The International Monetary Fund (IMF) last October predicted the global economy would grow 3.2% in 2025. The Organization for Economic Cooperation and Development (OECD) and the World Bank (WB) made similar forecasts, with the figures ranging from 3% to 3.3%.
Soft landing
Last year’s relatively positive achievements have laid a foundation for expectation of stable economic growth this year. OECD Secretary General Mathias Cormann said that the global economy demonstrated remarkable resilience last year when many countries recorded stable growth and inflation dropped to the 2% target set by central banks. An IMF report last October forecast that the average inflation rate would return to 3.5% by the end of this year, after peaking at 9.4% in the third quarter of 2022. Currently, the US’s inflation rate is fluctuating around 2.7%, while it is 2.2% in the Eurozone, and 2.6% in the UK.
High interest rates over the last two years to curb inflation have not caused the predicted sharp recession. Meanwhile, spending on services and labor have increased. In the second half of last year, the US Federal Reserve (Fed) and the European Central Bank (ECB) cut interest rates to prepare for a "soft landing" that is cooling the economy without causing a recession. According to S&P Global, the global economy is entering the new year in a relatively good position.
However, some experts cautioned that inflation in some major economies did not fall to the 2% target and may have increased slightly in the final months of 2024,so interest rates still need to be managed cautiously and inflation risks need to be closely monitored.
“We are in a global economy that although we celebrate the possibility of a soft landing what we say is that we are landing in the wrong runaway. We are landing in a framework of slow growth, high debt, weak investment, and the risk of fragmented trade,” said Rebeca Grynspan, Secretary-General of the UN Conference on Trade and Development (UNCTAD).
In their policy statements at the end of last year, Fed Chairman Jerome Powell and ECB Chairwoman Christine Lagarde said that it’s too early to draw conclusions about the fight against inflation as 2025 will see unpredictable trade conflicts. Both the Fed and the ECB will continue cutting interest rates, but at a slower pace than last year.
Variable US
The OECD made the most positive forecast of global GDP growth at 3.3%, while the IMF’s projection was 3.2%. More cautiously, the two leading US banks, Morgan Stanley and Goldman Sachs, forecast growth of 3% and 2.7% respectively.
However, the outlook varies significantly between regions. Goldman Sachs said the US’s GDP growth will be higher than other developed countries, reaching 2.5% this year, almost equal to the OECD's assessment of 2.4%. The world's second largest economy, China, is predicted to grow 4.7% by the OECD and 4.5% by the WB. The Eurozone is projected to grow 1.3% and Japan 1.5%.
Most observers see the US as an unknown variable. Seth Carpenter, chief economist of Morgan Stanley, said Donald Trump’s victory will trigger drastic policy changes with global impacts.
Goldman Sachs shared the view that the Eurozone's GDP may increase by a mere 0.8% this year due to new US tariffs and regulatory policies, especially if a trade war occurs. China will be unable to avoid new US tariffs this year, so its GDP may increase only 4.1%, according to S&P Global.
The impact is not one-sided. The US economy will also be affected if Trump imposes stiff tariffs on economic rivals, which could lead to increased trade conflicts.
“Most people think that they probably will be more effective than they were previously threatened higher tariffs and the WTO is much weaker than it was 8 years ago. Americans are worried of adverse impacts on the US economy,” Joseph Stiglitz, an American Nobel Prize laureate in economics, said.
According to Goldman Sachs, if trade uncertainty rises to the level seen in 2018-2019, GDP could fall 0.3% in the US, 0.9% in the Eurozone, and 0.7% in China.
The UK’s Capital Economics assessed the risk of trade conflict as moderate, because countries’ retaliatory measures will be designed to avoid escalating tensions with the US.