International outlook for 2025

R. Andrew Butters,

Associate Professor of Business Economics and Public Policy, Blanche “Peg” Philpott Fellow, Kelley School of Business

Russell Rhoads

Clinical Associate Professor of Financial Management, Kelley School of Business

Jennifer Rice

Senior Lecturer of Business Economics and Public Policy, Kelley School of Business

Introduction

Over the last four years, our forecasts were impacted dramatically by the stages of the global pandemic and subsequent recovery. From fiscal and monetary policy responses to labor and supply chain challenges and the subsequent global rise in inflation, each have largely influenced the projections for growth and policy changes since 2020.

Broadly speaking, our international outlook for 2025 is one that is much more “balanced,” albeit one that possesses some weakness and potentially more downside than upside risks. With that said, from a global perspective, the battle with inflation appears to have been won.

The projections for 2025 and beyond (see Figure 1) have global inflation continue its decline. In many parts of the world, monetary policy has already begun (and is likely to continue) to recalibrate—and decrease interest rates—given this progress.

Figure 1: Global inflation

Note: Values from 2019 to 2023 are actual data while values from 2024 forward are forecasts.
Source: International Monetary Fund: World Economic Outlook and authors’ calculations

This progress comes without a global recession. In fact, our projections for growth over 2025 are for the world economy to grow at 3.2%, a rate comparable to 2024 (see Figure 2). Emerging and developing economies are projected to grow at higher levels while experiencing somewhat higher levels of inflation.

Figure 2: Real GDP change

Note: (p) indicates a projection.
Source: International Monetary Fund: World Economic Outlook

Downside risks for the world economy exist. These include geopolitical pressures that appear to have only increased since we last provided an outlook. There is also risk that the expansion of regional wars might spill over and unsettle energy and financial markets. Another significant risk involves the rise in protectionist trade policies, and how that interacts with inflation. With almost half of the world holding elections in 2024, how the newly elected governments decide to handle trade and fiscal policy issues could also have an effect on growth in 2025 and beyond.    

United States

At this point, the U.S. economy has probably performed more to the upside coming out of the pandemic. Going forward, we project a small decrease in economic activity, but one that reflects a sustainable, on-trend trajectory that would constitute a “soft landing.” If progress on inflation continues, then the battle on inflation will reach its end.

Specifically, U.S. growth is expected to be near trend at 2.0% in 2025. While the consumer has provided a great deal of resilience over the last several quarters, we forecast some slowdown in consumption and a small uptick in the unemployment rate in the first half of 2025, before both improve slightly in the second half of the year.

Moreover, with the projected progress on inflation to continue, we expect the Federal Reserve—which has recommitted itself to both dimensions of its dual mandate (i.e., stable inflation and full employment)—to continue its interest rate decreases over the next year until a more neutral stance is achieved.

Eurozone

Growth in the Eurozone is projected to be subdued at 1.2% in 2025. Moreover, variation in growth exists within the Euro area, with Italy and Germany projected to grow at a slower rate of 0.8% and Spain expected to grow at a rate near 2.1%. Inflation in the Eurozone is expected to be at 2.0% for 2025. Like in the U.S., progress on inflation to this point has led the European Central Bank (ECB) to lower interest rates. With the overall growth outlook for Europe lower than other developed countries, many within Europe are raising concerns that, absent increases in productivity and structural changes that will spur innovation, a low growth future beyond 2025 could be inevitable.

Britain

The United Kingdom is expected to grow at 1.5% in 2025. With inflation in the U.K. already below the Bank of England’s stated target, we project subsequent cuts to the interest rate over the next year. Unemployment is predicted to remain just above 4%. A possible concern going forward, however, is the degree to which progress on inflation stalls due to rising energy costs or other shocks associated with trade. This could necessitate the Bank of England holding interest rates higher for longer over 2025.

North American trading partners

Canada

Following a period of subdued growth in 2023 and 2024, the Canadian economy is projected to outpace the United States in 2025, with a forecasted growth rate of 2.4%. This marks a significant rebound from the modest growth rates of 1.2% in 2023 and the projected 1.3% growth in 2024. In 2025, Canada is expected to be the fastest-growing economy among all advanced economies.

This anticipated growth is largely driven by expected increases in consumer spending and business investment, supported by lower interest rates and strong export demand. Additionally, inflation has fallen to 2%, approaching the target level, while reduced energy prices and diminished inflationary pressures are expected to further contribute to Canada’s economic expansion in 2025.

Mexico

In 2023, Mexico's growth rate of 3.2% outpaced that of the United States and all advanced economies. However, growth projections for 2024 and 2025 are less optimistic. The economy is expected to slow considerably, with a projected growth rate of just 1.5% in 2024, followed by slower growth of 1.3% in 2025. This 1.3% growth forecast for 2025 is among the lowest within the group of emerging markets and developing economies, significantly below the average growth rate of 4.2% for the broader group.

Mexico has faced a decline in domestic demand, coupled with the implementation of tighter monetary and fiscal policies. Although inflation has significantly decreased and continues to trend downward, it remains elevated relative to global and advanced economies. This persistent inflationary pressure is partly attributable to strong wage growth, which is hindering a more rapid reduction in inflation.

South America

Brazil

After experiencing moderate growth in 2023 and 2024, Brazil’s economy is expected to slow in 2025, with a projected growth rate of 2.2%. In the first half of 2024, strong private consumption, investment, a tight labor market and government transfers supported a projected growth rate of 3.0%. However, these trends are not expected through 2025. Although inflation has decreased and continues to trend downward, the pace of deflation has been tempered by robust wage growth.

Looking ahead to 2025, Brazil is likely to face ongoing restrictive monetary policies and a cooling labor market, leading to a further slowdown in economic activity. The country’s growth in 2025 is expected to be significantly below the projected 4.2% average for emerging markets and developing economies.

Argentina

2024 has been marked by significant economic challenges for Argentina, with a 3.4% contraction in economic activity during the first half of the year and a projected full-year decline of 3.7%. Throughout this period, the government has remained firmly committed to fiscal discipline, adhering to a "zero monetary issuance" policy and maintaining strict fiscal balance.

Looking ahead to 2025, Argentina's economic outlook is more optimistic, with the potential for a recovery driven by a combination of lower interest rates, a deceleration in inflation and a reduction in public spending. The government's fiscal consolidation measures, along with strict fiscal rules, are expected to contribute to a modest economic rebound, with growth potentially reaching 3.5% in 2025. This recovery is likely to be fueled by increased investment, rising exports and stronger private consumption, although the pace of growth will be constrained by debt repayments and limited international reserves.

Inflation, which surged in 2023 following the devaluation of the peso, is expected to decrease significantly in 2024 and 2025. However, the effectiveness of lower interest rates in curbing inflation may have reached its limits. Discussions surrounding the unification of exchange rates and the easing of currency restrictions could further help reduce inflationary pressures and support economic growth. With rising real wages, Argentina remains cautiously optimistic about achieving a positive economic turnaround in 2025.

Asia

China

China’s economic outlook continues to be worrisome due to a host of factors. First, there is a supply chain reconfiguration that has many firms moving production away from China. Internally, China continues to suffer from a housing crisis that is far from resolved. Finally, China’s place in the current geopolitical environment, which includes a potential tariff war with the incoming Trump administration, creates uncertainty with respect to doing business in China.

The emergence of COVID-19 is well behind most economies, but not in China. Post COVID, many companies decided to diversify their manufacturing operations to include other emerging economies. India, for example, is a big beneficiary of this trend. A prime example of this is Apple Inc., which has quietly diversified their manufacturing operations to include India.

The housing crisis in China could result in a situation reminiscent of 2008. Purchasers of homes often put money down before the homes are available for occupancy. Many individuals are paying for mortgages on homes that are nowhere near complete and may never be completed. The government continues to try various schemes to help with a resurgence in the housing market, but as of late 2024, these efforts have not brought the desired results.

All eyes are on China with the election of Donald Trump to a second term. Although the Biden administration maintained a good portion of Trump’s policies with respect to trade with China, Trump is very vocal about an expansion of tariffs. These tariffs will keep investors at bay with a wait-and-see attitude regarding doing business in China. Currently, net foreign investment in China was up 1.0% in 2023, but it appears that China may experience a net outflow of foreign investment in 2024.

Our model indicates GDP growth for China at 4.5% in 2025, a drop from 5.2% in 2023 (see Figure 3). Also, China has been leading growth in the emerging markets, consistently exceeding the average among developing countries. However, our 4.5% estimate for 2025 is only 0.3% higher than the average expectation for emerging and developing economies. This does not bode well for attracting investors, as other emerging economies may be more attractive on a growth basis.

Figure 3: Real GDP change for selected Asian countries

Note: (p) indicates a projection.
Source: International Monetary Fund: World Economic Outlook

India

If the early part of this century was about China’s emergence on the world stage, the next 10 to 20 years may be similar for India. India is projected to experience GDP growth of 6.5% in 2025, down from 8.2% in 2023, but still much stronger than China. As noted above, India may be a beneficiary of issues plaguing China. In early November 2024, there were reports of Apple planning on doubling their iPhone production in India over the next few years. Also, the company announced the establishment of the firm’s first research and development facility in India. Of course, Apple is just one company, but this is definitely an indication of a favorable trend that should continue for several years.

Japan

Japan’s GDP is expected to rise to 1.1% in 2025, an improvement from the expectation of 0.3% in 2024. This would be an improvement, but still lower than 1.7% in 2023. Unlike the United States, Japan is in the process of a tightening cycle, with the risk-free rate expected to rise from 0.25% to 0.70% by the end of 2025. This change may not sound significant, but Japan has experienced little-to-no inflation for decades. A recent increase in inflationary pressures has resulted in real wage growth coming in negative for Japanese workers. This gap is closing as wages are catching up with prices. However, when wages rise, prices rise as well. So, a risk for Japan is potential inflationary pressures which could prompt the Bank of Japan to be more aggressive with respect to raising interest rates.

Conclusion

For most countries, 2025 looks to be the last mile in reaching inflation targets. To the extent this comes to fruition, we can expect monetary policy across the globe—with some exceptions—to also return to a more neutral stance. This should improve the environment for interest rate-sensitive sectors and the costs associated with servicing debt over the near term, while also setting the stage for a more sustainable path of growth for the world economy. While the overall projection suggests the world economy is likely to achieve a soft landing (and do so without widespread job losses), downside risks abound. These include instability in the energy and financial markets resulting from geopolitical events and regional wars, as well as any continuation or acceleration in protectionist trade policies by trading partners.