As 2025 begins, the global economy stands at a turning point, facing slower growth, new policies, and changing market conditions. The global economy is poised for a year of moderated growth, reflecting both the fading momentum of pandemic-era recovery policies and the emergence of new economic headwinds. Forecasted global GDP growth of 3.0% marks a slight decline from previous years, with the US, Europe, and China each confronting unique challenges. In the US, the economic expansion is set to slow as newly implemented tariffs and stricter immigration policies ripple through the labour market and consumer spending. These measures, while aimed at reshaping trade and workforce dynamics, could inadvertently raise costs for businesses and consumers, placing downward pressure on growth.
The US labour market, while resilient, is showing signs of cooling. Monthly job growth is stabilizing between 100,000 and 150,000, a marked deceleration compared to the robust post-pandemic hiring trends. Despite this, unemployment remains low at around 4%, suggesting a healthy, albeit softening, labour environment. Consumer spending, which accounted for nearly 80% of US GDP growth in 2024, may face constraints as pent-up savings are depleted and debt burdens rise modestly. Retail sales growth, which was 4.1% year-on-year in November 2024, reflects the enduring strength of consumer activity but signals the possibility of a plateau in the coming year.
Inflation remains a critical variable in the economic narrative, albeit with a shifting trajectory. After years of intense focus on price increases, inflation appears to be normalizing across major economies. In the U.S., consumer inflation hovered near 2.7% in late 2024, with core measures slightly higher. Yet, tariffs and immigration policies could push costs higher temporarily in 2025, before broader disinflationary forces regain control. Europe and the UK are projected to see steadier declines in inflation, though at the cost of sluggish growth, with the eurozone nearing a cruising speed of just 1% GDP growth. Japan offers a contrasting picture, as its wage growth trends and steady inflation of around 2% underscore the country’s escape from decades of deflation. China, however, remains entrenched in deflationary pressures, reflecting deep structural issues in its overinvested manufacturing sector and insufficient consumption-driven recovery.
The divergence in inflation trajectories is mirrored in monetary policy across regions. The Federal Reserve, after cutting rates by 75 basis points in 2024, is expected to pause further reductions by mid-2025. This reflects a cautious approach, balancing the need to support growth with concerns about potential price increases from trade and fiscal policies. In contrast, the European Central Bank and Bank of England may continue easing, as their economies contend with stagnation risks. Meanwhile, the Bank of Japan could raise rates twice in 2025, signalling growing confidence in its economic transformation. Such divergent central bank strategies underscore the complex, region-specific economic dynamics shaping the global outlook.
China’s struggles stand out as a cautionary tale for the interconnected global economy. While its fiscal and monetary stimulus measures have sparked short-term rebounds, they have failed to address underlying weaknesses. The re-emergence of trade disruptions and oversupply threatens to exacerbate deflationary pressures, limiting China’s contribution to global growth. Neighbouring economies, particularly those dependent on China’s supply chains, may feel the ripple effects, though regions like India and Southeast Asia offer a counterbalance with strong domestic consumption and robust investment inflows.
Geopolitical and policy developments loom large over the 2025 outlook. In the US, the re-election of Donald Trump and the Republican congressional sweep signal significant shifts in fiscal and trade policies. The proposed extension of the Tax Cuts and Jobs Act, alongside potential new tariffs, could alter the competitive landscape for businesses and create uneven impacts across sectors. Tariffs, such as the suggested 10% on all imports and 60% on Chinese goods, may act as negotiating levers but could also stoke inflation and strain consumer budgets. The effects are likely to resonate beyond US borders, influencing global trade patterns and economic sentiment.
In Europe, the economic recovery remains fragile, with manufacturing and consumer sectors grappling with subdued demand. The eurozone’s heavy reliance on trade makes it particularly vulnerable to disruptions, and its slow response to geopolitical challenges could further weigh on growth. However, opportunities exist in targeted fiscal measures, such as green infrastructure investments, which could stimulate specific sectors.
The overall global economic environment in 2025 reflects a delicate balancing act between growth, inflation, and policy uncertainty. The interplay of these factors creates a landscape where regional disparities are likely to widen, and economic resilience will depend heavily on how nations navigate their unique challenges. While the paths may differ, the collective global narrative underscores the enduring importance of adaptability in an era of complexity and change.
Data Source: Forbes, JP Morgan, Morgan Stanley
