The global economy surprised on the upside in 2024 but looks set to face rougher waters in 2025. Across-the-board tariffs are poised to squeeze both international trade and foreign direct investment, while persistently elevated interest rates threaten to curb consumer spending and business outlays. Adding to the strain, the U.S. dollar’s continued strength will challenge emerging markets. China’s outlook remains weak in spite of additional fiscal and monetary stimulus, and many European nations are struggling to shake off ongoing stagnation.
Donald Trump’s second inauguration on January 20 has injected a new level of unpredictability into the global outlook, with the U.S. likely to upset the current world order and exacerbate geopolitical rifts. Worries of a trade war remain very real, particularly regarding China, Mexico, and Canada. Europe’s already fragile economy risks falling even further behind amid potential tariffs and a deteriorating external landscape. Meanwhile, emerging markets continue to wrestle with a strong dollar, higher-for-longer interest rates, and China’s sluggish growth.
Forecasting in the Face of Uncertainty
Against this backdrop, economic forecasting has become more complicated than ever. While the imposition of broad-based tariffs and persistent geopolitical tensions could significantly hamper global expansion, our baseline assumption is that although growth will lose steam in 2025, a full-blown collapse is unlikely.
Looking Back at 2024
Despite early worries, the (world economy) outpaced expectations last year. Initial forecasts pegged 2024 global growth at 2.3%, but recent estimates place it closer to 2.6%. Though this was a slowdown from 2.8% in 2023 and 3.2% in 2022, the easing had been anticipated, and overall growth remained modestly above potential.
A key driver was the U.S., where economic activity expanded by about 2.8%, surpassing the 1.9% growth anticipated in early 2024. The strength of the consumer sector and a robust labor market more than compensated for Europe’s weakness and China’s underwhelming rebound.
Another highlight was the long-awaited decline in (inflation), which generally returned to central bank targets across major economies, allowing monetary policymakers to begin lowering interest rates. Reduced price pressures and more favorable financing conditions provided a welcome lift in the second half of 2024, bolstering retail spending and spurring renewed investment.
And Forward into 2025
Before Trump’s reelection, the outlook for 2025 seemed straightforward: further declines in inflation and interest rates would support stronger domestic demand, and a pickup in global trade would help Europe’s export-dependent economies.
However, this rosy scenario no longer holds. We have made sizable revisions to our forecast due to shifts in U.S. trade, immigration, and fiscal policy—along with an expectation that affected trading partners will retaliate with tariffs of their own. There is no denying that secondary effects could ripple across other economies as well.
Although a worldwide recession does not appear imminent, Trump’s policy mix points to higher inflation, firmer interest rates, and weaker overall growth as 2025 unfolds, with potentially more pronounced effects in 2026.
The Much-Feared Trade War
A looming global trade war is at the top of many risk assessments. The Trump administration is expected to ramp up tariffs significantly on several major U.S. trade partners, most notably China, the European Union, Mexico, and Canada. Other countries—such as Vietnam and India, which have benefited from diverted Chinese trade—also appear to be in the crosshairs, along with automotive-export heavyweights Japan and South Korea.
We anticipate these tariffs will be introduced gradually over 2025 for legal, logistical, and strategic reasons. While the exact severity is uncertain, our baseline assumption is that the effective U.S. tariff rate on Chinese imports will rise from around 20% to 40% over the year, with China responding in kind. Similarly, tariffs on Mexico and Canada could climb by 10 and 5 percentage points, respectively, while EU tariffs—particularly on automobile exports—are likely to jump by 5 points. In each case, we expect reciprocal measures.
In addition, U.S. tariffs on Vietnam could hit 10%, given the large trade imbalance and concerns over Chinese investment there, and rates on India, South Korea, and Japan may increase by about 5 points, albeit with less retaliation.
Such wide-ranging tariffs are clearly negative for global trade and growth. Spillover effects could intensify if China diverts exports to alternative markets, prompting places like the EU and Canada to extend their own tariffs on Chinese goods. Heightened tariffs could further erode global supply chains, weighing on economies well beyond the U.S. and China.
Higher-for-Longer Interest Rates
Long-term interest rates have surged in recent months. Since the 10-year U.S. Treasury hit a low of 3.6% in September, it has climbed a full percentage point to 4.6%. Yields elsewhere have mirrored this uptick: the U.K.’s 10-year gilt has breached 4.8%—its highest level since 2008—while Germany’s 10-year bund and France’s 10-year OAT have both risen significantly.
It may seem counterintuitive that long-term rates are increasing at a time when central banks were cutting rates to rein in inflation. A key factor is the(Federal Reserve’s) decision to pause its easing cycle. The Fed has signaled that its December cut could be the last for a while, pointing to economic resilience, relatively loose financial conditions, and the uncertain fallout of Trump’s fiscal and trade policies. Tariff hikes, stricter immigration rules, and tax cuts financed by borrowing are likely to stoke inflationary pressures, prompting more caution from the Fed.
Moreover, the term premium—the extra yield demanded by investors for holding longer-term securities—has been on the rise as markets adjust to an era of greater volatility and higher debt. Deficit-financed tax cuts could exacerbate the U.S. fiscal position, further pushing up long-term yields.
This spike in interest rates poses serious risks to global economic stability. Higher borrowing costs threaten investment and could curtail government spending plans, especially in debt-burdened regions such as parts of (Europe). While our base case still anticipates further gradual rate cuts in some regions, the probability of interest rates staying higher for longer has grown.
Currency Weakness Spreads
Elevated long-term rates, reduced scope for U.S. rate cuts, and a potent dollar combination continue to pressure emerging-market currencies. Many central banks in Asia, Latin America, and Eastern Europe—once in easing mode—have now paused or reversed course to defend their currencies. Brazil, for instance, not only had to raise rates but also drew heavily on foreign reserves to support the real. Meanwhile, the Chinese yuan has come under intensifying depreciation pressure.
Developed nations in Asia are not immune: currencies in Japan and South Korea have weakened over the last few years, and the yen has seen particularly steep declines. The euro is hovering near parity with the dollar and could depreciate further before year-end.
Though weaker currencies can make exports more competitive, thereby offsetting some damage from tariffs, they also inflate import prices, fuel inflation, and complicate debt obligations for countries with large dollar-denominated liabilities.
China’s Economic Slowdown
Amid all this turmoil, China’s ongoing economic slowdown is especially concerning. Southeast Asian economies, heavily reliant on Chinese demand, are at risk, as are commodity producers in Latin America and Africa.
Unfortunately, a substantial rebound in China appears unlikely. A faltering property market, depressed consumer sentiment, and high youth unemployment continue to weigh on activity. Mounting trade barriers add to the gloom, and we see growth slowing to 4.3% in 2025 and softening further to 3.9% in 2026.
While Beijing has rolled out a range of stimulus measures—cuts to key lending rates and significant fiscal spending—consumers remain wary, unwilling to loosen the purse strings amid widespread uncertainty. With confidence in short supply, China’s contribution to global growth will likely remain below par.
Europe Stuck in the Slow Lane
Europe’s economic outlook remains precarious, teetering between modest growth and possible recession. Although there were glimmers of recovery in recent quarters, the region’s momentum is fragile.
Fixed investment has contracted for four consecutive quarters, and external demand remains under pressure. With the specter of new U.S. tariffs, softer Chinese demand, and weaker global conditions, businesses are reluctant to spend on capital projects. Europe’s manufacturing sector, particularly in automobiles and energy-intensive industries, has already been grappling with structural and cyclical challenges.
While more normalized interest rates could eventually revive loan growth and support investment toward late 2025, the current environment remains uncertain. Consumer spending has some room to grow on the back of easing inflation, but household savings rates are climbing in several major European economies. Meanwhile, governments are shifting from expansionary budgets to more conservative fiscal policies, meaning the public sector will offer less of a cushion than in the past two years.
Latin America Feeling the Pinch
Latin America will also feel the repercussions of U.S. protectionism in 2025. Tariffs on exports and reduced remittances from deported workers will hit growth and financial stability. Mexico, Brazil, and Central America look especially vulnerable, with Mexico’s GDP expected to slow to 0.6% in 2025 (from 1.3% in 2024) and Brazil’s to 2% (down from 3.5%). Central American nations face a drop in remittances, a key economic pillar for the region.
Elsewhere, spillover effects could dampen external demand, though Argentina and Colombia may fare slightly better in 2025 and help offset some of the region’s turbulence. Overall, Latin America is projected to hold steady with around 2.1% growth in 2025, barely above last year’s 2% figure.
Fasten Your Seat Belts for a Volatile Year
Even though 2024 ended on a relatively positive note, the outlook for 2025 is fraught with risks. Persistent tariffs, tighter monetary conditions, and a slowing Chinese economy will test policymakers worldwide. While we do not foresee a complete global downturn, ongoing shifts in trade policy and financial markets are likely to unsettle growth trajectories across continents.
All told, businesses, investors, and households should brace for a year of heightened volatility. Higher borrowing costs, uneven global demand, and renewed geopolitical tensions will make 2025 a challenging but pivotal period—one that could redefine economic norms for years to come.
