The global economy in 2025
India is likely to post another year of around six per cent growth, making it by some margin the world’s fastest-growing major economy.
It may not feel like it, but 2024 was a pretty good year for the global economy. Inflation receded, central banks cut interest rates and growth came in as expected and at around trend, or normal levels. Risks that were widely discussed a year ago – persistent inflation, an economic hard landing and geopolitical shocks that hit growth – failed to materialise.
We expect 2025 to be another decent year, with global GDP growth coming in around 3.2%, in line with the performance in 2023 and 2024. In many respects, it will be more of the same.
The US is likely to remain the growth leader of the rich world, with Europe, especially Germany, lagging far behind. Southern, central and eastern Europe and the Nordics are likely to outperform Germany, France and Italy again. The headwinds that weighed on Chinese growth last year persist and, with the Trump administration promising new tariffs on China, may mount. India is likely to post another year of around 6.0% growth, making it by some margin the world’s fastest-growing major economy. Inflation and interest rates should continue to decline.
UK activity has been choppy over the last 18 months – a mild recession in the second half of 2023, then a rebound in activity in the first half of 2024 followed by a near stagnation in the second half of the year. Business optimism spiked in July in the wake of the election but has since fallen away. Inflation has proved rather stickier than expected while UK interest rate expectations and bond yields have been pushed higher as part of a global move reflecting the strength of the US economy and concerns about the impact of tariffs and high government borrowing in the US. October’s UK budget saw the government announce the largest tax rises in over 30 years creating an additional headwind for the corporate sector which will bear the brunt of the increases.
The rise in yields, or interest rates on government bonds intensified in December and the first half of January. UK bonds came under particular pressure, with markets worrying that higher borrowing costs could wipe out the £10bn of headroom built into the government’s budget arithmetic, forcing the chancellor to cut expenditure or raise taxes. Yields declined last week, easing the pressure, but the episode highlights the problems facing the chancellor as she seeks to square the circle of improving public services, strengthening the public finances and boosting growth.
We expect UK economic activity to remain sluggish in the opening months of this year. Beyond this, we see growth picking up over the summer and into the second half of the year. Rising real incomes and falling interest rates should bolster consumption. Growth will also be boosted by increases in government spending announced in October’s budget. Despite a lacklustre start, we expect the UK economy to grow by about 1.0% this year, slightly ahead of last year’s growth rate.
The US delivered a major surprise on activity last year, with GDP growth coming in well above expectation and fears of a “hard landing” fading. The US economy seems to have it all – a vast and growing tech sector, rapid productivity growth, cheap energy and easy fiscal policy (the US’s fiscal deficit last year, at over 6.0% of GDP, was at levels that until recently would have been deemed appropriate only in a period of serious economic weakness).
To this, the new US administration is likely to add a heady mix of tax cuts and a broad programme of deregulation. Other policies, notably deporting unauthorised workers – in excess of 8m people – and levying tariffs of up to 60% on Chinese imports and 10%-20% on imports from other countries, are viewed by most economists as likely to weaken growth.
Given the costs and the political and logistical challenges involved in large-scale deportations, the new administration may focus its efforts on reducing immigration. Goldman Sachs, for instance, assumes that tighter policy will lower net immigration into the US from a pre-pandemic average of 1m a year to 750,000.
In a similar vein, increases in tariffs may be more targeted than suggested on the campaign trail. Even in a diluted form new US tariffs would be likely to weigh on growth in 2025, especially in the two countries with the largest export surpluses, China and Germany. Tariffs would also keep inflation higher for longer.
For the US economy the negative effect of tariffs and reduced migration would be countered by the boost from tax cuts, but it is impossible to gauge the overall impact in the absence of precise measures. In any case, 2025 seems likely to be another good year for the US, with growth coming in around the 2.0% mark. Strong real income growth and positive wealth effects (US equities have risen 50% in the last two years) should keep US consumers spending. Meanwhile, business investment is likely to show its fifth consecutive year of growth fuelled by lower interest rates and tax incentives.
Euro area GDP growth is likely to grow at around half US rates, about 1.0%. Germany, the region’s dominant economy, has stagnated for the last five years and now faces the threat of US tariffs. Chinese industry, having moved up the value chain, is providing serious competition for German manufacturing especially in the auto sector. Energy prices are significantly higher in Europe than in the US, particularly in Germany. The mood in Germany is downbeat. In December, the Ifo survey of German manufacturing confidence dropped to the lowest level since the pandemic. Commenting on the reading Timo Wollmershäuser, head of Forecasts at the ifo Institute, said, “Germany is going through by far the longest phase of stagnation in post-war history. It is also falling behind considerably in… international comparisons”.
One solution to Germany’s malaise would be for the government to borrow, and spend more. Relaxing the constitutional rules that limit borrowing has become a hot topic in German political circles. But few expect February’s elections, which seem likely to put the centre-right CDU into power, to deliver a swift or major change in fiscal policy. At best, Germany is likely to show very modest growth this year.
Things look rather better elsewhere in the euro area. A weak recovery unfolded last year and rising real incomes and high savings point to a further increase in consumer spending and GDP growth across most countries. Prospects are brightest among the smaller and medium-sized euro area countries, with Poland, Ireland and Spain likely to do well.
The Chinese economy is continuing to contend with an ageing population, greater protectionism and moribund construction and housing sectors. Around 70% of growth last year came from exports. Despite a more challenging environment, China’s trade surplus reached a record of nearly $1tn last year (some of this was due to US companies stockpiling Chinese products anticipating a rise in tariffs under the Trump administration). The consumer economy is weak with consumer confidence at the same level as in the pandemic when China’s population was dealing with draconian lockdowns. Greater policy stimulus should help counter some of the negative effects of likely US tariffs. The IMF sees China’s economy growing by 4.6% this year, slightly less than last year and about half the average since the turn of the century.
We see three main risks to the global economy this year. First, large increases in US import tariffs could trigger retaliation, adding to inflationary pressures, delaying interest rate cuts and dampening growth. Second, even leaving aside tariffs, inflation could yet prove more persistent than expected, with wages and core rates of inflation holding up. A strong US economy, soon, it seems, to be boosted by tax cuts, and the recent rise in gas and oil prices, poses particular inflationary risks. The third threat comes in the form of geopolitics, the issue that UK CFOs see as the principle external threat to their businesses. While not all geopolitical shocks have pervasive economic effects, some, such as the invasion of Ukraine, which triggered an energy crisis in European prices, do. Shocks that destabilise trade and financial markets, or raise prices, pose the greatest economic risks.
If we manage to avoid these sort of shocks the global economy may expand by around 3.0% – a respectable, if hardly rapid, pace of activity. More telling is how much of that growth is likely to depend on the US and how little will be generated by Europe. Boosting growth is perhaps the greatest challenge facing policymakers in the EU and the UK.
A personal view from Ian Stewart, Deloitte's Chief Economist in the UK. To subscribe and/or view previous editions just google 'Deloitte Monday Briefing'.
I will be examining prospects for the UK and global economies in our year-ahead webinar tomorrow, Tuesday, 21 January, 1300-1400 GMT. I hope you can join me. Register here.