National Institute Global Economic Outlook – Winter 2025 – Summary

Global economic growth is expected to continue to run just ahead of 3 per cent a year with easier financial conditions due to falling policy interest rates, offset by rising policy uncertainties and constrained fiscal positions in major advanced economies. Growth in advanced economies has been driven by the United States, while the Euro Area has underperformed. We forecast that GDP growth in the United States will slow but that in the Euro Area will become stronger as we move through 2025. India and China continue to lead growth in emerging markets, although the medium-term growth prospects for China are expected to be much weaker than a decade ago. This outlook is subject to downside risks because of the import tariffs discussed by US President Donald Trump in his inaugural speech. Our initial analysis based on the first-day policy speech indicates that global GDP growth could decline by around 0.2 percentage points in the first two years of tariffs, driven by average reductions of around 0.6 and 0.3 percentage points in the US and Chinese economic growth rates, respectively. Headline inflation rates have fallen towards targets in most advanced economies, but underlying inflation rates have shown more stickiness. We forecast that OECD annual inflation (excluding Turkey) will continue falling this year, from 3.1 per cent in 2024 to 2.3 per cent in 2025. However, with underlying inflation forecast to remain above target in the United States, fewer reductions in policy interest rates are forecast in 2025 than in our Autumn Outlook. We still expect gradual interest rate cuts from the Federal Reserve (Fed) and the European Central Bank (ECB) through this year. The ECB cut its deposit facility rate from 4 per cent to 2.75 per cent as of January and the Fed from 5.5 per cent to 4.5 per cent. We expect the ECB to continue to act more aggressively, especially with growth in the Euro Area remaining weak, but the Fed to be cautious. The Bank of Japan (BoJ) is likely to raise rates, whereas the People’s Bank of China (PBoC) is expected to remain cautious. The growth of government debt during the pandemic and the recovery phase is now, with higher interest rates, creating difficulties for governments in advanced economies. Governments are facing prospects of higher taxes and⁄or lower spending but the position in the United States is less clear following the recent election. Policy uncertainties in the US post-election period pose major downside risks to our forecast. However, potential upside risks from lower commodity prices and reconstruction efforts (if the situation in the Middle East and⁄or Ukraine stabilise quickly) could offset these. Overall, risks to our global GDP growth and inflation forecasts appear balanced, but confidence bounds have widened due to increased uncertainty.