Outlook for the Global Economy in 2025

As 2025 approaches, analysts at Capital Economics expect a modest recovery for most major global economies. This recovery is anticipated to follow a challenging second half of 2024, which was marked by a series of economic challenges.

According to the company's analysis, two key factors will shape the outlook for developed economies: inflation normalization and monetary policy easing. Both factors are expected to support GDP growth and contribute to economic stabilization following a turbulent period of high interest rates and rising prices.

Inflation Normalization and Monetary Policy

Throughout 2024, several central banks, including the European Central Bank and the U.S. Federal Reserve, have been combating inflation by tightening monetary policy. High interest rates aimed to curb rising prices, affecting both consumption and investment. However, as inflation gradually declines, central banks are expected to begin easing their policies in 2025, gradually lowering interest rates, increasing credit availability, and boosting consumer confidence.

This development is likely to have a positive impact on advanced economies, such as the United States, the Eurozone, and the United Kingdom. GDP growth is expected to be driven by both consumption and investment, with a return to more stable growth anticipated.

China’s Recovery and Global Trade

China, which has faced significant economic challenges following the COVID-19 pandemic, is expected to experience a stronger recovery in 2025, primarily due to fiscal stimulus. The Chinese government plans to make substantial investments in infrastructure and support domestic consumption, which should help boost economic growth.

However, several significant obstacles remain. Trade tensions with the U.S. and its allies will continue to hinder the full potential of China's economic growth. Sanctions and restrictions on access to key technologies could slow the development of critical sectors such as technology and manufacturing.

Risks on the Horizon

Despite the anticipated global economic recovery, several risks could jeopardize the outlook for 2025. Stubborn inflation, particularly in Europe, poses one of the main threats. If inflation remains high, it could constrain real income growth and limit the room for further monetary policy easing.

Other risks stem from political transitions in various countries, which could bring uncertainties regarding government policies, particularly in terms of debt-financed fiscal stimuli. Financial markets’ reactions to these moves could be unpredictable, leading to increased market volatility.

Additional challenges include growing isolationist trade policies and stronger resistance to immigration, which could lead to stagflation in advanced economies—stagnant growth combined with high inflation.

An Optimistic but Cautious Outlook

Despite these risks, Capital Economics remains cautiously optimistic about the economic prospects for 2025. While there are warning signs, such as declining industrial indices, rising unemployment, and an increase in non-performing loans, analysts emphasize that these indicators alone do not signal an impending recession.

Positive signs are emerging from sectors like credit, employment, retail sales, and construction, which continue to show favorable results. Capital Economics, therefore, predicts that the most likely scenario for 2025 will be a "soft landing"—a gradual return to growth without major market or economic shocks.

2025 brings a mix of challenges and opportunities for the global economy. While some regions will grapple with high inflation and political uncertainties, others, like China, may experience a revival due to fiscal stimulus. The overall outlook is cautiously optimistic, with a soft landing being the most likely scenario for most advanced economies.