Global Economic Outlook Q1 2025: Buckle Up

Even before taking office, a second Trump administration is already moving the macro-financial needle and raising downside risks for the global economy. The degree of ultimate policy implementation is a key unknown.

Our preliminary policy read on the new U.S. administration is that positive growth effects will be minimal, inflation pressures will rise, and the Fed is likely to stop cutting rates earlier. This will lead to tighter financial conditions, a stronger dollar, and a more complicated macroeconomic picture elsewhere.

Owing to a "wait and see" approach, our GDP growth forecasts have not moved much since the previous publication, other than incorporating changes related to base effects.

Risks include the full implementation of the proposed U.S. agenda on taxes, trade, and immigration; the end of resilient consumer spending and labor demand; and bond market stress. AI is an upside.

Economic Outlook U.S. Q1 2025: Steady Growth, Significant Policy Uncertainty

We forecast the U.S. economy to expand 2.0% in the next two years--incorporating partial implementation of Trump's proposed policies--following 2.7% growth this year.

We expect the Federal Reserve to reduce the federal funds rate more gradually than what we had considered in our September forecast update and reach an assumed neutral rate of 3.1% by fourth-quarter 2026 (was fourth-quarter 2025 previously).

Uncertainty around our forecasts is high given unknowns about how much of President-elect Trump's campaign promises will materialize.

Trump's policy proposals from his campaign, at face value, could result in higher inflation in the near term and lower growth in the medium to long term. And the probability of a disruption to the Fed's easing bias over the next two years has risen.

Economic Outlook Eurozone Q1 2025: Next Year Will Be A Game Changer

We project eurozone GDP growth of 0.8% in 2024 and 1.2% in 2025, with Germany lagging eurozone peers, and Spain continuing to outperform. Changes to our previous forecast largely reflect revisions of past data. Due to a more pronounced drop in energy prices, we expect inflation will be marginally lower in 2025 than we had anticipated (2.4% versus 2.5% previously).

A long period of very stable macroeconomic forecasts might come to an end as new leaders in the U.S., the EU, and Germany could take decisions early next year on tariffs, defense, and general spending that could reshape the economic outlook.

We anticipate the European Central Bank (ECB) will cut rates more quickly than we had previously expected due to persistently weak confidence and better visibility on the disinflation trajectory. That said, we do not expect that the extent of the rate cuts will exceed our previous forecast. We now project that the main policy rate will reach 2.5% before the summer of 2025, compared with our previous expectation of September 2025.

Economic Outlook Asia-Pacific Q1 2025: U.S. Trade Shift Blurs The Horizon

While China's stimulus measures should support growth, we expect its economy to be hit by U.S. trade tariffs on its exports. In all, we now project 4.1% GDP growth in 2025 and 3.8% in 2026; that's 0.2 percentage point (ppt) and 0.7 ppt lower than our forecast in September.

Asia-Pacific growth will be impeded by slower global demand and U.S. trade policy. But lower interest rates and inflation should ease their drag on spending power. And in emerging markets, robust domestic demand growth is buoying GDP growth.

Swings in capital flows driven by shifts in expectations about U.S. interest rates and trade policies require central banks to be vigilant and cautious. We expect Asia-Pacific central banks to take their time bringing policy rates down.

Economic Outlook Emerging Markets Q1 2025: Trade Uncertainty Threatens Growth

A likely increase in trade protectionist policies among major economies will hurt GDP growth in most emerging markets (EMs) in the next couple of years, but the magnitude of the impact will depend on those policies' details, which will become clearer in the coming months.

For now, we assume only a modest increase in tit-for-tat tariffs between the U.S. and China in 2025 and no new tariffs for the rest of the world, which would produce a relatively modest net impact on GDP in most major EMs outside of China.

However, downside risks to our forecast are high, and potential tightening in financial conditions because of trade-related uncertainty adds another hazard.

Shifting Green Growth Narratives Are Fostering The Energy Transition

The climate policy paradigm has moved from a doom-and-gloom view, where economic growth isn't possible, to a more constructive model in which growth and a sustainable environment can coexist.

With this, the focus of climate policy has expanded to include not only the costs of the energy transition but also opportunities for innovation and growth.

Decarbonizing fossil-fuel-reliant sectors and expanding renewable energy capacity is complicated by additional hurdles, in particular trade frictions, budget constraints, and distribution issues.