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Earlier this month, NIESR published its Winter 2025 Global Economic Outlook (GEO). In today’s Monday Interview, Senior Economist Ben Caswell asks Associate Economist Monica George Michail for her thoughts on the prospects for the global economy in 2025.
What are the global GDP growth projections for 2025 and 2026, and how do they compare to historical trends?
We expect global GDP to grow by slightly over 3 per cent in 2025 and 2026. While this rate falls short of the pre-pandemic decade’s global growth average of 3.7 per cent, it aligns with the long-term global growth average since 1980. This relative stability in the global growth outlook reflects the counteracting forces of falling interest rates offset by higher policy uncertainties and fiscal constraints in advanced economies.
GDP growth in advanced economies is forecast at 1.8 per cent in 2025, 0.2 percentage points higher than last year. The United States is expected to remain a strong performer, with GDP expected to grow by 2.4 per cent this year, driven by robust consumer, business, and government spending, following a robust growth rate of 2.8 per cent last year. In contrast, the Euro Area experienced sluggish growth of 0.7 per cent in 2024, held back by weakness in manufacturing activity, structural constraints and high public debt levels, but a slight improvement to 1.1 per cent is projected for 2025 thanks mainly to the ECB’s interest rate cuts.
For emerging economies, GDP growth rates are expected to be marginally lower than last year, with a forecast growth rate of 4 per cent in 2025. India stands out with strong growth of 6.4 per cent in 2024, which is expected to continue at 6.5 per cent in 2025 and 2026, supported by infrastructure spending and strong industrial output. China, however, is experiencing a slowdown, with growth projected to decline to 4.6 per cent in 2025 and 4.4 per cent in 2026, influenced by demographic challenges, institutional weaknesses, and slower productivity growth.
What are the main risks for growth this year? And which countries are most vulnerable to the proposed US tariffs?
The major downside risk to our forecast is global policy uncertainty, which currently stands at historical highs, driven by the new United States administration and political instability in Europe. This policy uncertainty has already raised inflation expectations in the US and contributed to rising government bond yields.
This uncertainty is compounded by the threat of rising trade protectionism and fragmentation, high indebtedness in the Euro Area, and ongoing geopolitical tensions in the Middle East and Ukraine. There is also the risk of a slowdown in the Chinese economy in the medium term driven by several factors including unfavourable demographics, falling productivity growth, and the end of a real estate boom.
The most significant risk, however, is the tariffs proposed by US President Donald Trump, which could have large implications for global trade, inflation and economic performances. Using the National Institute’s Global Econometric Model (NiGEM) for scenario analysis – where we assume the United States applies a 25 per cent tariffs on non-commodity imports from Mexico and Canada, and 10 per cent from China, and where all three countries retaliate with equal tariffs – US GDP growth rate could fall by up to 0.4 percentage points in the first year and US inflation would rise by 1 percentage point.
Canada and Mexico’s economy would be the most affected by these tariffs, given their high dependence on trade with the US. On the other hand, if China keeps its interest rates pegged, the impact of tariffs on its economic growth would be more limited at around 0.1 percentage points.
Looking to the UK, spillovers from these tariffs could raise inflation as much as 0.4 percentage points and lower GDP growth for 2025 by up to 0.25 percentage points. Overall, the proposed tariffs could reduce global GDP growth by 0.1 percentage points this year and raise OECD inflation rates by 0.3 percentage points. Early scenario analysis on the impact of tariffs on the global economy was also discussed in a previous NIESR Topical Feature.
What is the outlook for inflation, and will central banks continue cutting rates this year?
Global inflation is expected to continue slowing this year. However, as discussed, potential trade policy uncertainties present considerable upside risks to this central forecast.
We therefore think central banks in advanced economies will continue cutting rates in 2025, while carefully monitoring the potential inflationary effects of trade tariffs, as well as geopolitical tensions. We project the US Federal Reserve to implement two further rate cuts in 2025, maintaining a more cautious stance than the ECB, for which we expect three further cuts to support the Eurozone’s sluggish economic activity. The Bank of Japan, on the other hand, is expected to raise interest rates due to upward inflationary pressures.
Trends for inflation and interest rates are more mixed in Emerging Economies. While some countries like Brazil and Russia have increased interest rates in 2024 to combat inflation, others such as Mexico and South Africa, have begun to cut rates following trends in advanced economies. China, despite facing deflationary pressures, has been cautious with monetary policy.
Overall, central banks in emerging economies are expected to remain cautious given potential spillover effects from the Fed’s policies and the possible inflationary impacts of rising US import tariffs.
What is the state of public finances in advanced economies?
Public finances face significant challenges in advanced economies. A key issue is the growth in government debt that occurred during the pandemic and subsequent recovery period, which is now compounded by higher interest rates. This combination is putting pressure on governments, potentially requiring them to consider measures like higher taxes or reduced spending.
There is increasingly limited scope for advanced economies to use fiscal policy to stimulate economic growth, primarily due to debt sustainability concerns. Many of these economies are now in a phase of fiscal consolidation, moving away from the accommodative policies enacted during the pandemic. Moreover, high government bond yields seen in the last weeks further restrict the ability to implement accommodative fiscal policies, especially given the rising costs of interest payments on government debt.
The United States continues to experience economic expansion, partly due to ongoing fiscal stimulus, but also faces increased risk premia resulting from rising policy uncertainty and fears of unsustainable government debts.
The Euro Area, particularly Germany and France, is grappling with sluggish growth and fiscal constraints. France faced a political crisis in late 2024, leading to the collapse of the government due to a lack of consensus on the proposed austerity measures. These measures aimed to cut spending and raise revenues, but a revised version with reduced savings and no additional tax increases has since been proposed.
Simulations using NiGEM reveal that the proposed budgetary measures in France are expected to have a contractionary effect on economic activity in the short term. Specifically, France’s GDP is projected to be about 0.3 per cent lower in three years compared to our Autumn 2024 forecast.