By Anadolu Agency
December 24, 2024 12:57 pmLONDON
The world economy will confront trade wars, sluggish growth and geopolitical risks in 2025, following a year marked by monetary easing and falling inflation.
Many nations that had previously implemented monetary easing measures swiftly raised policy rates in the second half of the year to combat inflation.
The US Federal Reserve lowered its policy rate by 25 basis points at its December meeting last week, marking a total of 100 basis points in cuts for the year, bringing its policy rate to a range of 4.25% to 4.5%.
The European Central Bank (ECB) wrapped up the year with four rate cuts, the latest being a 25-basis-point reduction in December, bringing its deposit rate to 3% and its refinancing and marginal lending facility rates to 3.15% and 3.40%, respectively.
The Bank of England (BoE) made its first rate cut since March 2020, reducing rates by 25 basis points in August and another 25 basis points last week, ending the year with a total cut of 50 basis points, bringing the rate to 4.75%.
Weak growth in many countries, the potential for escalating trade wars and persistent geopolitical risks continue to exert pressure on the global economy.
Tax hikes, retaliation to US tariffs may pressure growth
Economists suggest that additional tariffs promised by US President-elect Donald Trump before taking office in January could significantly affect global growth in 2025.
Brian Coulton, chief economist at Fitch Ratings, told Anadolu that US economic growth is expected to slow next year and exports to China may also decelerate, although a moderate recovery is possible in the eurozone.
“We see a mild slowdown in global GDP growth to 2.6% next year from 2.8% in 2024,” he said.
Coulton added that tariff hikes would reduce activity in general, but US consumer spending may gain momentum beyond expectations. He pointed out that Fitch Ratings raised its US growth forecast from 1.6% to 2.1% for 2025.
He noted that the effective tariff rate could exceed 5%, warning that retaliation from China, Europe and other trading partners could hurt US growth while exacerbating inflationary pressures globally.
“A clampdown on immigration could also add to US inflation pressures by reducing labor supply growth, which might result in a shallower path of Fed rate cuts than we expect,” he said.
Coulton said the eurozone is likely to experience a slight recovery in consumer spending in 2025 due to rising real wages, though this recovery may be weaker than expected.
“Our assumption that the US will apply tariff increases across the board has also weighed on our eurozone growth forecasts, particularly for Germany, although this is partly offset by our expectation that the ECB will cut rates further and faster,” he said.
“We are also assuming a big increase in US tariffs on China, resulting in downward revisions to both our 2025 and 2026 China growth forecasts. These revisions are tempered by an expectation that China’s fiscal policy will be eased more aggressively to cushion the impact of US tariff hikes on the economy,” he added.
Rising debt in developed nations, EU fiscal consolidation appears essential
Ahmet Ihsan Kaya, principal economist at the UK-based National Institute of Economic and Social Research (NIESR), told Anadolu that inflation in developed countries is expected to remain under control in 2025 as interest rates decline steadily.
Kaya forecasted that the Fed will cut its policy rate to between 3.25% and 3.50%, the ECB will reduce its main policy rate to 2.25%, and the BoE will lower its policy rate to 3.75% by the end of 2025, noting that Trump’s protectionist policies beyond tariffs and immigration could support growth through regulations and tax cuts.
“The most significant risk to international trade and growth in the world economy seems to be Trump’s protectionist trade policies,” he said.
“Trump announced several tariffs, and we will see how these will manifest and affect the economy over time. Meanwhile, our studies show that global growth could be about 1 percentage point lower if Trump’s tariffs are implemented broadly, and our global growth forecast for next year is 3.2%,” he added.
Kaya said developed countries have been experiencing rapidly rising public deficits since the coronavirus pandemic, and reducing the debt burden requires major fiscal consolidation, especially in the EU.
He noted that the EU’s new framework encourages countries to increase public sector savings and raise taxes, which has led to social reactions and instability, citing the political turmoil in France.
Kaya added that attention will focus on the structural problems of the Chinese economy, which continues to slow, and the challenges faced by developing countries due to trade policies in 2025.
S&P Global Market Intelligence reported on Dec. 5 that concerns over “economic angst, domestic discontent, elusive alliances and trade troubles” will be prevalent themes in the global economy next year.
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