The global economy in 2025

The global economy in 2025

It may not feel like it, but 2024 was a pretty good year for the global economy. Inflation receded, central banks cut interest rates and growth came in as expected and at around trend, or normal levels. Risks that were widely discussed a year ago – persistent inflation, an economic hard landing and geopolitical shocks that hit growth – failed to materialise.

• We expect 2025 to be another decent year, with global GDP growth coming in around 3.2%, in line with the performance in 2023 and 2024. In many respects it will be more of the same.

• The US is likely to remain the growth leader of the rich world, with Europe, especially Germany, lagging far behind. Southern, central and eastern Europe and the Nordics are likely to outperform Germany, France and Italy again. The headwinds that weighed on Chinese growth last year persist and, with the Trump administration promising new tariffs on China, may mount. India is likely to post another year of around 6.0% growth, making it by some margin the world’s fastest-growing major economy. Inflation and interest rates should continue to decline.

• UK activity has been choppy over the last 18 months – a mild recession in the second half of 2023, then a rebound in activity in the first half of 2024 followed by a near stagnation in the second half of the year. Business optimism spiked in July in the wake of the election but has since fallen away. Inflation has proved rather stickier than expected while UK interest rate expectations and bond yields have been pushed higher as part of a global move reflecting the strength of the US economy and concerns about the impact of tariffs and high government borrowing in the US. October’s UK budget saw the government announce the largest tax rises in over 30 years creating an additional headwind for the corporate sector which will bear the brunt of the increases.

• The rise in yields, or interest rates on government bonds intensified in December and the first half of January. UK bonds came under particular pressure, with markets worrying that higher borrowing costs could wipe out the £10bn of headroom built into the government’s budget arithmetic, forcing the chancellor to cut expenditure or raise taxes. Yields declined last week, easing the pressure, but the episode highlights the problems facing the chancellor as she seeks to square the circle of improving public services, strengthening the public finances and boosting growth.

• We expect UK economic activity to remain sluggish in the opening months of this year. Beyond this, we see growth picking up over the summer and into the second half of the year. Rising real incomes and falling interest rates should bolster consumption. Growth will also be boosted by increases in government spending announced in October’s budget. Despite a lacklustre start, we expect the UK economy to grow by about 1.0% this year, slightly ahead of last year’s growth rate.

• The US delivered a major surprise on activity last year, with GDP growth coming in well above expectation and fears of a ‘hard landing’ fading. The US economy seems to have it all – a vast and growing tech sector, rapid productivity growth, cheap energy and easy fiscal policy (the US’s fiscal deficit last year, at over 6.0% of GDP, was at levels that until recently would have been deemed appropriate only in a period of serious economic weakness).

• To this the new US administration is likely to add a heady mix of tax cuts and a broad programme of deregulation. Other policies, notably deporting unauthorised workers – in excess of 8m people –  and levying tariffs of up to 60% on Chinese imports and 10%-20% on imports from other countries, are viewed by most economists as likely to weaken growth.

• Given the costs and the political and logistical challenges involved in large-scale deportations the new administration may focus its efforts on reducing immigration. Goldman Sachs, for instance, assumes that tighter policy will lower net immigration into the US from a pre-pandemic average of 1m a year to 750,000.     

• In a similar vein increases in tariffs may be more targeted than suggested on the campaign trail. Even in a diluted form new US tariffs would be likely to weigh on growth in 2025, especially in the two countries with the largest export surpluses, China and Germany. Tariffs would also keep inflation higher for longer.

• For the US economy the negative effect of tariffs and reduced migration would be countered by the boost from tax cuts, but it is impossible to gauge the overall impact in the absence of precise measures. In any case, 2025 seems likely to be another good year for the US, with growth coming in around the 2.0% mark. Strong real income growth and positive wealth effects (US equities have risen 50% in the last two years) should keep US consumers spending. Meanwhile, business investment is likely to show its fifth consecutive year of growth fuelled by lower interest rates and tax incentives. 

• Euro area GDP growth is likely to grow at around half US rates, about 1.0%. Germany, the region’s dominant economy, has stagnated for the last five years and now faces the threat of US tariffs. Chinese industry, having moved up the value chain, is providing serious competition for German manufacturing especially in the auto sector. Energy prices are significantly higher in Europe than in the US, particularly in Germany. The mood in Germany is downbeat. In December the Ifo survey of German manufacturing confidence dropped to the lowest level since the pandemic. Commenting on the reading Timo Wollmershäuser, head of Forecasts at the ifo Institute, said, “Germany is going through by far the longest phase of stagnation in post-war history. It is also falling behind considerably in… international comparisons”.

• One solution to Germany’s malaise would be for the government to borrow, and spend more. Relaxing the constitutional rules that limit borrowing has become a hot topic in German political circles. But few expect February’s elections, which seem likely to put the centre-right CDU into power, to deliver a swift or major change in fiscal policy. At best Germany is likely to show very modest growth this year.

• Things look rather better elsewhere in the euro area. A weak recovery unfolded last year and rising real incomes and high savings point to a further increase in consumer spending and GDP growth across most countries. Prospects are brightest among the smaller and medium-sized euro area countries, with Poland, Ireland and Spain likely to do well.

• The Chinese economy is continuing to contend with an ageing population, greater protectionism and moribund construction and housing sectors. 70% of growth last year came from exports. Despite a more challenging environment, China’s trade surplus reached a record of nearly $1tn last year (some of this was due to US companies stockpiling Chinese products anticipating a rise in tariffs under the Trump administration). The consumer economy is weak with consumer confidence at the same level as in the pandemic when China’s population was dealing with draconian lockdowns. Greater policy stimulus should help counter some of the negative effects of likely US tariffs. The IMF sees China’s economy growing by 4.6% this year, slightly less than last year and about half the average since the turn of the century.

• We see three main risks to the global economy this year. First, large increases in US import tariffs could trigger retaliation, adding to inflationary pressures, delaying interest rate cuts and dampening growth. Second, even leaving aside tariffs, inflation could yet prove more persistent than expected, with wages and core rates of inflation holding up. A strong US economy, soon, it seems, to be boosted by tax cuts, and the recent rise in gas and oil prices, poses particular inflationary risks. The third threat comes in the form of geopolitics, the issue that UK CFOs see as the principle external threat to their businesses. While not all geopolitical shocks have pervasive economic effects, some, such as the invasion of Ukraine, which triggered an energy crisis in European prices, do. Shocks that destabilise trade and financial markets, or raise prices, pose the greatest economic risks.
   
• If we manage to avoid these sort of shocks the global economy may expand by around 3.0% – a respectable, if hardly rapid, pace of activity.  More telling is how much of that growth is likely to depend on the US and how little will be generated by Europe. Boosting growth is perhaps the greatest challenge facing policymakers in the EU and the UK.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 3.1% at 8,505 as a weaker pound boosted expectations for companies with dollar revenue and on growing expectations that the Bank of England will cut interest rates in February.

Economics

• The UK economy grew 0.1% in November, below expectations of 0.2% but higher than the previous two months of negative growth
• Bank of England monetary policy committee member Alan Taylor said a “more accelerated pace of rate cuts” may be needed given the softening in UK growth 
• UK inflation fell to 2.5% in the year to December, from 2.6% in the previous month, due to lower hotel and restaurant prices
• UK government bond yields or interest rates fell back on weak inflation data having, in the previous week, hit the highest level since 2008
• UK house prices and sales are expected to rise throughout 2025, according to the Royal Institute of Chartered Surveyors 
• UK retail sales fell unexpectedly by 0.3% in December compared with the previous month, as food sales fell to their lowest level since 2013
• Germany’s economy contracted by 0.2% in 2024, the second consecutive year of declining output, highlighting the country’s continued economic weakness. The Bundesbank predict growth of just 0.1% growth in 2025
• China’s economy grew by 5% in 2024, the lowest annual growth outside the pandemic since 1990
• China’s trade surplus reached a record high of $992bn in 2024, with strong annual export growth suggesting a possible frontloading of trade ahead of potential US tariffs

Business

• The six largest US banks generated $142bn in profit across 2024 amid higher trading and dealmaking activity, the FT reports
• The US announced an export licencing regime on chips used in artificial intelligence applications in an attempt to limit exports to China
• Aerospace company Boeing’s commercial jet deliveries in 2024 were the lowest since the pandemic due to strikes and production issues
• On Sunday TikTok resumed services in the US to 170m subscribers after president-elect Donald Trump said that he would issue an executive order to give the app a reprieve when he takes office on Monday
• Meta, owner of Facebook, announced it will end its fact-checking programme in the US and instead use a community-based system similar to X
• New York rush-hour traffic speeds have improved dramatically in the first weeks of Manhattan’s congestion charging scheme, the FT reports
• Oil company Saudi Aramco announced plans to increase its investments in lithium production, aiming to commercially produce the metal by 2027 in a bid to diversify away from oil
• Government and industry sources said the proposed UK Sizewell C nuclear plant may cost approximately £40bn, nearly double the original estimates, the FT reports. The UK government and contractor EDF have disputed this figure
• The UK government launched its AI Opportunities Action Plan, consisting of 50 recommendations in a bid to become an “AI superpower”
• Energy company BP announced 4,700 job cuts equivalent to over 5% of its workforce
• UK games and figurines manufacturer Games Workshop, creator of the Warhammer game series, posted a record performance in the second half of 2024, supported by strong growth in video games sales
• Royal Mail is expected to return to profit following a “successful Christmas period” of parcel deliveries
• Lloyds Bank announced approximately 500 job cuts and the closure of two offices as part of its four-year investment plan 
• Spain has proposed a 100% tax on non-EU resident property buyers in an attempt to improve housing affordability for residents

Global and political developments

• Israel and Hamas agreed to a ceasefire and the release of remaining hostages, halting the 15-month conflict in Gaza
• South Korea’s impeached president Yoon Suk Yeol was arrested by police and investigators following his attempt to impose martial law in December
• Canada warned of implementing “tit-for-tat” tariffs on US products if the incoming Trump administration imposes planned tariffs on Canadian imports
• Former governor of the Bank of England Mark Carney announced his candidacy to replace Justin Trudeau as head of the Liberal Party and as Canada’s prime minister
• UK prime minister Keir Starmer signed a 100-year pact with Ukraine during his first visit to the country as prime minister. Starmer said the UK will play its “full part in guaranteeing Ukraine’s security”
• Polish president Donald Tusk warned that “Russia was planning acts of terrorism in the air not only against Poland”

And finally… an Australian court has annulled the marriage of a newlywed couple after the bride was tricked into the marriage thinking it was a staged ceremony as a prank for the groom’s social media following - insta-sham