Global growth in 2025 will expand at a modest 2.5% pace as the sluggish recovery from the pandemic continues, according to our forecast.
Global growth in 2025 will expand at a modest 2.5% pace as the sluggish recovery from the pandemic continues.
This forecast accounts for an expectation of higher import taxes in the U.S. market, particularly for goods that flow through Chinese supply chains.
Developed economies will most likely experience growth between 1.25% and 1.75%, compared with a 3.5% to 4% rate in emerging economies.
The major drivers of global economic activity will be the emerging markets, which will see solid but restrained growth in commodities exports. India will continue to show strength, as will the United States, all of which will bolster global growth.
Emerging economies face risks, though. Not only do they depend on China’s demand for commodities for their own growth, but they will also feel the impact of sagging Chinese demand for a wider range of imports if a broader trade war breaks out.
And the eurozone faces challenges as it continues to adjust to higher energy costs caused by the de-risking from Russian oil and gas exports. In addition, Europe is contending with industrial overcapacity, the prospect of higher tariffs from the U.S. and the ripple effect of a slowing Chinese economy that is deleveraging from years of debt-fueled growth.
But the bigger picture for the global economy is still for solid, if unspectacular, growth, driven by a rebalancing of labor markets, easing inflation and lower interest rates.
Read RSM’s outlooks for the United Kingdom, Australia, Canada and the United States.
Global inflation should ease toward a more sustainable 4%, which is critical as elevated debt levels become a greater concern and as interest rates reset higher.
Emerging economies with elevated debt levels must adopt more sustainable fiscal paths, including rebuilding fiscal buffers and foreign exchange reserves, to weather the coming storm associated with rising tariffs.
Because of these trade tensions, import prices will rise, which will keep upward pressure on inflation, creating further financial stress.
But China’s deleveraging and the tepid growth in the eurozone—which we forecast at just above 0.5% as Germany contends with manufacturing overcapacity, particularly in autos—will play a significant role in the global economy over the next two years.
Amid these trends, the American dollar is likely to surge in value to levels not seen in a quarter century. As of the end of November, the dollar had increased by about 7.5% on a real trade-weighted basis over the past year.
A stronger dollar amid rising tariffs will create the conditions for a resurgence in inflation across many emerging markets that import oil and settle their trades in more expensive dollars.
Inflation outlook: Slowing toward 4%
Global inflation, which surged as economies emerged from the pandemic, continues to abate.
Following the global peak in inflation of 9.4% in the third quarter of 2022, we expect inflation to ease toward 4% in 2025.
The synchronized tightening of monetary policy in recent years, which helped stabilize prices, is beginning to unwind.
Broad supply disruptions that were the primary cause of the pandemic-era price shocks have dissipated because of the combined effect of tighter monetary policy that put constraints on growth and improved labor demand, which permitted inflation to decline without causing a major downturn.
But there are risks to the inflation outlook.
- Protectionism: First, trade policy in the U.S. will move toward protectionism. At a minimum, prices on Chinese imports into the U.S. will rise significantly. It is likely that trade tiffs between the U.S. and Europe, and the U.S. and Mexico, will also put upward pressure on global inflation.
- Stronger dollar: Second, a stronger dollar for economies that import oil will push up inflation. Uncertainty around demand from China, slower growth in India and the rising dollar’s impact on the real effective price of oil for many emerging economies will almost certainly shape the inflation narrative in 2025.
China is flooding the global economy with excess domestic production and exporting deflation to its trade partners. China is effectively trying to force its trade partners to accept a reduced global share of manufacturing, and we think this will play a significant role in stoking trade protectionism. The result could be higher global inflation.
Central banks: Global monetary easing
The major central banks will continue to ease restrictive policies as inflation growth slows to manageable levels. Close to 75% of all central banks will be reducing policy rates.
We expect that the Federal Reserve will reduce its policy rate to 3.5%, while the Bank of England, European Central Bank and Bank of Canada will also reduce their policy rates to a far less restrictive level.
The Federal Reserve will most likely cut its policy rate between 50 and 75 basis points in 2025, with the European Central Bank and Bank of England each expected to reduce its policy rate by at least 100 basis points. The Bank of Canada will most likely cut its policy rate by 150 basis points. All of these reductions will support risk taking and fuel growth.
In Asia, the People’s Bank of China will have no alternative but to lower rates aggressively to offset a slowing in growth below the official 5% target. The domestic economy is struggling as the commercial and residential property sectors, as well as households, face a period of deleveraging and as consumer demand eases.
Japan is the lone major central bank that will not be easing as it moves cautiously to increase its policy rate.
In Australia, we expect the terminal rate to settle at 3.35% by the end of 2025, with a quarter-point reduction in each quarter. Should the Reserve Bank of Australia delay the start of its easing cycle, we expect a half-point cut midyear followed by quarter-point cuts in the third and fourth quarters of 2025.
Stronger dollar
The appreciation of the U.S. dollar figures to be one of the major economic narratives in 2025 as global investors seek to take advantage of the rising returns on investment inside the American economy.
The real trade-weighted adjusted dollar index shows the dollar sitting at 117.2 at the end of November—a multidecade high.
This increase is already stoking protectionist measures inside the U.S. economy, which implies years of adjustment for major American trading partners and emerging markets that peg their currencies to the greenback or use carefully managed floats.
This dynamic will no doubt result in calls for a managed devaluation of the greenback. But unlike the 1980s, when a devaluation was possible, it’s a difficult proposition today.
To begin with, there is a new, multipolar global political framework to deal with as well a Federal Reserve that targets inflation and not the exchange rate.
On top of this, a weaker dollar would require notable fiscal consolidation in the United States. All of these factors make a devaluation of the dollar highly unlikely.
The real trade-weighted dollar index peaked at 131.5 in March 1985, which translated into years of protectionist trade policies and failed attempts to manage bilateral currency valuations.
Should the dollar overshoot reasonable valuations, global investors and firm managers with exposure in the wealthy American market should prepare for further protectionist measures.
Any attempt to talk down the value of the dollar would require those with such exposure to engage in substantial hedging strategies.
Trade and tariffs: Risk in the years ahead
A round of higher tariffs by the U.S. would require America’s trading partners, particularly China, to make significant adjustments.
We expect that the Trump administration will place an additional 10% to 60% tariff on selected Chinese goods imported into the U.S. early in 2025.
We expect 10% to 20% tariffs on transshipments from China through Vietnam and Malaysia in addition to the import taxes placed on exports to the U.S. out of China.
China would certainly respond with a devaluation of the Chinese yuan in a range between 10% and 15% to make its exports less expensive, just as it did during the 2018−2020 trade skirmish.
The impact on China would be hard to ignore. We expect such a trade war would bring a 0.6% decline in growth inside China, falling to around 4%, which is well below Beijing’s official 5% growth target.
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This is predicated on China’s devaluing its currency as it did in 2018−2020, when the yuan depreciated by over 14% as the U.S. increased import taxes on selected goods.
Should a second trade skirmish turn into an outright trade war, we would have to reduce our global and Chinese growth targets.
In Europe, we anticipate that both indirect and direct effects on any tariffs imposed by the U.S. on the eurozone would result in a loss to growth of a half-percent.
Should trade tensions between the U.S. and Europe approach 2018−2020 levels, recession risks in the European Union will take center stage and the U.S. growth prospects will need to be revised down by approximately a 0.2 percentage point.
The risk to emerging economies, though, is more uncertain. We think the greatest risk is to those emerging economies with exposure to China, Russia and Germany, which are likely to face greater economic headwinds because of their own domestic conditions.
Emerging market currencies that are pegged to the dollar and are contending with high levels of debt could be subject to increased stress as Washington seeks to adjust the terms of trade.
Commodities and oil prices
One of the more interesting aspects of the year ahead will be the impact of commodities and oil prices on the dollar.
Oil prices should remain at or below the levels of late November as rising global production brings an additional million barrels per day to market.
Should the dollar keep rising, that increase would have the opposite effect on economies that import oil, like China, Japan and India, which settle their trades in the dollar, pushing up inflation.
Sagging demand out of China is certain to be the primary source on the other side of the equation for both oil and commodities.
From Oct. 25 to the end of November, the Bloomberg commodity price index had fallen 1.22%.
From its cyclical peak of June 2022, it had declined 27.8%.
While growth in India will reach 6% to 7%, growth of 3.5% to 4.5% in China is simply not aligned with prepandemic growth. The debt and deleveraging era that has now ensnared
China will continue to function as a drag on commodities exports.
The takeaway
Global growth will expand at a solid if unspectacular pace of 2.5% in 2025, according to our forecast, driven by strength in India, emerging market economies and the United States.
Global labor markets will continue to rebalance, and inflation will continue to stabilize as goods prices ease. Monetary authorities will also provide global economic support through less restrictive rates, which should support a greater risk appetite and business fixed investment in the year ahead.
The primary risk to the global outlook includes a modestly slower growth rate if trade tensions between the U.S. and its major commercial partners escalate significantly.
Second, the role and status of China as a major source of growth will evolve as Beijing decides how to manage the period of debt and deleveraging ahead.
Monetary and fiscal firepower will be necessary to move beyond stabilization policies to support conditions for growth anywhere near China’s 5% growth targets and to offset the tariffs coming their way from Washington.
Should China shy away from sustained action to address the source of its weak household consumption and continue to pursue mercantilist policies, economic policy tensions could spill over into the political sphere, leading to further disruptions in the global trade and financial framework.
