Global Economic Outlook 2025: A Widespread Growth Slowdown

The global economic outlook for 2025 presents a challenging scenario, as experts anticipate the slowest growth rate since the Covid-19 pandemic. One of the primary catalysts for this slowdown is the newly implemented U.S. trade policies, which have introduced significant uncertainty into the global marketplace. Higher tariffs are dampening demand on an international scale, creating structural shocks in economies worldwide.

According to Morgan Stanley Research, the global economy is projected to grow at an annual rate of 2.9% in 2025, down from 3.3% in 2024. By 2026, this growth is expected to reduce further to 2.8%. This outlook presumes that the U.S. will continue to engage in trade discussions but will not fully roll back tariffs. Seth Carpenter, Chief Global Economist at Morgan Stanley, emphasizes the ongoing economic damage resulting from these tariffs. Even if all tariffs were reversed, global growth might not return to its original trajectory, highlighting the long-lasting impact of such trade policies.

Tariff-induced uncertainty is not just a U.S. issue; it’s anticipated to affect global markets. As negotiations with key trading partners reach deadlock moments, the risk of escalating tariffs again looms, which could potentially lead the U.S. into a recession, dragging the global economy along with it.

### Central Banks and Fiscal Policy

In this economic landscape, inflation rates are expected to cool down globally, with projections indicating a decrease to 2.1% in 2025, down from 2.4% in 2024. This trend is driven by a combination of weaker demand, currency appreciation, and lower oil prices, all contributing to the easing of consumer prices. Although inflation generally slows, the United States stands out as an outlier, with the Federal Reserve likely to maintain steady interest rates until March 2026.

Central banks across various regions are responding to low inflation and decelerating growth by considering reductions in interest rates, while governments in the U.S., euro area, and China are expected to ramp up spending to prop up their economies. This surge in public expenditure may lead to significant increases in national deficits. For instance, Germany’s deficit might reach its highest point since its reunification in 1990, as investments in infrastructure and defense take precedence. Concomitantly, in the U.S., escalating interest costs are also expected to contribute to a rising deficit, complicating fiscal policy.

### U.S. Growth and Inflation

Turning to the U.S., economic growth, which was 2.8% in 2024, is predicted to decelerate to 1.5% in 2025 and further to 1% in 2026. Restrictions on immigration and lingering policy uncertainties are expected to compound the negative impacts of tariffs on growth. Michael Gapen, Chief U.S. Economist at Morgan Stanley, indicates a skepticism regarding substantial support from fiscal policy or deregulation, raising concerns over recovery.

Furthermore, inflation in the U.S. is anticipated to peak between 3% and 3.5% in the third quarter of 2025, as companies transfer some tariff-related costs to consumers. Labor shortages, exacerbated by immigration restrictions, are expected to add further pressure on wage levels in the service sector. While inflation might ease in 2026 due to lower business spending and weakened demand, the Federal Reserve remains focused on containing inflation. Gapen suggests that once inflation starts to decline, the labor market could weaken subsequently, leading the Fed to cut rates substantially—anticipating reductions totaling 175 basis points by the end of 2026.

### Continued Easing for the ECB

In Europe, the landscape is similarly daunting. A significant barrier to economic growth is the decline in exports. The eurozone’s economy is projected to grow by just 1% in 2025 and 0.9% in 2026, following modest growth of 0.8% in the previous year. Inflation is expected to fall below the European Central Bank’s target, freeing the ECB to pursue an easing cycle. Jens Eisenschmidt, Chief Europe Economist at Morgan Stanley, forecasts that by December 2025, the policy rate will dip below neutral to around 1.50%.

### China’s Bumpy Growth Journey

In China, while government measures aim to bolster the economy, they are unlikely to counteract the adverse effects of U.S. tariffs. The Chinese economy is projected to grow by 4.5% in 2025, down from 5% in 2024, as deflationary pressures and weakness in the housing sector persist. Morgan Stanley’s Chief China Economist, Robin Xing, notes that while some sectors may thrive thanks to government support, the overall recovery will be slow and fraught with challenges.

### The Domestic Demand Buffer for India and Japan

On a more positive note, Japan could experience mild growth, driven by rising base pay and improved real incomes, allowing for sustained economic momentum despite external challenges. Growth rates of 1% in 2025 and 0.5% in 2026 are anticipated, slightly above the previous year’s 0.2%.

India, on the other hand, is projected to remain the fastest-growing economy, with an expected growth rate of 5.9% in 2025. Chetan Ahya, Chief Asia Economist at Morgan Stanley, underscores India’s advantages, including its low goods exports to GDP ratio and recovering domestic demand. The supportive macro policy stance is also promising for growth.

### Mexico Growth Stalls, Brazil Slows

Conversely, Mexico is expected to see stalled growth in 2025 before resuming in 2026, facing struggles related to tariff impacts and a weak labor market. Elevated uncertainty surrounding trade agreements, chiefly with the U.S. and Canada, continues to hinder growth prospects.

Brazil, while anticipated to grow in both 2025 and 2026, will do so at a slower pace hampered by high interest rates and weakening wages, creating a challenging environment heading into significant elections.

### Conclusion

The global economic outlook for 2025 suggests widespread challenges that countries must navigate carefully. While some regions show resilience, the overarching theme is one of cautious growth plagued by uncertainties stemming from trade policies and global dynamics. Monitoring these evolving situations will be crucial for stakeholders across every sector in the coming years.

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