In 2025, it might get more challenging for the global economy with a new round of inflation, a global slowdown, or both.
As soon as the world economy started recovering from the COVID-19 pandemic, a whole new set of problems began opening up for 2025.
In 2024, the world’s central bank finally reduced interest rates after successfully defeating inflation without causing a worldwide recession.
Stocks in the United States and Europe hit all-time highs, and Forbes announced a terrific year for the mega-rich, as 141 new billionaires joined its list of ultra-rich.
If this was good news, someone forgot to inform voters. They criticized legislators from South Africa, Europe, the United States, and India for the harsh economic reality they were facing. The cost of living was increased significantly due to cumulative post-pandemic price increases.
In 2025, it might get more challenging for the global economy with a new round of inflation, a global slowdown, or both. If the US implements import tariffs from the United States, it may lead to a trade war. The unemployment rate, which is close to historic lows, may increase.
This situation can get more complicated due to political crises in Germany and France and conflicts in the Middle East and Ukraine.
Meanwhile, the cost of climate degradation is becoming a pressing issue for many countries.
The World Bank claims that the poorest countries face their worst economic condition in the past two decades, having missed the post-pandemic rebound. The last thing they need is new obstacles like weaker trade or worsening financial conditions.
Governments in developed economies must find a way to counter the belief of many voters that their purchasing power, standard of living, and prospects for the future are failing. Failing to do so would feed the growth of extremist parties, which are currently causing division in parliament.
Spending to fight climate change and boost armies for aging populations stresses national budgets already under strain after the COVID-19 pandemic. Only healthy economies can provide the money required.
If the government decides to do what it did for years: pilling up more debt, then, sooner or later, it will be embroiled in a financial crisis.
As European Central Bank (ECB) President Christine Lagarde stated in a press conference following the ECB’s year-end meeting, there will be much uncertainty in 2025.
It is unclear whether US will implement tariffs of 10-20% on imports, or increase 60% on Chinese goods, or if those threats were merely opening tactics for negotiation. If he moves forward with them, the impact will depend on which industries are hit the most and who responds.
The second-biggest economy in the world, China, is facing increasing pressure to start a significant change as its current growth declines. Economics recommends reducing its over-reliance on manufacturing and putting more money in the wallets of low-income residents.
France and Germany, the two largest economies in the euro zones, must solve their political crisis, as it’s behind the US since the pandemic. If Trump’s policies cause inflation and slow the Fed’s rate cuts, then the possibility of a higher dollar is terrible news for many economies. It would lead to investment loss and increase their dollar-denominated debt.
The unknown impact of the Middle East and Ukraine wars will potentially affect oil prices, which fuels the global economy.
Policymakers and financial markets are counting on the global economy to weather these and central banks to return their interest rate levels to normal.
Emerging economies (EM) face significant challenges due to the strong US dollar and high Treasury yields.
Many EMs are dealing with weaker currencies, more increased dollar-denominated debt, decreased capital inflows, depressed local asset process, and slow growth due to American exceptionalism hanging big over the rest of the world.
History has shown that when such patterns take hold of EM, they can lead to vicious cycles that are hard to escape.
Unfortunately, there is no simple plan to avoid it. Take a look at Brazil and China. These two Ems are using distinct fiscal and monetary paths. Brasilia (the capital of Brazil) is proposing to significantly increase interest rates, while Beijing (the capital of China) is offering to ease monetary and fiscal policy to awaken its economy.
Regardless of where EM economies stand in their gross domestic product (GDP), inflation, fiscal health, and current challenges indicate whether they will face a challenging road in the upcoming years.
As the International Monetary Fund (IMF) stated in its latest World Economic Outlook, brace for uncertain times.