Global Economic Outlook for 2025

It has been a mixed year for the markets in 2024. The global economy recovered through the first half of the year while inflation gradually cooled, giving central banks the impetus they needed to start monetary easing. The stock markets remained strong, with the S&P 500 reaching record closing highs 52 times by the end of November. The US Presidential election was another highlight, closely followed by investors. However, geopolitical tensions remained a downside risk to the global economy.

As the year draws to a close, it is time to look ahead at what to expect from the global economy and financial markets in 2025.

Global Economic Growth to Remain Strong

Goldman Sachs expects 2025 to bring “another solid year of global economic growth.” Its economists forecast that the US economy will beat expectations. At the same time, the Euro Area might suffer if the Trump administration levies fresh tariffs, as promised during the campaign trail. Global GDP growth is predicted at 2.7% for 2025, with the US GDP likely to grow 2.5% and the EU’s economy expanding 0.8%.

“Inflation has continued to trend down and is now within striking distance of central bank targets. And most central banks are well into the process of cutting interest rates back to more normal levels,” states Goldman Sachs’ Research Chief Economist, Jan Hatzius.

Meanwhile, the OECD’s Economic Outlook report pegs global GDP growth at 3.3% for 2025 and 2026. However economic growth is expected to vary widely across geographies, with the US expected to witness 2.8% GDP growth in 2025 and 2.4% in 2026. The Euro Zone’s economy could be supported by tight labour markets, a recovery in real household incomes and reduced policy interest rates. GDP growth in the Euro Area is forecasted at 1.3% for 2025, followed by 1.5% in 2026.

China, however, is expected to continue to recover slowly, with its GDP growing at 4.7% in 2025 and 4.4% in 2026.

Impact of Monetary Policies

While inflation rates might vary across regions, they have continued to normalise. However, inflation could rebound in the US by late 2025 if new immigration and tariff policies are passed, which, in turn, could lead to higher labour costs and prices. This could push the Federal Reserve (Fed) to hold off on interest rate cuts.

The European Central Bank (ECB) and Bank of England (BoE) are likely to continue with their rate cuts through 2025, as inflation steadily decreases. Moving eastward, Japan’s inflation could fall below the 2% target of the Bank of Japan (BoJ) by 2026. To proactively deal with this possibility, the central bank might resort to interest rate increases in 2025. China is also likely to witness deflationary pressures amid its excess manufacturing capacity and trade disruptions.

China could be hit by new tariffs under the Trump administration, which would have global implications. Prices of goods could increase as a result by the second half of 2025, which would affect consumer spending, which has been driving economic growth in the US and other countries.

What Does All This Mean for Investors?

Apart from economic growth, several other factors are likely to move the markets in 2025. Potential new tariffs, persisting geopolitical tensions in the Middle East, China’s intention to maintain a “loose monetary policy” and launch another stimulus package, OPEC ending its production cuts in April 2025, and the US likely to increase oil production under Trump could all lead to market volatility across asset classes.

Here’s a look at what analysts expect from the financial markets.

Analysts are optimistic about the potential of US stocks in 2025, with Deutsche Bank stating that tax relief, deregulation and rising profits under the Trump administration could prove favourable. Morgan Stanley and Blackrock also expect the AI wave to drive stock valuations up. European stocks are likely to face the consequences of slower economic growth than the US, potential tariffs, trade restrictions due to geopolitical tensions, and exposure to China.

Among commodities, intensifying conflicts in the Middle East could hurt the energy markets and investor confidence. As mentioned earlier, increased oil production by the US and the end of production cuts by OPEC could lead to a market glut, especially if demand does not recover substantially, especially from China. Such uncertainties could keep gold prices high through 2025.

In the forex market, the US dollar is likely to remain strong, given America’s expected economic growth, potential new tariffs and the Fed turning less dovish, compared to other central banks. On the other hand, the euro is likely to remain weak against the USD while the Japanese yen could rise due to rate hikes and economic growth. 

Against this backdrop, investors are likely to look at ways to build resilient portfolios. Closely following the news can help make informed decisions regarding portfolio rebalancing.

To Sum Up

• Economists expect 2025 to be another year of strong growth for the global economy.
• Inflation is expected to continue its downward trajectory.
• While the US is projected to see strong economic growth, the Euro Area might lag, especially if the Trump administration levies new tariffs.
• Economic recovery in China is also expected to be slow.
• The Fed might pause interest rate cuts while the ECB and BoE are likely to continue with monetary easing.
• The BoJ might need to raise interest rates due to persisting deflationary pressures.
• Analysts are optimistic about the performance of US stocks in 2025.
• Oil is likely to face pressures due to intensifying geopolitical tensions and increased production by the US.
• The US dollar is predicted to remain strong compared to the euro, while the yen might gain if rates are hiked.

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