World Economy to Continue Rebalancing in 2025

The range of potential economic outcomes is wide, but a solid starting point suggests resilience.

The global economy has performed well in 2024, exceeding even our relatively upbeat expectations. Global growth may not have been exciting—our estimate for real GDP growth for the year is 2.6%—but the world economy did make solid progress toward rebalancing after the volatility of the post-pandemic period. We expect this rebalancing to continue, with both growth and inflation moving back toward equilibrium across the globe.

That said, significant changes in economic policies could alter the picture for 2025 and beyond. If tariffs are imposed broadly, as the incoming US administration has promised, we could see a more pronounced slowdown than we currently expect—and inflation could keep running hotter than desired. We don’t have much clarity yet on policy measures, which makes the range of economic outcomes unusually wide as we head toward the turn of the year.

US Consumer Spending Will Slow…but Gradually and Modestly

Still, the key to the US economic outlook continues to be consumer behavior. A strong labor market should keep household income growth above the inflation rate in 2025, supporting real consumption. With the pace of hiring slowing (Display), we anticipate that consumption will slow as well in 2025, though only gradually and modestly—unless the labor market suddenly collapses.

Growth is only part of the rebalancing story. Inflation is also in the process of normalizing, or at least moving toward what a new normal might be (Display). The Federal Reserve is targeting 2.0%, but we expect that over time it will be satisfied with inflation running closer to 2.5%. We think inflation has the potential to hit that mark in 2025, though if new tariffs are imposed that might not happen until 2026 or beyond. Despite the policy uncertainty weighing on the inflation outlook, we still expect the Fed to cut rates steadily in the coming quarters, with the policy rate eventually falling to close to 3% over time.

Europe’s Sluggish Growth Is Vulnerable to Trade Upheaval

While the US economy is on track to register impressive 2024 performance, the story is different in Europe, where growth has remained sluggish. The scope for economic divergence in the region seems to have grown.

That storyline seems likely to continue as we move into 2025. Consumer demand in Europe remains weak (Display), the manufacturing sector is already in recession and labor markets are weakening. Because consumer spending doesn’t have as big an influence on final demand as it does in the US, the region relies a lot more on external growth drivers—namely, trade.

On that front, if the US imposes tariffs on Europe, it could easily create a bigger downdraft for what’s already a weak growth outlook. The impact on gross domestic product (GDP) would likely vary substantially across sectors and countries: some of the region’s largest exporting sectors, including autos, machinery, chemicals, pharmaceuticals and food, could take a sizable hit.

Given the sluggish growth outlook, we expect the European Central Bank to continue cutting policy rates. That should be enough to ward off a recession for now.

China’s Growth Is Subdued

China, which represents nearly 20% of the world economy, has seen nominal GDP growth fall to its lowest level in roughly a decade. In real terms, 2025 is likely to only see subdued growth by China’s standards, with our projection calling for real GDP growth of 4.5%. Without a social safety net, China is struggling to unlock household savings (Display), limiting the ability of consumers to put a shoulder behind growth. That leaves the public sector to do the heavy lifting.

Policymakers have taken meaningful steps to support the economy, including rate cuts and a recent 10 trillion yuan ($1.4 trillion) debt package to help strained municipal finances, but we view these as designed to manage the pace of the slowdown, not to push growth onto a more rapid trajectory. And China is vulnerable to a trade conflict with the US, particularly with China’s economy treading water.

Less Election Uncertainty, More Fiscal Spending

It’s easy to point to contentious trade policy as a potential downside risk for the global economy, but other factors could point toward more rapid growth.

The political landscape in 2024 was littered with events that created a cloud of uncertainty on many fronts, and business investment likely suffered as a result. With almost all of these political developments in the rearview mirror, we expect to see some acceleration in capital investment, which should help support growth.

The expected trajectory of fiscal policy seems unlikely to slow growth. It’s been a bulwark for the global economy, enabling expansion to continue even as central banks raised interest rates to bring down inflation. And there’s little reason to expect budget deficits to shrink in 2025. Deficit spending will likely swell the debt burden and—we expect—keep Treasury yields higher than their pre-pandemic range.

The Big Picture: Resilience in the Face of Twists and Turns

It’s a trite, but true, observation that the year to come will surprise us in many ways. The range of economic outcomes is unusually wide and unusually sensitive to potential changes in economic policy. From a broader perspective, though, the solid starting point suggests to us that the world economy is likely to be resilient in the face of the inevitable twists and turns.