10% to 60% on certain Chinese imports early in the year. Goods transshipped through Vietnam and Malaysia from China might face an additional 10% to 20% tariff.
China isn’t likely to take this lying down. Just like during the 2018–2020 trade tiffs, Beijing might devalue the yuan by 10% to 15% to keep its exports competitive. But such a move would come at a cost –
- Slower Growth: China’s growth could slip by 0.6%, dropping to around 4%—well below its official 5% target.
- Global Impact: A trade war would likely force a downward revision of global growth projections, with China taking the biggest hit.
What About Europe?
Europe isn’t escaping unscathed either. Any U.S. tariffs on the eurozone could shave half a percentage point off its growth. If tensions escalate to 2018–2020 levels, recession fears in the EU will take center stage. Even the U.S. could feel the pinch, with its growth forecast dipping by about 0.2 percentage points.
On the other hand, emerging markets face a mixed bag of risks –
Countries relying on Chinese demand or closely tied to its supply chains could feel the heat. Those with currencies pegged to the dollar and high debt levels may struggle as the U.S. reshapes trade terms. Economies linked to China, Russia, or Germany could face compounded challenges due to their own internal issues.
Hence, if a second U.S.-China trade skirmish escalates into a full-blown trade war, the economic fallout will be hard to ignore. Tariffs, currency devaluations, and slowed growth will dominate headlines, with the risks spreading across developed and emerging markets alike.
Commodities and Oil Prices
As we head into 2025, commodities and oil prices will play a major role in shaping the global economy—and the dollar’s fate.
Oil Prices. Steady but Tied to the Dollar
Oil prices are expected to stay flat or dip slightly, hovering around late November levels.
Why? Global oil production is expected to rise, adding an extra million barrels per day to the market. However, if the dollar continues to climb, it could spell trouble for oil-importing nations like China, Japan, and India. Since these countries settle their trades in dollars, a stronger greenback will make oil more expensive, pushing inflation up.
China’s Slowing Demand
On the flip side, sagging demand from China will weigh down oil and commodities prices. From October 25 to November’s end, the Bloomberg commodity price index dropped by 1.22%. And compared to its peak in June 2022, it’s down nearly 28%.
This slowdown in China—growing at just 3.5% to 4.5%—is a far cry from its pre-pandemic boom. As China continues to work through a debt and deleveraging period, it’s likely to be a major drag on global commodity exports.
The Last Bit
So, what’s the takeaway?
Looking ahead to 2025, the global economy is set to grow at a modest pace of around 2.5%, driven by strong performances in emerging markets, particularly India, as well as the United States.
However, this growth comes with a number of challenges. Inflation, though easing from its pandemic highs, remains a concern, with trade tensions, a stronger dollar, and rising tariffs posing risks to both global growth and price stability.
The shifting dynamics in China, with its slowing economy and ongoing debt issues, will be another key factor influencing the global economic scene.
Meanwhile, oil prices, which are expected to remain stable or slightly dip, could face inflationary pressures, especially in economies that rely heavily on imports.
On the policy front, central banks around the world are expected to ease restrictive monetary policies, which should support risk-taking and investment, but there are uncertainties around how these adjustments will play out, especially if trade tensions escalate or if China struggles to stimulate domestic demand.
Therefore, not a rosy picture indeed for the global economy as we head into 2025!