Economic projections for 2025 paint a picture of moderated global growth, with divergent dynamics among major economies. While inflation shows signs of cooling in most regions, the United States emerges as a notable exception, facing persistent inflationary pressures that could influence the Federal Reserve’s (Fed) monetary policy decisions. New U.S. trade policy adds a layer of complexity, acting as a structural shock with the potential to globally restrict demand. This article delves into the key trends, forecasts, and underlying factors shaping the 2025 economic landscape.
Global Growth: A Synchronized Slowdown with Notable Exceptions
Analysts from institutions like Morgan Stanley and the International Monetary Fund (IMF) converge on the expectation of a global economic growth slowdown in 2025, albeit with nuances in their projections. Morgan Stanley Research forecasts the global economy to expand at an annual rate of 2.9% in 2025, a decrease from the estimated 3.3% in 2024. 1 The IMF, in turn, projects global growth of 3.2% in 2025. 2 This deceleration is partly attributed to the uncertainty generated by higher tariffs and the consequent contraction in global demand.
The United States presents a distinct picture. Morgan Stanley projects 1.5% growth for the American economy in 2025 (1% 4Q/4Q), a significant reduction from 2.8% in 2024. Factors such as immigration restrictions and political uncertainty, coupled with the impact of tariffs, contribute to this forecast. 1 Ernst & Young (EY) corroborates this view of slower growth, with a forecast of 1.3% for U.S. real GDP in 2025, although it slightly revised its previous projections upward due to temporary relief in Chinese tariffs. 3 Despite this, the average U.S. tariff rate remains at historically high levels, representing an ongoing supply shock.
The Eurozone also faces challenges, with a projected expansion of 1% in 2025, mainly due to lower export demand.
Inflation and Monetary Policy: The Central Banks’ Dilemma
Globally, inflation is expected to continue losing steam, falling to 2.1% in 2025, according to Morgan Stanley. This trend is driven by weaker demand, currency appreciation in some regions, and lower oil prices. 1 The IMF also forecasts a drop in global inflation to 4.4% in 2025. 2
However, the U.S. again stands out. American inflation is predicted to accelerate, peaking between 3% and 3.5% in the third quarter of 2025 as companies pass on some tariff-related costs to consumers. Additionally, immigration restrictions could lead to labor shortages and inflate services. 1 EY also anticipates a new inflationary push due to higher tariffs, although it has revised down its year-end CPI inflation forecast to around 3.3% y/y after the relief in Chinese tariffs. 3
Given this scenario, most central banks may lean towards reducing interest rates. The European Central Bank (ECB), for example, is expected to continue its easing cycle, bringing the policy rate to 1.50% by December 2025. 1 However, the U.S. Federal Reserve will likely keep rates steady until March 2026. The rationale is that tariffs tend to boost inflation before slowing growth, leading the Fed to prioritize inflation containment until it peaks and begins to decline. Only after inflation falls and the labor market deteriorates would the Fed consider significant rate cuts. 1
Implications of U.S. Trade Policy and Uncertainties
U.S. trade policy is a crucial factor in current projections. The imposition of high tariffs and the resulting uncertainty are seen as a brake on global growth. 1 Although a U.S.-UK trade agreement and temporary relief on Chinese tariffs have been introduced, the average U.S. tariff rate remains the highest since 1939, indicating the lasting nature of this supply shock. 3
The divergence in growth forecasts between institutions like Morgan Stanley and the IMF, though small, may reflect different weightings of the impact of these trade policies and the resilience of certain economies. The fact that the U.S. is an outlier in both growth (stronger in the short term, but slowing) and inflation (more persistent) suggests that U.S. domestic dynamics and policy responses will have a disproportionate weight on the global economic trajectory. The U.S. economy’s ability to absorb tariff costs without a severe recession, while the Fed maintains a restrictive stance for longer, will be a key test for a global “soft landing.”
The economic outlook for 2025 indicates a period of slower global growth and declining inflation for most, but with the United States facing a more challenging inflationary path. Central bank policies will diverge, with the Fed likely maintaining a tighter stance for longer. U.S. trade policy and associated geopolitical uncertainty remain significant risks. Investors and policymakers will need to closely monitor the complex interplay of these factors to navigate the intricate economic scenario ahead.
