Global economic growth is forecasted to expand at a modest 2.5% pace in 2025 as the slow recovery from the pandemic continues. This outlook factors in anticipated higher U.S. import tariffs, particularly impacting goods routed through Chinese supply chains.
Developed economies are expected to grow between 1.25% and 1.75%, while emerging markets are projected to expand at a more substantial 3.5% to 4% rate. Emerging economies will be the primary drivers of global activity, supported by steady commodities exports. India and the United States are set to remain key pillars of global growth.
However, emerging markets face significant risks. Their heavy dependence on Chinese demand for commodities exposes them to potential downturns if broader trade conflicts emerge, weakening China’s appetite for a wide range of imports.
Meanwhile, the eurozone continues to grapple with the effects of higher energy costs resulting from reduced reliance on Russian oil and gas. European economies must also navigate industrial overcapacity, possible U.S. tariffs, and the ripple effects of a slowing, deleveraging Chinese economy.
Despite these headwinds, the broader global outlook remains positive. Rebalancing labor markets, easing inflation, and declining interest rates will support growth, setting the stage for solid but moderate economic expansion in 2025.
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Global inflation is expected to ease toward a more sustainable 4% in 2025, a critical development as elevated debt levels become a growing concern and as interest rates reset higher across global markets.
Emerging economies with high debt burdens will need to pivot toward more sustainable fiscal strategies, including rebuilding budgetary buffers and foreign exchange reserves, to withstand the rising pressures brought on by escalating global trade tensions and higher tariffs.
As tariffs increase, import prices are projected to rise, maintaining upward pressure on inflation and intensifying financial stress, particularly for economies heavily reliant on foreign goods.
Meanwhile, China’s ongoing deleveraging and weak growth in the eurozone—forecasted at just above 0.5%, with Germany grappling with significant manufacturing overcapacity, especially in the auto sector—will have substantial implications for the global economy over the next two years.
Amid these shifting dynamics, the U.S. dollar is poised to strengthen significantly. As of the end of November, the dollar had appreciated by approximately 7.5% on a factual trade-weighted basis over the past year, reaching levels not seen in more than 25 years.
A stronger dollar, combined with rising tariffs, will likely trigger a resurgence of inflation across emerging markets, particularly in nations that import oil and conduct trade in dollars, making their transactions more costly.
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Inflation outlook: Slowing toward 4%
Global inflation, which spiked as economies reopened after the pandemic, continues its steady decline. After reaching a peak of 9.4% in the third quarter of 2022, inflation is projected to ease toward a more sustainable 4% by 2025.
The tightening of the synchronized monetary policy across major economies in recent years has successfully helped stabilize prices. Now, that tightening cycle is beginning to unwind, signaling a gradual return to more normalized economic conditions.
The broad supply chain disruptions that triggered pandemic-era price shocks have largely dissipated. This improvement stems from the combined effects of tighter monetary policy, which restrained growth and stronger labor market conditions, allowing inflation to ease without triggering a major global recession.
However, several risks threaten the inflation outlook for 2025:
- Protectionist Trade Policies: U.S. trade policy is expected to shift more aggressively toward protectionism. Prices on Chinese imports into the United States will likely rise sharply. Additionally, escalating trade tensions between the U.S. and Europe and between the U.S. and Mexico could further drive up global inflation.
- Strengthening U.S. Dollar: A stronger dollar will create inflationary pressures, especially for economies reliant on oil imports. Sluggish demand from China, slower growth in India, and the dollar’s appreciation will effectively raise the actual cost of oil for many emerging markets, shaping the global inflation landscape in 2025.
- China’s Export of Deflation: China is aggressively exporting its excess domestic production, effectively flooding global markets and exporting deflation to its trading partners. This strategy forces other economies to accept a reduced share of global manufacturing, likely fueling even stronger protectionist responses worldwide. In turn, this shift could contribute to higher global inflation over the coming years.
Central banks: Global monetary easing
As inflation growth slows to more manageable levels, major central banks around the world are expected to continue easing their previously restrictive monetary policies. Nearly 75% of global central banks are projected to reduce policy rates in 2025.
The Federal Reserve is anticipated to lower its policy rate to 4%, with the Bank of England, European Central Bank, and Bank of Canada also moving toward significantly less restrictive rate levels.
Specifically, the Federal Reserve is expected to implement a 50 basis point cut in 2025. Meanwhile, both the European Central Bank and the Bank of England are forecasted to reduce their rates by at least 100 basis points. At the same time, the Bank of Canada is likely to deliver a more substantial 150 basis point reduction.
These collective rate cuts will encourage greater risk-taking, ease financial conditions, and help fuel global economic growth as monetary policy shifts toward a more supportive stance.
In Asia, the People’s Bank of China is expected to aggressively lower interest rates to counter slowing economic growth, which is projected to fall below the official 5% target. China’s domestic economy continues to face significant challenges as both the commercial and residential property sectors undergo a period of deleveraging and consumer demand weakens.
Japan, however, stands out as the lone major economy where monetary policy tightening will continue. The Bank of Japan is moving cautiously to increase its policy rate, diverging from the global trend of monetary easing.
In Australia, the Reserve Bank of Australia (RBA) is projected to bring its terminal policy rate down to 3.35% by the end of 2025. The baseline forecast anticipates quarter-point reductions each quarter. However, if the RBA delays the start of its easing cycle, a half-point rate cut is expected midyear, followed by quarter-point decreases in both the third and fourth quarters of 2025.
Stronger dollar
The strengthening of the U.S. dollar is set to become one of the dominant economic narratives in 2025 as global investors seek to capitalize on higher returns within the American economy.
By the end of November, the absolute trade-weighted dollar index reached 117.2, marking a multi-decade high. This rapid appreciation is already fueling protectionist sentiment within the U.S., signaling years of adjustment ahead for significant trading partners and emerging markets that either peg their currencies to the greenback or maintain managed float systems.
While these pressures could spark calls for a managed dollar devaluation, such a move is highly unlikely today. Unlike the 1980s, when coordinated devaluation efforts like the Plaza Accord were feasible, the current environment is far more complex. The global political landscape has become multipolar, and the Federal Reserve remains focused on inflation targeting, not exchange rate management.
Moreover, achieving a weaker dollar would require significant fiscal consolidation in the United States, a politically challenging prospect. These realities make a strategic devaluation of the greenback improbable in today’s context.
Historically, the dollar peaked at 131.5 on the absolute trade-weighted index in March 1985, leading to protectionist trade policies and largely unsuccessful efforts to manage bilateral currency valuations.
If the dollar continues to overshoot fair valuations, global investors and multinational firms with exposure to the American market should brace for heightened protectionism. In such a scenario, companies would be wise to implement robust hedging strategies to safeguard against further volatility and potential trade barriers.
Trade and tariffs: Risk in the years ahead
A new wave of higher U.S. tariffs would force major trading partners—particularly China—to undertake significant economic adjustments.
We anticipate that, under the Trump administration, the United States will impose additional tariffs of 10% to 60% on selected Chinese goods imported into the country as early as 2025.
Beyond direct tariffs, we also expect 10% to 20% tariffs on transshipments from China routed through Vietnam and Malaysia, further tightening restrictions on Chinese exports reaching American markets.
In response, China is likely to devalue the yuan by 10% to 15%, mirroring strategies used during the 2018–2020 trade disputes, in an effort to keep its exports competitive despite higher U.S. import taxes.
The impact on China’s economy would be significant. We forecast that a renewed trade war could cause Chinese GDP growth to decline by approximately 0.6 percentage points, lowering overall growth to around 4%—well below Beijing’s official 5% target.
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Our outlook assumes that China will devalue its currency, much like during the 2018–2020 trade tensions, when the yuan depreciated by over 14% in response to rising U.S. import taxes on selected goods.
If renewed trade skirmishes escalate into a full-blown trade war, we would need to lower our global and Chinese growth forecasts accordingly.
In Europe, the combined direct and indirect impacts of potential U.S. tariffs on eurozone exports could trim regional GDP growth by about 0.5 percentage points. Should U.S.-Europe trade tensions intensify to the levels seen in 2018–2020, recession risks in the European Union would sharply increase, and U.S. economic growth could also be downgraded by approximately 0.2 percentage points.
The risks to emerging markets are even more complex and uncertain. Economies with significant exposure to China, Russia, and Germany are particularly vulnerable and may face mounting economic headwinds due to both external trade shocks and domestic vulnerabilities.
Additionally, emerging market currencies pegged to the U.S. dollar—especially those burdened with high debt levels—could come under intense pressure as Washington redefines global trade terms, increasing financial stress across the developing world.
Commodities and oil prices
One of the most intriguing factors shaping the global economy in 2025 will be the interplay between oil prices, commodity markets, and the U.S. dollar.
Oil prices are expected to stay at or below the levels seen in late November 2024, as rising global oil production adds an extra million barrels per day to the market.
However, if the U.S. dollar continues to appreciate, economies that rely on oil imports, such as China, Japan, and India, will likely face increased inflation. These nations settle oil transactions in dollars, and a stronger dollar makes imports more expensive.
On the flip side, slowing Chinese demand is set to weigh heavily on oil and commodity prices. From October 25 to the end of November, the Bloomberg Commodity Price Index dropped by 1.22%, and from its peak in June 2022, it has fallen by 27.8%.
While India’s growth is forecasted to reach a healthy 6% to 7%, China’s growth is expected to slow to 3.5% to 4.5%—well below pre-pandemic levels. China’s ongoing era of debt and deleveraging will continue to drag on its commodity exports, affecting global supply and prices.
The takeaway
Global growth is forecasted to expand at a solid, yet modest, pace of 2.5% in 2025, supported by strength in India, emerging market economies, and the United States.
Labor markets worldwide will continue to rebalance, and inflation is expected to stabilize as goods prices ease. Additionally, monetary authorities will likely adopt less restrictive policies, which should encourage higher risk appetite and bolster business investment in the coming year.
However, the primary risk to the global outlook is the potential for slower growth if trade tensions between the U.S. and its major trading partners escalate significantly.
Another critical factor will be the evolution of China’s role as a significant growth engine. As Beijing navigates the period of debt and deleveraging, its approach to economic management will be crucial. Monetary and fiscal policies will be necessary to transition from stabilization to growth, mainly if China aims to meet its 5% growth target while facing increasing tariffs from the U.S.
If China continues to delay meaningful actions to address weak household consumption and maintains mercantilist policies, economic policy tensions may escalate into the political sphere, causing further disruptions in the global trade and financial system.
Frequently Asked Question
What is the global growth forecast for 2025?
Global growth is expected to expand at a solid but modest pace of 2.5% in 2025. This growth is driven by strong performance in India, emerging market economies, and the United States.
Which regions will drive global growth in 2025?
India, emerging markets, and the United States will be the primary drivers of global growth in 2025. India is expected to see robust economic growth between 6% and 7%.
How will global inflation behave in 2025?
Inflation is expected to continue stabilizing as goods prices ease. The combined effect of easing monetary policies and a rebalance in labor markets will contribute to a more controlled inflationary environment.
What role will U.S. trade policy play in the global economy in 2025?
U.S. trade policy, particularly rising tariffs, remains a key risk to the global outlook. An escalation in trade tensions between the U.S. and its trading partners, especially China and Europe, could lead to slower global growth.
Will China’s economic role continue to be significant in 2025?
China’s role as a significant source of global growth will evolve as the country navigates its debt and deleveraging period. The effectiveness of China’s policies will impact its ability to meet its 5% growth target and maintain global influence.
What impact will trade wars have on global growth?
Trade wars, particularly between the U.S. and major partners like China, could dampen global growth. If trade tensions escalate significantly, it could result in slower growth and increased volatility in international trade.
How will the global economy be affected by U.S. tariffs on Chinese goods?
U.S. tariffs on Chinese goods could negatively impact both the U.S. and China, with higher costs for consumers and businesses. China may respond with measures like yuan devaluation, further complicating global trade dynamics.
Conclusion
The global economy in 2025 is projected to grow at a solid but modest rate of 2.5%, driven primarily by strong performances in India, select emerging markets, and the United States. While inflation is expected to stabilize, thanks to easing monetary policies and a rebalance in labor markets, significant risks remain on the horizon. The rising trade tensions between the U.S. and its principal commercial partners, especially China, could potentially slow growth and create instability in global trade dynamics.
China’s economic slowdown and the ongoing period of debt and deleveraging pose challenges, both regionally and globally. As Beijing manages its growth trajectory, its ability to navigate trade tensions and consumer demand issues will be critical in shaping the broader economic landscape. Meanwhile, U.S. trade policy continues to influence global markets, with tariffs and protectionist measures potentially exacerbating economic slowdowns, particularly in emerging economies.