With the heightened Trump policy uncertainty, the US economy is likely to settle at a lower growth estimated at 2.2% in 2025 from a brisk 2.9% in 2024. — Bloomberg
THE global economy sailed reasonably well to grow by 3.2% in 2024, driven by falling inflation, positive labour market conditions, resilient consumer spending and less restrictive monetary policy.
This period still marking rising geopolitical tensions in several regions, with the persistent military conflict in Ukraine compounded by the conflict in Israel and the Middle East, a historically conflict-ridden region.
With Donald Trump heading to the White House as the 47th president of the United States, the potential implementation of the tariff policy, investment incentives and tax cuts as well as energy policy would stir significant and volatile responses in the global economy, capital flows and financial markets.
The year 2025 is the year of volatility, uncertainty, complexity and ambiguity (Vuca).
The global economy will stay on course experiencing a moderate growth estimated at 3% in turbulent times, shaped by both supportive fiscal and monetary policies amid challenging factors. It remains below the long-term average global economic growth of 3.8% in 2000 to 2019.
While the easing inflation and continued monetary easing trajectory, albeit cautiously, are expected to support the global economy in 2025, persistent geopolitical conflicts and concerns about the uncertainty and instability associated with Trump upending trade and economic policies would pose headwinds not only to the US economy but also to emerging economies.
Economic growth will vary among advanced and emerging economies. Real gross domestic product (GDP) growth, though, continues but will be below recent historical averages.
> Recent indicators suggest that the US economy has continued to expand at a solid pace with GDP rising at an annual rate of 2.7% in third-quarter (3Q) 2024.
Consumer spending remained resilient, and capital investment has strengthened. With the heightened Trump policy uncertainty, the US economy is likely to settle at a lower growth estimated at 2.2% in 2025 from a brisk 2.9% in 2024.
The Federal Reserve (Fed) has to keep inflation risks at bay, as Trump’s agenda on higher tariffs and immigration crackdown could fuel inflation.
The upside risks to core inflation, in particular services, could come from resilient consumer spending; impending tariff hikes are set to push up import prices and tighten immigration at a time when the labour participation is relatively low constraining the labour force.
> The eurozone economy accelerated to a seasonally adjusted 0.4% quarter-on-quarter (q-o-q) and 0.9% year-on-year (y-o-y), respectively, in 3Q of 2024 (0.2% q-o-q and 0.5% y-o-y respectively in 2Q), marking the strongest expansion in two years.
Private spending and investment helped the improvement. However, GDP growth is seen losing some steam in 4Q due to a slowdown in demand. The disinflation process remains on track.
Eurozone growth
Growth in the eurozone is expected to improve slightly to 0.9% in 2025 from an estimated 0.6% in 2024.
Lower interest rates and looser financing conditions are set to improve consumer spending and increase fixed investment.
However, businesses and investors are concerned rising US protectionism under Trump 2.0 could cloud the export sector, and a loss of dynamism as well as the fiscal consolidation in some large economies would weigh on demand prospects.
> The Japanese economy continues to exhibit uneven performance. While real GDP growth moderated to 0.3% q-o-q in 3Q (0.5% in 2Q), it bounced back to increase by 0.5% y-o-y in 3Q from a 0.9% decline in 2Q, marking the best performance since 4Q of 2023.
While private consumption and government spending increased, external demand continued to deteriorated.
We expect Japan’s economy to maintain a modest pace of growth of 1% in 2025 (estimated 0.2% in 2024) amid domestic challenges and growing external threats.
Private consumption remains weak despite continued wage growth as persistent inflation and the falling yen eat into household purchasing power. The downside risks to the growth outlook have grown with Trump’s administration threatening higher tariffs, placing further pressure on the yen.
> Deflation pressures, weak domestic private demand and the prolonged adjustment in the real estate sector continued to dampen China’s economy.
Real GDP growth moderated to 4.6% y-o-y in 3Q (4.7% in 2Q), marking the softest growth since 1Q of 2023. While the services sector strengthened, the industry and agriculture sectors had experienced a slowdown.
Exports grew unevenly for eight months in a row since April 2024 to grow by 6.8% in the first eleven months of 2024.
November’s economic data showed mixed signals – improving property prices for a second straight month, raising prospects for a gradual stabilisation and an eventual bottoming out of the property sector going into 2025, while other economic data such as fixed investment, retail sales and value added of the industry showed a mixed performance.
The effectiveness and scale of domestic stimulus as well as the responsiveness of Chinese consumers and investors will determine whether or not China’s economy will be reinvigorated and continues to sustain at steady growth path.
Since late-September, Beijing authorities have rolled out interest rate cuts and property measures as well as kicked off an unprecedented 800 billion yuan (US$111.60bil) rescue package for the stock market.
We estimate China’s real GDP to grow by 4.5% in 2025 (estimated 4.8% in 2024).
The authorities will continue to implement proactive fiscal support and appropriate loose monetary policy to expanding domestic demand and boosting consumption.
The stimulus measures, including cut in multiple policy rates support the economy into 2025.
Trump 2.0 implications
Trump’s stated policy on reducing the immigrant labour force, placing large tariffs on important trading partners, and cutting taxes to spur consumer spending and investment are inflationary-induced and could reset the Fed’s interest rates trajectory.
Additionally, resilient consumer spending backed by a healthy labour market and continued pent up demand for services are keeping services inflation high.
Investors were preoccupied with the pending outcome of the Trump’s plan for across-the-board tariffs on imports as they pose potential downside risk to global trade, economic and earnings growth.
Some viewed the tariff policy would not be as damaging as feared it is more of a negotiating tool to reach a beneficial agreement in favour of the US with trading partners, most importantly China.
One should expect the impact on China to be even more direct. It is expected that larger trade drags in more trade-exposed economies, while certain emerging economies could get a boost from trade diversions away from China.
The amount of the tariffs and products to be imposed, the countries targeted and how those countries respond will determine what the broader economic impact will be.
As for the redirection of investment flows from the US FDI companies back to the US economy due to the industrial policy and tax cuts, the impact could see lower US outbound FDI to other countries, especially for those large recipients of US FDI.
Inflation and interest rates trajectory. The global disinflation process continues, but the key components of core inflation revealed that there was bumpiness in services inflation in some advanced economies.
Some price pressures are persistent, including those from the services sector and wage growth. The limited progress towards inflation goals in recent months suggest stickiness in the last mile of disinflation to meet some major central banks’ target.
There remain upside risks to inflation. These could stem from intensifying global geopolitical conflicts and ensuing risk to the supply chains, commodity and energy prices. Trump’s economic plans would worsen inflation. Risks to the US monetary policy from services inflation, tariffs, and immigration.
The US Federal Reserve (Fed) ended the year of 2024 with three consecutive months of reduction, bringing the Fed fund rate to 4.25%-4.5% at end-December 2024. The Fed is starting to contend with how President Donald Trump and his ambitious economic and trade policies could reignite higher inflation in 2025.
The Fed chair has acknowledged that the uncertainty surrounding what effects the Trump’s policies may have on the Fed’s rate path, and will consider them when those policies are implemented. Hence, the Fed has signaled a shallower, slower path of easing throughout 2025. We expect the Fed to cut interest rates by 50-75 basis points in 2025.
The European Central Bank (ECB)’s pivot toward easing has been driven by falling inflation and lackluster economic growth. With the Eurozone’s annual inflation eased to 2.2% in November from 2.8% in January 2024, and near economic growth stagnation (annualized 0.4% q-o-q), the ECB will continue its gradual approach to its monetary easing. We the ECB to cut its deposit facility rate by a cumulative of 100 basis points at each monetary policy meeting to reach 2.0% by 1H 2025.
Bank of Japan (BoJ) ended end-December 2024 by keeping its short-term policy rate at 0.25% as policymakers preferred to tread cautiously in raising interest rates amid uncertainty surrounding Japan’s economy though consumer prices remain high. Concerns over the impact of Trump’s economic agenda on the US economy and the prolonged strength of the US dollar, and the spillover effects on the Japan economy could complicate the BoJ’s interest rate decision-making.
The yen carry trade could make a comeback in 2025, driven by wide gaps in the interest rate differentials between the US and Japan and higher government borrowing in the US. These conditions make it more attractive to borrow in Japan and then deploy the funds in higher yielding markets around the world.
The People’s Bank of China will deliver the biggest interest-rate cuts starting 2025 as policymakers intensify efforts to shore up growth and arrest deflation amid the Trump’s economic and trade policies-induced disruptions on the global economy and export-oriented economies in the region, which are China’s major trading partners.
A number of central banks in ASEAN will continue to cut Interest rate in 2025, but will be shallower than that of advanced economies. The central banks will still be keeping tab on the geopolitical tensions in Ukraine and Middle East, the monetary stance in advanced economies as well as global commodities and energy markets.
Key risks in 2025 – what could go wrong?
Risk 1: Top the list is geopolitical tensions and military conflicts are expected to continue to dominate and any escalation will have inevitable knock-on effects on the economy, financial and commodity markets. President Trump’s new administration could take a new position to influence the direction of efforts to help ending the on-going military conflicts in the Ukraine and Middle-East.
The Russia-Ukraine war continues amid President Trump has called for immediate ceasefire in December 2024. On November 26, Israel and Lebanon-base Hezbollah agreed to a cease-fire to be implemented in phases over 60 days. But, the peace may remain fragile as it remains to be seen how the truce might affect Palestinians for the Gaza war to end
Risk 2: Global trade war, which is likely to be wider under the Trump’ second term Presidency as he may impose tariffs go beyond 60% tariff on imports from China and 10% universal tariff on imports from other countries. Most importantly, the US’s trading partners could retaliate, inviting further protectionist measures amongst major advanced economies. The trade war could potentially shave off global GDP growth by between 2-3% points, and also raises inflation by at least one-tenth percentage points.
Risk 3: Inflation risk flares up. Trade conflicts and tariffs between key economies could affect the prices of imported goods, making consumer goods more costly and intermediate inputs more expensive. Consumer inflation will rise again and the businesses and producers may force to pass-through increased business costs onto end-consumers. Market focus is on the Fed’s interest rates path in 2025.
Global investors must remain vigilant over downside risks such as a disruptive global trade war, inflation risk flares up, a sudden spike in bond yields and a shocking pivot by the Federal Reserve toward rate hikes.
Risk 4: Soaring global debt, in particular public debt. In 2024, global public debt is forecast to reach US$102 trillion, with the rising levels of debt coming from the US (34.6% of total), Japan (10.0%) and China (16.1%). Rising public debt levels have constrained fiscal flexibility for many governments, compelling them to act fast to reduce their deficits before it is too late. The US debt is growing quickly, reaching US$34.3 trillion at end September 2024 or over 120% of GDP.
Unsustainable fiscal deficits and public debt levels would undermine macroeconomic and financial stability. A point in time will come when investors will demand a higher interest rate (yields) when buying the US bonds to finance its persistent widening budget deficits. We have seen emerging signs of market participants’ growing discomfort with the need to absorb the burgeoning supply of public debt.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
