There is an array of factors that are likely to affect the performance of the global economy in 2025, but the consensus is that the outlook will be dominated by policy uncertainty. During the final quarter of 2024, economic performance was mixed – weaker in larger economies like China, India and some major European countries and resilient in other economies, like the United States (US). It is evident that the global economic outlook will be shaped by a divergence in economic growth, an ambiguous inflation trajectory, and highly speculative economic policy, characterized by trade, fiscal and monetary policies decisions. This unpredictability in policies is likely to affect how certain economies manage relative to others, resulting in what can be even more deviations in economic performance across the world. This article will outline the four main themes which are expected to dominate in 2025.  

US Economic Policies

The US economy remains robust despite some softening in the global environment, growing by an average of 2.9% over the first three quarters of 2024. Consumer spending continued to strongly support the US economy, expanding by an average of 2.8% in the first three quarters of 2024, as measured by the US personal consumption expenditure index. Consumer spending has historically been the largest contributor of the US economy, accounting for close to 70% of total GDP. Spending has been ably supported by the strong labour market and robust wage growth. In 2024, the unemployment rate rose to 4% from 3.6% in 2023, while the average hourly earnings growth was 3.9%, slightly down from 4.3% recorded in 2023. US inflation has steadily been decelerating, ending 2024 at a rate of 2.9%, as measured by the consumer price index, compared to 3.4% and 6.5% in 2023 and 2022, respectively. The outlook for the US economy is supported by expectations of a less restrictive monetary stance, continued wage growth as well as supportive financial conditions. There are, however, uncertainties regarding fiscal measures that may be implemented, specifically related to tax cuts as well as deficit spending and the impact on the US’ fiscal accounts and debt levels.

While there is no clear indication about the pace and extent of additional and/ or new trade tariffs, one of the major risks to the global economic outlook is any escalation in protectionist trade policies, which according to the IMF, could exacerbate trade tensions, lower investment, reduce market efficiency, distort trade flows and again disrupt supply chains.

Economic growth in the US is projected to be 2.7% in 2025, from an estimated 2.8% in 2024, according to the World Economic Outlook from the IMF, published in January 2025. This strong growth is expected to be fuelled by robust consumption, as well as more accommodative policies such as tax cuts which should positively impact in the near term. The major downside risks to this outlook are the adverse effects of tariffs and a reduction in the labour force due to lower migration flows to the US. The US dollar is also expected to remain strong primarily because of differentials in economic growth and monetary policy amongst different countries. 

Chinese Economic Policies

The IMF forecasts that the Chinese economy will expand by 4.6%, reflecting pass through effects of the fiscal stimulus packages announced since September 2024 as well as monetary easing measures that were implemented. Among these measures was the announcement of a USD1.36 trillion debt package to ease local government financing strains and to stabilize economic growth in November 2024, and in September, the central bank unveiled its most aggressive stimulus measures since the COVID-19 pandemic – which included broad interest rate cuts. In December 2024, the authorities announced that they will target a budget deficit of 4% of GDP in 2025 and economic growth of around 5%. More recently, according to a Reuters report, government workers saw an increase in wages as the authorities try to increase spending to support the economy given that private consumption continues to severely drag overall activity.  

While economic policies are largely expansionary, it remains to be seen whether they will offset the negative impact on investment from heightened trade policy uncertainty as well as the weaknesses in the Chinese property market downturn. The possibility of deflation and weak growth in China will likely have spillover effects on the rest of the world, given the country’s economic size and its influence on global trade. Weaker Chinese growth will also keep energy prices subdued given that they are the world’s second largest consumer. Developing economies account for about 45% of global GDP and more than 40% of their goods exports go to other developing economies. As a result, their economic impacts are significant. According to data from the World Bank, an increase of one percentage point in the GDP Growth of the three largest developing economies – China, India and Brazil, tends to result in a cumulative GDP boost of nearly 2% in other developing economies after three years. While these effects are only about half the effect of growth in the three biggest advanced economies: the US, the Euro Area and Japan, the data highlights strong and important economic linkages between the developing economies.

Global Interest Rates and Inflation

The disinflationary trend has generally persisted since retreating from previous highs. However, for many countries, inflation rates remain higher than target. Global inflation is expected to drop to 4.2% in 2025 and further to 3.5% in 2026 with the advanced economies expected to converge to targets before the emerging markets. According to the IMF, while core goods price inflation has fallen to or below trend, services price inflation is still above Pre-COVID-19 levels, notably in the US and the Euro area. The retreat in inflationary pressures over 2023 – 2024 allowed many central banks to ease monetary policy, by cutting policy interest rates. Accordingly, monetary policy easing will likely continue in 2025, but at a slower pace, reflective of rising inflationary risks as well as the economic growth outlook for some countries.

In the US, it is expected that the Federal Reserve (Fed) will cut its benchmark interest rate, the Fed Funds rate, by just 50 basis points over 2025, compared to a 100 basis points cut over 2024. In September 2024, the Fed projections showed a full percentage point cut in the rate. The brake on the pace of US interest rate cuts reflects stickier US inflation, strong GDP growth and a resilient labour market. Further, policies expected to be implemented have the potential to stoke inflationary pressures, therefore the outlook for US interest rates will be heavily dependent on data in 2025. The first Fed meeting for 2025 is scheduled for 29 January and market expectations are for the rates to be held steady.

The European Central Bank has also cut its policy interest rate by a cumulative 100 basis points over 2024 and has made some progress in returning inflation back to its 2% target, with the inflation rate averaging 2.4% during the year. The ECB maintains its commitment to sustainably stabilize inflation at its target in the medium term but highlighted that the high level of uncertainty calls for prudence and that appropriate monetary policy stance will be data-dependent, however, if the current economic trajectory continues, they have indicated that policy restrictiveness will be further reduced. The market, however, is currently pricing in another 100-basis points rate cut for 2025.

There is a scenario in which global inflationary pressures rise sharply due to policy shifts, which may coerce central banks to tighten their monetary policy stance, which can result in an increase in interest rates. Given the high amount of uncertainties that exist, particularly related to drastic policy swings, most central bankers are indicating a cautious approach which will be data-driven.      

Geopolitical Risks

Caldara and Iacoviello[1] define geopolitical risks as the risks associated with wars, terrorist acts, and tensions between states that affect the normal and peaceful course of international relations.

Over the past few years, geopolitical fragmentation has increased sharply, including Russia’s invasion of Ukraine, events in the Middle East and other conflicts. The impact of rising geopolitical tensions is far-reaching and can cause disruptions in global economic activity through trade and financial linkages. According to the World Bank, ‘a major escalation in the intensity of incidence of conflicts and geopolitical tensions represents a substantial risk to global economic activity and would likely also set back progress considerably on a range of developmental goals. Specifically, the World Bank indicated that prolonged intensification of the Middle East conflict has the potential to significantly affect oil and natural gas supplies, which will put pressure on energy prices, which will disrupt the global disinflationary outlook.

Supply chain management is critical to mitigate the risks of rising geopolitical risks. In 2022, the global economy experienced a surge in inflation due to severe supply chain disruptions caused by geopolitical influences, among other factors. According to Standard and Poor’s, ‘strategies for building supply chain resilience include greater engagement with labour unions, geographic diversification, close monitoring of environmental profiles, reshoring and improved supplier engagement to manage tariff and geopolitical risks.’

The World Economic Forum’s Global Risks Report – 2025, which presents findings of the Global Risks Perception Survey 2024 – 2025, shows that ‘State-based armed conflicts’ was ranked at the top, among 33 risks, in the current (2025) risk outlook. In the two-year outlook, this category of risk has also moved up from fifth in the 2023 – 2024 report to third place. The results of the survey reflect respondents’ fears of ongoing cross-border conflicts and escalation risks in Russia’s invasion of Ukraine and the Middle East conflicts. The report also highlights the worsening humanitarian crises, given funding constrained and lack of sustained focus on these issues.    

Conclusion

2025 is expected to be a highly uncertain year, given the political changes that have occurred over 2024, resulting in an unclear policy path, in addition to the existing economic and geopolitical threats. The IMF indicates that medium-term risks are tilted to the downside, while the near-term outlook is characterized by divergent risks.  The IMF also forecasts that energy commodity prices will decline by 2.6% in 2025, driven by weak Chinese demand and strong supply from non-OPEC+ countries. These downside price pressures are expected to be only partially offset by increases in gas prices, due to colder weather and supply disruptions caused by the ongoing, or an escalation of Middle East conflicts. Non-fuel commodity prices are expected to rise by 2.5%, reflecting higher food and beverage prices. Benchmark interest rates are anticipated to steadily decline, at differing paces. An increase in protectionism will pose downside risks to the global economy as large tariffs will significantly affect countries that are heavily dependent on US demand such as China, Mexico and Canada. Additional tariffs can also ignite inflationary pressures and possible accompanying monetary tightening. Generally, the confluence of the major themes creates an exceptionally high degree of uncertainty in 2025, particularly for policymakers who will be tasked with mitigating the impact of these risks on their respective economies.  

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[1] Caldara, Dario and Matteo Iacoviello (2018). Measuring Geopolitical Risk. International Finance Discussion Papers 1222. https://doi.org/10.17016/IFDP.2018.1222