Global economy on brink of trade shock
GLOBAL GROWTH OUTLOOK
Risks to economic recovery growing
Juni 2022
▪ The frail upward trend of the global economy is in danger of coming to an abrupt halt. Growth is set to drop to around 2.7 percent in 2025 if President Trump goes through with his plans to impose new tariffs. With no new tariffs, growth would likely reach 3.2 percent as in the previous year.
Die amerikanische Lokomotive der Weltwirtschaft Aufschwung im Norden, Risiken im Süden
▪ The US economy is heading for growth of just under 2.5 percent (2.4 percent) next year. The planned tax concessions will have a slightly expansionary impact, while the envisaged course in trade and immigration policy is set to curb growth. The biggest risk to the US economy is the new administration itself and its policies.
▪ New tariffs from the United States could well cause a slump in growth in the EU with individual countries sliding into recession. Without new tariffs, growth in the euro area could nudge up to one percent in 2025 overall.
▪ Germany is still grappling with low global demand and maintaining its appeal as a business location. Economic output in Germany is in line for stagnation in 2025 (minus 0.1 percent). Tariffs from the US would mean another year of recession for the German economy.
▪ China’s economy would still grow by around 3.5 percent next year even with a trade war. If an all-out trade war is averted, China is set to grow by 4.5 percent.
▪ The monetary policy of the large central banks will be put to the test this year. The Federal Reserve is expected to keep key interest rates at around four percent, while the ECB has its sights set on further cuts to prop up the economy.
▪ Diverging financial policy is impacting exchange rates. Both the Trump administration’s expansionary financial policy and the gradual consolidation in the euro area in Europe will buoy the dollar.
▪ OECD countries need structural reform to mobilise investment in the twin transformation.
▪
Next shock looming for the global economy
At first glance, the global economy appears to have exceeded expectations in 2024. Growth picked up slightly and inflation dropped steeply in most countries, while labour markets remained robust, and no large-scale instabilities rocked the financial markets. The global economy has proven to be relatively resilient against the multiple shocks from the Russian war of aggression and inflation. Global economic growth was accordingly surprisingly solid and higher than anticipated at the beginning of the year. The service sector steadily continued its upward course while the manufacturing sector struggled to gain ground. Overall, growth in 2024 should come out at just over three percent and not the slightly under three percent growth predicted by us at the start of the year.
Headway was also made in tackling the main problem of the year, inflation. With central banks leading the way, inflation was suppressed substantially and with unexpected speed. Last year thus also marked a turnaround in monetary and financial policy. Most central banks switched course and cut interest rates with financial policy gradually turning away from its path over the previous few years of supporting demand with large-scale spending packages to consolidation. All international organisations reported in autumn that price stability was in sight, growth was being maintained, and that the global economy could avoid recession (OECD 2024, IMF 2025, 2024, European Commission 2024).
At the turn of the year, however, it became clear that some factors had been left out of the equation and that massive uncertainties from the political arena would jeopardise economic recovery. The new US administration headed by President Trump with broad support in both chambers of Congress will have particularly serious consequences, not only on growth and inflation in the United States, but also in Europe, East Asia and many emerging countries. The announced change in course in immigration policy is likely to curb growth in the United States and intensify upward pressure on prices. The planned tax cuts will jeopardise fiscal consolidation. The largest risk however is from trade policy. The tariffs scheduled to be imposed by the United States in the first six months of 2025 of 60 percent on imports from China, 25 percent on imports from Mexico and Canada, ten to 20 percent on imports from the EU and ten percent for imports from all other countries, are poised to restrain global economic growth substantially and tangibly push up inflation (see Box).
Gradual recovery throughout 2024
The economic recovery in the course of 2024 displayed several characteristics. Overall, services again outperformed manufacturing, particularly in industrialised countries, keeping world economic growth at a moderate level. With industrial momentum flagging and China displaying low growth, oil prices also turned down even though OPEC production levels were lower than anticipated. At the same time, the supply of labour expanded significantly in several major countries on the back of large flows of immigration, helping to reduce inflationary pressures. In parallel, consumer spending was the first domestic driver of growth to pick up. With generous wage agreements in a great many countries, the real incomes of private households recovered, and consumer spending increased markedly in many countries outside of Europe. Consumer sentiment nonetheless remained low in many countries.
US tariffs and their impact on growth
US President Donald Trump’s announcements that the US would impose high tariffs of 60 percent on Chinese imports and ten to 25 percent on imports from other trading partners as part of his economic policy have moved the topic to the top of the agenda once again. These new tariffs would constitute an increase in the current US tariffs from around three percent to more than 19 percent, much like in the 1930s (Oxford Economics 2024). Following the elections, the focus is now on the likely economic impact of these protectionist measures.
The economic impact of the tariffs
Import tariffs affect a country’s economic development in various ways. In the United States, as the country that imposes the tariffs, they make imports more expensive than domestic products, which can support domestic production in the short term. Tariffs can also generate additional tax revenues. Overall, however, the negative consequences outweigh the positive ones. Higher import prices reduce consumer purchasing power and saddle companies with higher costs for inputs which, in turn, curbs consumption and investments. At the same time, increased uncertainty tends to have a negative impact on investment decisions. An appreciation of the US dollar would magnify this effect by making US products more expensive abroad. If trade partners, in turn, impose retaliatory tariffs, US exports would drop as they become even more expensive on the export markets. These factors would all pull down US competitiveness and growth.
The main consequence for those countries affected by the tariffs is a decrease in exports to the United States, which is a large blow to countries whose economies are dependent on exports such as Germany. Falling demand and uncertain conditions of trade curb economic growth, while disruptions in global value chains affect productiondependent countries such as China and Germany particularly. At the same time, highly export-dependent European countries such as Germany could also see their exports to China drop as Chinese companies stand to face particularly high pressure from the US tariffs and may, consequently, order less intermediate goods and inputs from Europe. Furthermore, the EU market would face increased pressure from Chinese imports if exports to the US market collapse. In the long term, trade routes would be restructured and compensate for at least a part of the losses, but the drop in net exports would still constitute a major obstacle to growth.
Model-based estimates: regional impact on GDP
Numerous model-based estimates have been developed to chart the possible impact of US tariffs on the different regions and countries. Although many of these studies come to similar conclusions, being based on different assumptions regarding tariffs, countermeasures and calibrations, they are not directly comparable. The following summary nonetheless provides an initial overview of the possible scale of the impact on selected countries and regions
▪ Global: The IMF (2024) concludes that US tariffs would have a negative impact on global growth in the long run, reducing global GDP by 0.3 percent up to 2026 compared to the baseline scenario, and global imports and exports by around four percent. The uncertainties surrounding trade policy could also trigger a reduction in global investment levels of almost two percent up to 2026. The German Economic Institute, IW, (2024), even anticipates a slightly higher negative impact on global growth of minus 0.5 percent in 2025 and minus a good one percent in 2026.
▪ United States: Bundesbank (2024) simulations indicate that US tariffs of 60 percent on Chinese imports and ten percent on imports from other countries and symmetrical retaliatory measures on the part of the trade partners, combined with further measures such as large-scale deportations, could reduce US GDP by an average of 0.7 percentage points each year from 2025 to 2027. The Congressional Budget Office (2024a), regarding the new tariff measures in isolation, estimates a negative impact on US GDP of minus 0.6 percent in 2034. The Kiel Institute for the World Economy (2024) expects clear reductions in US GDP of up to 1.7 percent in the short term and around 1.2 percent in the long term.
▪ Europe: Europe, and particularly Germany as an export-oriented economy, would be deeply affected by the trade restrictions. IW (2024) has calculated that a transatlantic trade war with reciprocal tariffs of 30 percent would reduce the GDP of the EU by 0.4 percent in 2025, 1.1 percent in 2026 and 1.3 percent in 2027 and 2028.
▪ Germany: The IW (2024) estimates that the tariffs could reduce Germany’s GDP by as much as 0.5 percent in 2025, 1.4 percent in 2026 and 1.5 percent in 2027 and 2028. Total GDP losses (in constant prices of 2020) over the four-year period would thus amount to around 180 billion euros. The Bundesbank models (BbkM-DE and NiGEM) indicate that in a risk scenario of US tariffs, tax concessions and deportations, German GDP could drop by between 1.3 and 1.4 percent below the baseline scenario until 2027, with a large proportion of the drop attributable to the tariffs. Jobs could also be jeopardised on a huge scale. In Germany, 1.2 million jobs depend on exports to the United States, 400,000 more than those dependent on exports to China. According to the Macroeconomic Policy Institute, IMK, tariffs and reciprocal tariffs could cost between 200,000 and 300,000 jobs. The pharmaceutical, mechanical engineering, vehicle and chemical industry would be most affected by the tariffs as a particularly large proportion of employees in these industries effectively work for the US market (Prognos, 2025)
Source: IW Köln
▪ Canada and Mexico: On account of their close trade relations with the United States, the impact of the tariffs would be particularly pronounced for Canada and Mexico. According to ifo Institute calculations (2024), exports from Mexico to the United States could drop by around 25 percent and exports from Canada by as much as 28 percent. Globally, the exports of both countries could drop by 14 percent bringing GDP down considerably in both countries. The Peterson Institute for International Economics (2025) estimates that tariffs of 25 percent on all goods from Mexico and Canada would lower the GDP of Canada by 1.3 percent at its peak (2027) and the GDP of Mexico by two percent (2032). The United States would also be impacted negatively by bilateral tariffs and could reduce US exports by a total of up to 200 billion dollars during the second Trump administration compared to a scenario without tariffs. Back in 2019, the Bank of Canada simulated that US tariffs of 25 percent on trade partners and corresponding reciprocal tariffs could reduce Canada’s GDP by around six percent within two years. The drop in GDP is so steep here because the analysis factors in both uncertainties on future trade relations and the short-term market distortions which will impede a swift redistribution of resources from the affected sectors.
Unfavourable financing terms keep investment levels down
▪ China: China is one of the main targets of the US measures with threats of tariffs of up to 60 percent against them. The Kiel Institute for the World Economy (2024) estimates that a scenario with US tariffs and reciprocal measures could trigger a reduction in Chinese exports of 8.5 percent in the short term and 10.8 percent in the long term and steep drops in real GDP, peaking at almost one percent in the short term. The IW (2024) even puts the reduction in real growth in 2028 at 1.7 percent.
Impact for Germany of tariff increases threatened by Trump
Worldwide investment levels, on the other hand, remained subdued, which was to be expected in view of the high interest rates in most countries. The construction industry, being particularly sensitive to interest rates, recorded low investment activity in many industrialised countries with private demand for construction plunging The early indicators here are only gradually starting to pick up positive momentum. Investment in plant and equipment is also weak with low demand for industrial goods around the world, low incoming orders and, consequently, low production capacity utilisation rates coupled with high interest rates on credit This component of demand is only going to gradually turn up when the rate cutting cycle sets in. Furthermore, the unexpectedly high flows of immigrants into the United States and the EU have stimulated growth and eased up the tight labour markets.
Momentum in the United States and some emerging countries, Europe and Japan remain weak
A look at the regional distribution of growth once again reveals unanticipated imbalances. The US economy did not continue to cool down as expected, delivering a surprising performance yet again by growing an estimated 2.8 percent in 2024 overall. China just managed to meet the five percent growth target set by the government, helped to the finishing line by last-minute stimulus packages. The Asian emerging countries again recorded robust growth, with India leading the way. The industrialised and emerging Asian countries were bolstered by the steep increase in demand for semiconductors. Europe continued its slow road to recovery, leaving Germany behind. For 2024 overall, we estimate growth of 0.7 percent in real terms for the euro area. Japan had a bad year, stagnating overall, while the UK economy turned in a surprising return to moderate growth.
Global trade stepped up solidly in spring 2024
Global trade volumes of goods and services are estimated to have increased by around 2.5 percent last year. This was slightly weaker than expected (three to 3.5 percent) with the weak momentum in goods trading (up two percent) pulling the overall result down. The growth in overall trade was fuelled exclusively by emerging countries. This is also reflected in the distribution of global industrial production over the year with strong growth among emerging countries of just under four percent (January to July) and a contraction among industrialised countries of almost one percent. World trade stepped up markedly in the second quarter with freight, container and passenger transport volumes all growing substantially despite the terrorist activity of the Houthi rebels in the Red Sea. The trade in goods did not grow as much as expected on account of low investment activity with demand for consumer goods weak, particularly in the second half of the year.
Early indicators still weak
The global economic upturn is still on unsteady ground. The purchasing managers indices of the major regions did not all move steadily upwards. In the second half of the year, the global indices dropped down again overall with the global index for manufacturing even slipping back down into contractionary territory Indices for services and the overall economy remained slightly in the positive. The euro area displayed the same trends on a lower level and the United States on a higher level. In China, all indicators trended downwards in the first half of 2024, indicating stagnation by autumn.
Outlook 2025
The international organisations expect economic activity overall to pick up a little compared to the previous year in most countries, barring any further economic policy shocks or other shocks. The IMF predicted growth of 3.3 percent for this year in its most recent forecast (IMF 2025). We expect growth of just under 2.5 percent in the United States (2.4 percent), one percent in the euro area, and 4.5 percent in the People’s Republic of China. Japan should find its footing and grow one percent. India is likely to grow by over six percent once again.
These forecasts are based on the prospects of a change in the policy mix towards a less restrictive monetary policy and a gradual consolidation in financial policy, in Europe at least. Overall, consumption expenditure and investment worldwide should gradually start to pick up with global trade expanding and production rising somewhat. Investment levels and construction activity will continue to be somewhat weaker than consumption expenditure, while foreign trade is not expected to contribute significantly to growth in many countries. Overall, growth is on course to rise slightly in Europe and Japan while dropping off a little in the United States and the People’s Republic of China.
If US tariff policy changes abruptly, as envisaged by President Trump, the global economic recovery will be much weaker. Global economic growth would be considerably lower, with the United States, in particular, growing a good one percent less in the first two years and the EU, especially Germany, likely to lose out on 0.3 to 0.4 percentage points in the first year with a substantially higher fallout in the following years. For Mexico and Canada, a plunge in their exports to the United States would stifle growth substantially and mean lower growth for many emerging and developing countries.
The central banks would be in a complicated situation, trying to get to grips with the impact on inflation in the United States, and comprehending and addressing the impact on price levels in the euro area, with contrary effects going on at the same time, while also taking account of consumer and investor uncertainty. Furthermore, corporate and mortgage financing has become much more expensive since the US elections with bond markets factoring in the prospect of higher tariffs, and this is also curbing investment levels.
Growth of real gross domestic product in 2025 compared to previous year (in percent) (Scenario with tariff increases in brackets)
Source: BDI
Forecast summary: Growth in real GDP 2025/2026 in percent
1: IMF (2025), January
2: OECD (2024), December, *September, Forecast for India for fiscal year beginning April
3: European Commission (2024), November.
4: Forecast on basis of 70 percent world GDP (PPP of 2013)
5: Information on India for the fiscal year in current prices
At the same time, the rate and scale of structural reform to stimulate growth remains low in most OECD countries which means that growth potential is only likely to pick up very slightly in a few countries (OECD 2024). In other words, the recovery could gather pace somewhat if political shocks are minimised and once the upward forces gradually receive more tailwind. A more pronounced recovery would require more substantial reform activities in several major economies. This is currently only on the cards in the United Kingdom, while economic policy going forward in Germany and France remains uncertain and Italy and Spain continue at their usual pace. Japan does not have any large-scale reforms in the pipeline either. In the United States, the main policies going forward are set to curb growth, particularly the intended course of the new administration in immigration and trade.
Monetary policy around the world
Progress made in combating inflation in 2024
The rapid tightening up of monetary policy in the large majority of industrialised countries and a great many developing and emerging countries, with the major exceptions of China and Japan, combined with a swift stabilisation of inflation expectations triggered a steep rise in real interest rates and, consequently, a sharp cooldown in the demand for investment and property loans thus dampening overall economic demand. Central banks only gradually started to cut interest rates again. Real interest rates initially remained restrictive, staying well above the neutral real interest rate. Bank lending first recovered in the United States in spring 2024 and then, to a lesser extent, in the euro area in the second half of 2024.
Monthly global inflation rates have fallen steeply from their peak level of 9.4 percent in the second quarter of 2022. The IMF now expects inflation to drop to 3.5 percent by the end of 2025, which is onetenth of a percentage point below the 20-year pre-crisis average (IMF 2024). The annual average inflation rates should also continue their steady downward trend, from 5.7 percent in 2023 to 5.8 percent in 2024 and 4.3 percent in 2025.
Broadly speaking, core inflation for goods stagnated while core inflation for services persisted at twice the pre-crisis level of more than four percent. This is obviously on account of the steep wage increases being factored into the price of services, many of which are labour-intensive. Levels will settle down in the course of time, once the next rounds of wage negotiations result in more moderate wage increases as much of the real income lost during the shock years will have been compensated for by then.
The downtrend in inflation only had marginal downward effects on employment levels as the economy was in the steep part of the Phillip’s curve which meant that rapidly dropping inflation was achieved with little impact on production and employment levels. The surge in inflation rates during 2022 and 2023 triggered a rise in per unit profits, while last year saw wages increase solidly. In the United States, productivity also rose robustly and per unit costs remained within reasonable bounds. In Europe, on the other hand, companies lost competitiveness overall with productivity faltering and nominal wages increasing substantially. Some buffer from higher per unit profits in the recent past remains to absorb these costs, but, in view of the weak level of incoming orders, particularly in manufacturing and internationally traded services, this will become a problem over the next few quarters.
The key factors for monetary policy this year will be the increased uncertainty surrounding economic policy and the complex effects of US trade policy on domestic inflation in the United States and on global goods and capital markets. Instead of being able to settle down again and concentrate on their main task of bringing inflation in line without any major shocks, central banks are bracing for volatility once again.
interest rate in the international environment
US monetary policy in uncertain waters
This task will be particularly complicated for the US central bank as core inflation is still a high 2.8 percent (2024 Federal Reserve estimate) and monetary policy will have to remain restrictive for some time to come. If trade policy triggers another inflation shock, monetary policy will likely have to be tightened again, or at least more restrictive than without another shock. Estimates of the possible impact of the tariff measures announced by President Trump on inflation range from at least one half of a percentage point up to as much as two percentage points of additional inflation in 2025 and 2026 while dampening growth and employment at the same time. Pressure on prices is also set to increase with a still more expansionary financial policy course on the horizon, unfunded additional tax concessions planned for 2026, and a more restrictive immigration policy.
Without tariff increases, smaller cuts would be on the cards to get interest rates closer but not down to the neutral level of just over three percent. The Federal Open Market Committee lowered its key interest rate by 50 basis points on 18 September to a range of 4.75 to five percent followed by two further cuts of 25 basis points, one in early November and then again in the middle of December, down to a range of 4.25 to 4.5 percent. In December, the Federal Reserve then upwardly revised its 2025 inflation forecast, measured by the Personal Consumption Expenditures Index, raising its September forecast by a substantial 0.4 percentage points up to 2.5 percent for the middle of the year. The Federal Open Market Committee members’ median estimated interest rate also adjusted to 3.9 percent, up from the previous estimate of 3.4 percent, the robust economic recovery combined with the flat downtrend in core inflation providing grounds for more reserved prospects. The rapid upward movement in bond yields and the US dollar over the last few weeks should also have a dampening effect. The road ahead continues to be incredibly complex for the Federal Reserve. If imposed, the threatened tariff increases will bring growth in the United States well below the Federal Reserve’s forecasts over several quarters, down from the predicted annual average of a good two percent in 2025 and 2026, by up to half a percentage point in 2025 and a good one percentage point in 2026. Inflation would go the other way and probably be 0.5 to 1.5 percent higher than expected. The Federal Reserve would then have to slow down its path to neutral monetary policy and keep key interest rates close to four percent until the end of 2026 with a possible hike if tariffs are increased substantially. This would, in turn, markedly increase the risk of recession.
Growth concerns in the euro area signalise swifter monetary easing
The latest figures from Eurostat show that the measures taken to contain inflation in the euro area have made considerable progress. After trending sideways in the first six months of the year, inflation continued to point down after the summer. The small rises recorded in inflation recently (2.2 percent in November 2024 and 2.4 percent in December 2024) were largely triggered by baseline effects in energy prices. Core inflation remained steady at 2.7 percent in December 2024 which was higher than the European Central Bank’s target of two percent. The upward pressure on prices in the service sector at over four percent is proving particularly persistent and has been dubbed by some market analysts as the ‘long last mile’ (DB Research 2024). Inflation in services should continue to fall along with overall inflation over the course of this year.
At the same time, the growth prospects for the euro area remain subdued and the price pressure coming from wage increases should ease off, which will likely cool off inflation. US tariffs would further reinforce this momentum by negatively impacting growth. The account of ECB’s meeting in October clearly shows that the focus of concerns had shifted from inflation to low growth even before the US
elections. This is likely to overcompensate an eventual increase in goods prices inflation following a weaker euro caused by US trade policy.
Furthermore, the US tariffs could prompt a redirection of the flow of Chinese exports to the euro area which would further exacerbate the downward pressure on inflation caused by surplus Chinese capacities. This could well affect the ‘machinery and mechanical appliances’ sector, which, in 2022, accounted for almost half (46.4 percent) of Chinese exports to the United States, followed by ‘miscellaneous manufactured items’ (12.9 percent), ‘chemicals, plastics, rubber, leather goods’ (twelve percent), and ‘textiles, footwear, headgear’ (ten percent) (US Census Bureau, 2023). An ECB study of 2020 showed that tariff increases during a trade dispute between the United States and China from 2016 to 2019 caused a rapid and marked decrease in the volume of goods imported from China by the United States but hardly any trade diversion of exports from third countries to the United States. The ECB believes that the impact on trade flows could take longer to unfold in view of the high conversion costs particularly in technologically advanced products. This is also likely to hold true for the redirection of exports from China to the EU, particularly considering the large volumes involved, so the full impact will only become manifest gradually and over a longer period of time.
Overall, the situation gives grounds for the ECB possibly speeding up its monetary easing and sprinting to the target level with a certain risk of inflation falling below target in the next two years (DB Research 2024). In December, the ECB consequently cut interest rates for the fourth time since the beginning of the current easing cycle in May. The main refinancing rate of the ECB has stood at 3.15 percent since 18 December 2024, the deposit interest rate at three percent, and the marginal lending rate at 3.4 percent. By the end of 2025, key interest rates could drop down to around two percent according to market analysts. Some analysts are even predicting key interest rates of 1.5 percent by the end of 2025. In view of the estimated neutral level of two to 2.5 percent, the monetary policy of the ECB would then change from restrictive to neutral to slightly stimulative (DB Research 2024). At the same time, the reduction of the Asset Purchase Programme (APP) portfolio is being continued, while reinvestments under the Pandemic Emergency Purchase Programme (PEPP) were fully discontinued at the end of 2024.
The Bank of England tackles persistent price pressure
Inflation remains problematic in the United Kingdom, with prices being pushed up particularly in the service sector through ongoing wage pressures. While global energy prices have returned to normal levels, fiscal policy, also in the form of tax amendments, continues to support price development (OECD 2024a, DB Research 2024). At the same time, skilled staff is still thin on the ground in certain sectors such as engineering and finance, revealing clear structural challenges on the labour market. The OECD (2024a) forecasts 2.6 percent inflation in 2024 and 2.7 percent in 2025 before anticipating a slight drop down to 2.3 percent in 2026.
The monetary policy of the Bank of England is currently in transition, with sights set on phased easing to reach the target level of inflation in the medium term. While further cuts in key interest rates are anticipated until 2026, action will be cautious and closely tied to developments going forward, particularly in view of the uncertainties in the momentum of wages and prices (OECD 2024a; DB Research 2024). In parallel, the Bank of England is likely to continue steadily and carefully reducing its portfolio (OECD 2024a).
In Japan inflationary pressure decreasing despite wage increases
In November 2024, the increase in consumer prices in Japan was at 2.9 percent, after registering 2.3 percent in October and 2.5 percent in September. The consumer price index therefore remained higher than the target rate of two percent, while core inflation dropped to 1.7 percent (Statistics Bureau of Japan, SBJ) Real wages have pointed upwards since last year. According to Japan’s monthly labour force survey, contractual cash earnings (base salary) increased by around three percent, which aligns with the results of the 2024 Shuntō spring wage negotiations (DB Research 2024). Overall inflation is expected to drop from an average of 2.6 percent in 2024 to just over two percent in 2025 and 2026 (OECD 2024a), even though increased wage pressures and a stubbornly weak yen are set to somewhat curb the downtrend.
In July 2024, the Bank of Japan (BoJ) announced a short-term increase in interest rates from between zero and 0.1 percent to around 0.25 percent along with plans to reduce the purchases of Japanese government bonds by half by the first quarter of 2026. At the same time, Japan’s monetary course should remain largely accommodating considering the subsiding inflationary pressure, unless the depreciation of the yen and persistently high wage pressures prove to be more tenacious than expected. The forecast inflation rate of around two percent justifies a gradual increase in the key interest rate up to 1.5 percent by 2026 (OECD 2024a).
Fiscal policy around the world
Fiscal policy around the world has not been running smoothly at all in the last one and a half years. Following the extensive support measures of 2022 and 2023 in the United States and in Europe for companies and households to ease the inflation and energy price shock triggered by the Russian war of aggression on Ukraine, fiscal policy last year had begun to focus more once more on consolidating deficits and restoring reasonable fiscal positions in the medium term. Overall primary deficits nonetheless increased between 2022 and 2024, with planned and actual figures more than two percentage points apart, and a good four percentage points among industrialised countries. Fiscal policy among industrial countries remains de facto expansionary overall and has reached tangible proportions with a two percentage point deterioration in primary deficits. In the euro area, consolidation was a clear quarter of a percentage point short of the two percent target, reflecting the delayed economic recovery, which, in turn, also restricts the scope for a hardline course. Developing countries, on the other hand, have tightened their budgetary policy, and the deficits of emerging countries only grew very slightly (IMF 2024). The OECD regards the prospects for consolidation in 2025 and 2026 based on the budgets published so far as insufficient. It anticipates an improvement of only 0.3 percent in the primary balances of OECD countries until 2026, and around double that in the euro area. Japan’s deficit is set to increase this year before starting to adjust. A very few countries are driving a tighter course, including the United Kingdom, Korea and Poland (OECD 2024: 45). High structural budget deficits remain a substantial problem in some major economies, most drastically in the United States, but also in France and the United Kingdom. As a general trend, the OECD also expects debt servicing costs to increase in the medium term as many countries will face higher costs for refinancing loans taken out during the crisis years on very favourable terms. This factor will compound medium-term consolidation additionally.
Although the consolidation of public budgets will be assisted by the lower financing costs of loans and low increases in nominal spending combined with robust tax and duty revenue, many economies will
not manage to correct their course adequately without short-term moderate and medium-term substantial growth and consolidation packages. Any larger shock from the international political arena which has a knock-on effect on overall economic output will further impede consolidation. Broadly speaking, most countries face an extremely difficult balancing act in their public budgets between financing the necessary increased defence expenditure while maintaining the equally necessary investment in the twin transformation in an environment of feeble growth and increasing social expenditure, through the aging population alone. The rise of populist political parties has furthermore hampered the ability of the centre-left and centre-right parties to agree on and implement government programmes towards sustainable consolidation and assert their agendas in the face of criticism from the populist forces.
The United States is particularly in need of a credible medium-term plan to reduce the very high public debt levels but is, instead, heading the other way. Deficits here are set to rise further in the next few years. The public finances of China are also showing consolidation problems that are also likely to intensify in the medium-term in view of the current crisis embroiling the Chinese growth model
In the euro area and in the EU, most governments tackled consolidation in the last year, but feeble economic growth impeded any tangible progress on this front. This year is unlikely to see any real improvement either. The European Commission expects the budget deficit of the EU to inch down from its current level of 3.1 percent to three percent in 2025 and 2.9 percent in 2026 (European Commission 2024). At the same time, the new fiscal rules have entered into force and must now be applied by the European institutions and Member States.
Overall, financial policy in 2025 and beyond is set to have a slightly more restrictive impact on economic activity. As a general conclusion, over the next few years, fiscal policy is only likely to provide stimulus for economic activity if countries manage to marry the necessary consolidation of public budgets with growth-stimulating priorities, structural reforms in the social security systems, and viable and robust medium-term fiscal plans. Regarding the euro area specifically, the new fiscal rules could help governments achieve this as they require the development of corresponding economic policy plans.
Corporate financing terms and conditions have improved around the world since 2023 (OECD 2024a; European Commission 2024). Among industrialised countries, inflation is approaching the targets set by the central banks and the start of monetary easing is backing this trend (German Council of Economic Experts, 2024). The high valuations on stock markets and corporate bonds have made the financing terms and conditions in advanced economies relatively favourable by historical standards (IMF 2024).
Long-term real interest rates, though, are still high in a longer-term comparison, particularly in the United States, the euro area and in emerging countries such as Brazil, even though the long-term nominal bond yields have dropped, and the issuance of corporate bonds has increased (OECD 2024b). China’s monetary easing, in contrast, has eased the financing conditions but credit growth remains weak overall (IMF 2024). In some developing countries, particularly low-income countries, the public debt situation remains stressed, though spreads of dollar-denominated government bonds have remained stable in most countries (OECD 2024b).
According to the OECD (2024a, 2024b), systemic market stress has remained at a low level despite the short-lived spike of market volatility in August 2024. If inflation does not continue to fall as expected, the markets could reevaluate monetary policy with knock-on effects on risk and term premia. The IMF (2024) has warned that looser financing terms could fuel financial risks as some assets appear overstated, global debt is rising and the take-up of external capital from non-bank financial intermediaries has increased.
Source: Macrobond Yield on 10-year government bonds
Bank lending stabilises slightly but still held back by uncertainty
Lending in advanced and emerging countries is showing first signs of stabilisation and, in some cases, moderate rises (OECD 2024a). Nonetheless, lending growth remains modest in real terms. Monetary policy easing has triggered a further drop in both bank lending and deposit rates, with deposit rates falling at a comparatively faster pace than lending rates (OECD 2024a). While lending standards remain restrictive in some countries, credit demand has started to recover for both households and firms.
The upward trend in lending is still being pushed down by the continuing reduction of debt in the private sector. Global uncertainties and financing costs also remain high by historical standards, additionally hampering a more extensive recovery of lending (European Commission 2024; German Council of Economic Experts 2024).
Bond markets respond with falling yields; political uncertainty in France
The global bond markets initially responded to the progressive monetary easing with falling yields. Since early December 2024, yields have started to rise again overall, which may well be a response to the recent slight increases in inflation, which could prolong the timeline of the anticipated rate cuts. In China, government bond yields have reached a record low, reflecting the subdued outlook and further monetary stimulus measures. Spreads to US dollar-denominated bonds remained low across most emerging economies (OECD 2024a).
Global stock markets, change in percentage since 1 January 2024
Source: Macrobond
Within the euro area, spreads initially fell slightly, with the exception of France, where spreads widened following the EU elections, the dissolution of the French parliament and the resulting political uncertainty (European Commission 2024). Yields of ten-year French bonds were at 3.34 percent on 8 January 2025, slightly higher than those of Greek bonds at 3.29 percent. This reflects a change in
the risk perception of euro area debtors and underlines the concerns of investors about the political and financial prospects of France (Financial Times 2024).
Corporate bonds also initially recovered around the world In its growth outlook published in December, the OECD (2024a) shows that corporate credit spreads to risk-free rates have declined to levels below long-term averages, reaching their lowest levels since 2007 in the United States. The latest figures, however, show corporate bond yields rising slightly on the back of rising government bond yields.
Strong performance from stock markets, particularly in the United States
Global stock markets delivered a strong performance last year overall buoyed by expectations of a soft landing for the global economy. The short-term market correction in August 2024 triggered by weak US labour market data and an increase in interest rates in Japan, proved to be short-lived (IMF 2024).
While stock markets in Europe have faltered since spring in global comparison, US stock markets are benefiting particularly from optimistic economic prospects, which have been fuelled further since the outcome of the US elections and the tax cuts and possible deregulation of financial markets this holds in store. In September 2024, Chinese stock markets registered an upwards surge following announcements by the government of tax concessions and looser property policy. High price-earnings ratios nonetheless indicate potential risks as warned by the IMF (2024) and the OECD (2024a).
Currency markets: US dollar supported by higher bond yields and political developments
Following a sharp depreciation in the second half of 2022, the dollar stabilised. Since late September 2024, the US dollar has appreciated against the euro, the British pound, the Japanese yen and the Chinese renminbi.
Source: Macrobond
There are many possible causes for this development. One factor is that US government bonds have risen since September, making the dollar more appealing for investors. Political developments, including the re-election of Donald Trump on 5 November 2024, have also coloured market sentiment
(RBC Capital Markets 2024). Import tariffs are likely to increase inflation within the United States, which could, in turn, motivate the Federal Reserve to raise rates or at least make cuts more moderately This tends to lead to an appreciation of the US dollar, which the markets seem to be factoring in already. Furthermore, uncertainty regarding global trading relations can also raise demand for the dollar as a safe harbour.
Industrial production
Global industrial production slow to pick up momentum
Global industrial production (excluding construction) recovered somewhat in 2024 but failed to reach the growth rates of the past. Such growth as there was had come almost exclusively from emerging countries. According to the Netherlands Bureau for Economic Policy Analysis (CPB), production levels here have increased by more than three percent year on year in each of the last six quarters. Industrial production among advanced economies, on the other hand, has dropped steadily year on year since the first quarter 2023. Between January and October 2024, industrial production in the advanced economies was 0.7 percent lower than in the previous year. In the same period, industrial production in emerging countries expanded 3.8 percent bringing global industrial output up 1.7 percent overall as per October 2024.
World: Industrial production*, Purchasing Managers Index
*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year
Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis, own calculations
The latest figures from October show that global industrial production increased both month on month and year on year, signalising another small pick-up. The purchasing managers’ index for manufacturing rose out of contractionary territory after four months in November, before slipping back down to 49.6 index points in December. Based on the course of the year so far, expect global industrial production to increase 1.5 percent in 2024 overall, which is only half the average growth rate over the last ten years.
Advanced economies: only Asian countries excluding Japan grow
Among advanced economies, industrial production in each of the first three quarters of 2024 was lower year on year, although the rate of downturn flattened out steadily. As of October, industrial production in advanced countries was 0.7 percent lower than in the same period the previous year. Among the advanced countries, only Asian countries (excluding Japan) registered growth. In the first ten months, production here was up 5.7 percent year on year. The other advanced economies (excluding Asia) also expanded production, but at a much lower rate of 0.8 percent. The euro area registered the steepest drop in production, falling 3.1 percent. Industrial production in Japan also contracted by a substantial 2.5 percent. In the United Kingdom, industrial production was down 1.3 percent in the first ten months of the year, in the United States, it was down 0.3 percent.
Movements during the rest of the year were mixed. According to the latest figures, industrial activity increased month on month in October but was still down year on year. The purchasing managers’ index for this group of countries has been below the 50-point threshold since May 2024 but has recovered slightly from its lowest level of the year in September. Standing at 48.2 points in December, it is still below the 50-point threshold above which the index indicates expansion. Even if production levels picked up slightly towards the end of the year, industrial production among advanced economies dropped by just under one percent overall, based on the figures for the year so far.
Advanced economies: Industrial production*, Purchasing Managers Index
(left
*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year
Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis (CPB)
Looking closer, industrial activity in the euro area was down by an estimated three percent in the year overall and in the United Kingdom down by one percent. The US industry also failed to draw level year on year. Production in the advanced Asian economies excluding Japan looks to have grown by a solid
five percent, while Japan’s industrial activity was down by a good two percent, according to current estimates. In the other advanced economies, we estimate that industrial production rose slightly in 2024 overall.
Emerging countries: growth momentum primarily from China and Central and Eastern Europe
In the first quarter of 2024, industrial production in emerging countries expanded by 3.7 percent year on year thanks to high growth in China and Central and Eastern Europe. In the second quarter, the rate of growth accelerated to 4.1 percent. With the exception of Africa and the Middle East, activity continued to increase in the other regions. In the second half of the year, the uptrend continued with industrial production per October 2024 was 3.8 percent higher than in the first ten months of the previous year. The Chinese industry is once again the engine of growth, expanding 5.6 percent. Industrial production also increased above average in Central and Eastern Europe (up 4.4 percent), while the increase in industrial production among Asian emerging countries excluding China was only a moderate 2.8 percent. Industrial production in Latin America only rose by a small 0.9 percent, while production in Africa and the Middle East was down by 1.2 percent year on year in the first ten months of the year.
The upward trend continued for the rest of the year. In October, industrial production in emerging countries increased by 0.5 percent compared to the previous month and 3.7 percent compared to the previous year. The purchasing managers’ index for this group of countries exited contractionary territory in October 2024 and has remained above the 50-point threshold that indicates expansion for three months in a row. As the performance here was much better than expected in the second half of the year, we have upwardly revised our forecast from the spring somewhat and now expect an increase for the year of 3.5 percent.
*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis (CPB) Emerging economies: Industrial production*, Purchasing Managers Index
Africa/Middle East
Latin America
Central and Eastern Europe
Asia (excluding China)
China
Purchasing Managers Index seasonally adjusted (left axis)
China’s industry, which is in the group of emerging economies, has returned to its former high growth. We estimate that industrial production in 2024 overall increased by five percent compared to the previous year. In Central and Eastern Europe, industrial activity also looks to have expanded above average at around four percent. In the other Asian emerging countries, we expect growth in industrial production to come in at just under average at three percent. Latin America’s industry, judging by the figures so far, increased by one percent, marking the region’s fourth year of growth. In Africa and the Middle East, on the other hand, industrial activity was down by an estimated one percent
Global trade
After pointing down in 2023, global trade activities picked up again in 2024. According to figures from the Netherlands Bureau for Economic Policy Analysis (CPB), the global trade in goods in the first quarter of 2024 were 1.5 percent higher year on year. The increase was brought about exclusively by higher exports from emerging countries, while exports from developed economies stagnated. In the second quarter, the uptrend broadened out. Global goods exports rose by a total of 2.4 percent year on year, with exports from emerging countries (up 5.8 percent) contributing the lion’s share of the increase while exports from advanced countries only increased 0.4 percent. The positive development continued into the second half of the year, lifting the global volume of exports between January and October 2024 2.3 percent higher year on year overall.
World: Exports according to region of origin
Source: Macrobond
Exports among advanced economies were up by a total of 0.4 percent in the first ten months of 2024. In this group of countries, the United Kingdom recorded the steepest drop, with exports plunging 7.5 percent. The euro area exported 2.5 percent less goods than one year ago. While Japan’s exports stagnated, the other advanced Asian economies stepped up their exports by a hefty 7.5 percent. The United States proved to be a positive exception, with exports from the country rising 2.9 percent. Exports from the other advanced economies rose by a marginal 0.2 percent.
Emerging countries exported 5.5 percent more goods in the first ten months of 2024 than in the same period in 2023. Alongside China, whose exports rose 10.8 percent, the other Asian emerging countries
(excluding China) recorded the highest increase in exports, with a rise of 5.9 percent. Central and Eastern European emerging countries also laid down a good performance with exports rising 3.6 percent year on year. Even Latin America, whose exports were still pointing down the previous year, posted an increase in exports of 2.4 percent. Only exports from Africa and the Middle East were down, falling 5.5 percent year on year.
The latest figures show the upward trend in trade activity continuing. In October 2024, global exports were up on the previous month by 0.9 percent and three percent higher than in October 2023. This latest growth in exports was entirely attributable to rising exports from emerging countries. For 2024 overall, the global trade in goods is estimated to have increased 2.5 percent. This year’s result is likely to be similar, barring substantial tariff increases on the part of the United States.
United States
US economy in good shape in 2024
The state of the country’s economy was an important topic in the 2024 US presidential elections. In the CNN election day survey of November 5, 2024, 68 percent of respondents said that the state of the US economy was not so good or poor. Of this group, 28 percent said that they have voted for the Democratic candidate, Kamala Harris, and 70 percent said they voted for Donald Trump. A total of only 31 percent of those surveyed rated the state of the domestic economy as excellent or good. Of those 31 percent, 92 percent voted for Harris and seven percent for Trump (CNN 2024). The respondents’ perception of the state of the US economy in the months before the elections did not reflect the actual situation, as shown by the following indicators.
US GDP growth, quarterly (annualised)
Source: Bureau for Economic Analysis
In the third quarter 2024, US GDP rose at an annualised rate of 3.1 percent according to the third estimate of the Bureau of Economic Analysis (BEA). In its first and second estimate, BEA had calculated growth of 2.8 percent. This growth was fuelled primarily by an increase in consumer spending, federal government spending and non-residential fixed investment. Imports outpaced
exports so that net exports pulled GDP growth down slightly (BEA 2024a). In the second quarter, US GDP rose by an annualised rate of three percent. For 2024 overall, the OECD expects robust growth of 2.8 percent (OECD 2024a). The IMF also estimated 2.8 percent growth in its World Economic Outlook Update of January 2025 (IMF 2025).
The unemployment rate rose slightly in the course of last year, climbing from 3.7 percent at the start of the year to 4.1 percent in December. Jobs in December were generated in healthcare, the public sector, the social assistance sector and in retail trade, which had cut jobs in November (BLS 2025c).
Extra savings accumulated during the pandemic spent, but consumer spending remains stable In the course of 2024, inflation in the United States initially continued to approach the two-percent target before increasing again towards the end of the year. According to figures from the Bureau of Labor Statistics (BLS), the Consumer Price Index (All Urban Consumers, CPI-U), without seasonal adjustment, dropped steadily between March (3.5 percent) and September (2 4 percent), before nudging up in October (2.6 percent) and November 2024 (2 7 percent) In December, inflation again rose slightly, increasing to 2.9 percent (BLS 2025a). In December 2024, the price index increased by 0.4 percent compared to the previous month and after seasonal adjustment. The rise in the index was triggered primarily by rising energy costs. Prices for gasoline and food also increased (BLS 2025b).
In the years following the pandemic, consumer spending stayed steady despite high inflation. By using up their savings from the time of the pandemic, US households thus contributed to the ‘soft landing’ of the US economy. Although these savings have been used up since the middle of 2024, the savings rate remains low. The Federal Reserve Bank of San Franciso has calculated that by September 2024, US households had saved a total of 291 billion US dollars less than they would have done if the pandemic had not taken place and assuming the savings rate would have followed the same trend as before the pandemic (Richter 2024, Federal Reserve Bank of San Francisco 2024). At the beginning of 2024, the savings rate was at 5.5 percent of disposable income. It then dropped steadily throughout the year, reaching 4.1 percent in September 2024. In October, it then turned up again to 4.5 percent before falling back to 4.4 percent in November. For comparison: in the years preceding the pandemic, the average annual savings rate was 6.4 percent in 2018 and 7.3 percent in 2019 (BEA 2024b). The latest figures show an increase in consumer spending of 0.4 percent in November 2024 compared to the previous month (BEA 2024c).
US foreign trade: imports rise in third quarter
The trade deficit of the United States is a thorn in the side of new US president, Donald Trump. US imports increased in the third quarter 2024, at least partially fuelled by Trump’s announcements that he would impose additional tariffs in his second term. The threat of increased tariffs no doubt incentivised US companies and consumers to import as many of their inputs and foreign goods as possible before additional tariffs are imposed.
In the third quarter 2024, the United States exported goods and services worth 810 billion US dollars. This represents an increase in exports of 2.7 percent on the previous quarter. Imports in the third quarter 2024 amounted to 1,043 billion US dollars, 2.9 percent higher than in the previous quarter. The foreign trade deficit (goods and services) in the third quarter at just under 234 billion US dollars was around 3.7 percent higher than in the previous quarter. The deficit for goods only amounted to 307 billion US dollars (BEA 2024c).
Interim budget until mid-March 2025
US public deficit and public debt have continued to grow. In the fiscal year 2024, which ended on 30 September 2024, the budget deficit was at 1.8 trillion US dollars according to the Congressional Budget Office (CBO). This corresponds to 6.4 percent of GDP. Compared to the fiscal year 2023, the deficit increased by 138 billion US dollars (eight percent). Public debt (‘debt held by the public’) at the end of the fiscal year 2024 was at 97.8 percent of GDP, more than the 96 percent registered at the end of the previous fiscal year (CBO 2024b). There is no final budget for the fiscal year 2025 as yet. A continuing resolution for transitional funding was passed by both chambers of the US Congress on 20 December 2024. President Biden signed the resolution one day later. The resolution safeguards the funding of the US government until March 14, 2025.
As designated president, Trump attempted to include a suspension of the debt ceiling for several years in the resolution but failed. According to current legislation, the debt ceiling was suspended until January 1, 2025. The ceiling is therefore now in effect again and stands at the current debt of around 36.1 trillion US dollars. With the help of a few technical tweaks, the US Treasury was still able to pay bills for a few days. US Treasury Secretary Yellen, who is now no longer in office, informed the Congress on January 17, that the debt ceiling would be reached on January 21. The Treasury has since used so-called extraordinary measures to prevent defaulting on payment (Treasury 2025). This should tide the US government over for several months depending on the volume of tax revenues this spring and how fast, for example, the disaster assistance for victims of last autumn’s hurricane agreed in the Continuing Resolution is paid out (Luhby 2025). The new US Congress will thus have to address the budget for the remaining fiscal year and the debt ceiling.
Outlook 2025: positive economic stimulus through tax cuts and deregulation
Forecasts for the economic development of the United States in the next few years are currently very difficult to make as the various announcements made by the new US President Trump over the last few months regarding lower taxes, deregulation, mass deportation of illegal immigrants and tariff increases, all have varying effects on the US economy.
On the one hand, Trump would like to keep taxes low. In 2017, during Trump’s first term in office, the United States adopted the Tax Cuts and Jobs Act (TCJA), which included numerous tax concessions. Among other things, the national corporate tax rate was lowered from 35 to 21 percent. Most of the amendments provided under the TCJA that affect individuals or families were temporary and will cease at the end of 2025. The new president and the Republicans in Congress are therefore planning a new reform of taxes to extend the tax concessions made under the TCJA. Trump would also like to decrease the corporate tax rate to 15 percent, for companies that produce in the United States While these measures would certainly stimulate consumption and investment, they would also increase public debt even further in the absence of sufficient funding by other means. Even higher public debt combined with permanently lower tax revenues would raise the US public debt still further and burden the creditworthiness of the United States. At the same time, a further reduction in the US corporate tax rate to 15 percent would put additional pressure on Europe as a business location and further increase the appeal of the US market. The resulting combined US tax rate would then be only 20.1 percent which is just marginally above the combined tax rate of Estonia of 20 percent. According to the Tax Foundation, Hungary, Ireland and Luxemburg are the only OECD countries to have a significantly lower combined tax rate (Watson & York 2024).
Beyond this, Trump intends to reduce regulation. Trump’s plans are to put business leader Elon Musk in charge of a Department of Government Efficiency (DOGE) in the new administration to develop recommendations to downsize public authorities and drastically cut regulation. The possible impact of such an attempt at deregulation are very difficult to put into figures but these measures are generally assumed to have a positive impact on the US economy (e.g. Deutsche Bank Research 2024, OECD 2024a).
… but tariffs and mass deportations would harm the US economy
Tax cuts and deregulation would have a positive impact on GDP growth. On the other hand, Trump has also announced tariff increases and mass deportations of illegal immigrants. Broad, area-wide tariff increases would increase prices for US consumers and could drive up inflation. Furthermore, the imposition of additional tariffs could well trigger countermeasures from US trade partners. Retaliatory tariffs would lead to a decrease in US exports. The Congressional Budget Office (CBO) therefore assumes that US economic output would decrease overall, but that a higher demand for domestic products would moderate this decrease. According to the CBO, higher US tariff revenues would reduce the budget deficit and mean the government needs to borrow less money thereby freeing up funds for private investment. Higher private investment would, in turn, increase US production levels thereby decreasing the downward impact on US GDP further. The CBO concludes that an additional tariff of ten percent on all imports and 60 percent on imports from China would decrease US GDP by 0.6 percent until 2034. Other studies have come to similar conclusions (CBO 2024a, see also Box on pp. 4-5).
Illegal immigrants, in turn, hold many jobs in the US as harvest workers, in the hotel industry and in gastronomy, in which US citizens often do not want to work. If these relatively low-cost workers are no longer available then the pressure on wages will increase, driving up inflation. The Peterson Institute for International Economics (PIIE) has considered two scenarios. In the first, considered the minimum scenario, 1.3 million illegal immigrants will be deported. PIIE has calculated that US GDP would then be more than one percent lower for several years than in the scenario without deportations. In the second scenario, 8.3 million people are deported (this is the estimated number of undocumented immigrants in 2022). In this scenario, US GDP would be 7.4 percent lower in 2028 than in the scenario without deportations. The scenario without deportations assumes US GDP growth of around 1.9 percent each year. The intended deportation policy would more than nullify this growth. In both scenarios, inflation would increase in the next few years before starting to fall again following effective countermeasures by the Federal Reserve (McKibbin et al. 2024).
Brookings Institution analysts have developed two much more moderate scenarios for the immigration policy under Trump and its impact on US GDP. According to Brookings, the immigration policy of the new administration would reduce GDP growth in 2025 by between 0.1 percentage points (‘high’ scenario) and 0.4 percentage points (‘low’ scenario) which corresponds to between 30 and 110 billion US dollars. The scenario of high immigration is based on an immigration policy only marginally more aggressive than during Trump’s first term in office with net migration of 1.3 million in 2025. The scenario of low immigration assumes that the United States will record net emigration, with 650,000 more people leaving the country than entering (Edelberg et al. 2024). In view of the high degree of uncertainty of the concrete economic policy of the United States in 2025, GDP growth could be anywhere between less than 1.5 percent to three percent for 2025. We expect the United States to grow by 2.4 percent if it does not impose massive tariff increases, as it has started out the year with a solid carryover of 0.3 percentage points.
China
Twin challenge presented by economic and structural crisis
Xi Jinping’s New Year’s Eve address gave the impression that everything was going to plan in the Chinese economy. Indeed, the growth target of ‘around five percent’ was met. According to the National Bureau of Statistics (NBS), China’s GDP rose by precisely five percent in 2024 (alternative estimates arrived at significantly different results, see Box). Alongside strong exports, the target was reached primarily with the help of economic stimulus measures.
The second largest economy in the world is dogged by persistent deflationary pressure. China faces a twin challenge in the form of a short term economic downturn and a structural crisis. The Chinese economy has still not fully recovered from the pandemic. The property crisis, which has been smouldering since 2021, continues to burden the economy considerably. Geopolitical tensions and trade disputes are adding uncertainty into the unwholesome mix. Structural factors such as demographic change and imbalances in China’s growth model, above all the chronically weak level of domestic demand, are additionally pulling down growth prospects. All these factors are eating away at the confidence of households and firms.
After experiencing a strong first quarter in 2024 (5.3 percent GDP growth), the economy cooled down markedly. To meet the growth target nonetheless, the government implemented support measures starting in September. Instead of a large-scale fiscal economic package, the government opted for a series of phased measures focused on monetary policy. Measures included the PBOC lowering interest rates and the reserve requirement ratios for banks. In addition, 200 billion renminbi (28 billion US dollars) were set aside for investment projects by local governments. In November, China’s Ministry of Finance allowed local governments to issue new bonds to the total volume of ten trillion yuan (1.32 trillion euros) to replace accumulated ‘hidden debts’. In the current year, local governments should be able to save around 1.2 trillion yuan (160 billion euro) in interest expenses, according to Absolute Strategy Research.
Towards the end of the year, the property market showed frail signs of bottoming out following measures taken by Beijing in the second half of the year, including lowering mortgage rates, setting tax incentives and providing local governments with a new funding option to buy up unsold homes with special bonds. For 2024 overall, prices for new houses continued to fall, dropping by 5.3 percent compared to last year according to the NBS. However the downward momentum has slowed down in the last three months. In the tier 1 cities, Beijing, Shanghai, Guangzhou and Shenzhen, prices increased by 0.2 percent in December, which is the first rise seen since June 2023. However, large problems persist, particularly on the supply side. In 2024, property investments were 10.6 percent lower than in the previous year, according to NBS, which is the largest decrease registered so far. 2024 also saw property sales and new building projects, measured in area, fall by 12.9 percent and 23 percent respectively.
Lack of transparency breeds uncertainty
China’s opaque, state-controlled economic system does not only repeatedly distort markets but also economic data and narratives. Much of the official data is of questionable reliability. Former Chinese Premier Li Keqiang used an alternative index with freight volumes, power consumption and lending as he was said not to trust the official figures on growth provided by the provinces. However, the central government is also frequently not transparent and issues implausible data. A recent study by the Rhodium Group (2024) criticises the “authoritarian bias” of the official data of the Chinese government and its influence on IMF and World Bank estimates. The relatively stable official figures of high growth in 2023 and 2024 do not align with the increasingly aggressive support measures taken in the course of last year, according to the study. The alternative, spendingbased calculation of GDP by the Rhodium Group deviates substantially from the official figures.
China’s GDP growth in percent (Rhodium Group estimate) 2023 2024 2025
1 5
(see IMF and OECD: 5 2)
Quelle: Rhodium Group
Production grows, profits sink
2 4 – 2 8 (see IMF: 4 8 and OECD: 4 9)
three – 4 5 (see IMF: 4 5 and OECD: 4 7)
Fuelled by Beijing’s industrial policy and strong exports, China’s industrial sector expanded faster than the economy overall, as in the previous year. As shown by the figures from NBS, a strong increase in December lifted growth for the year overall to 5.8 percent, which is the strongest growth registered in the last three years. The high-tech industry expanded by 8.9 percent year on year. Key industries exceeded the overall level of growth considerably. The production of New Energy Vehicles, including hybrid and fuel cell electric cars, increased by around 38.7 percent, the production of integrated circuits by 22.2 percent, and the production of industrial robots by 14.2 percent. The electronics industry expanded 11.8 percent and shipbuilding by 10.9 percent. Industries connected to the property market not surpringly continued to struggle in 2024. The production of cement (down 9.5 percent) and steel (down 1.7 percent) continued downwards.
Although producers managed to increase production levels, they had a hard time finding enough customers in the current environment of low domestic demand. The purchasing managers’ index correspondingly shows a very mixed picture. China’s official purchasing managers’ index for manufacturing was below the threshold of 50 for seven out of twelve months last year. The average level of the official index in 2024 was in contractionary territory at 49.8 points. The index published by the economic magazine Caixin, which better reflects the activities of of smaller and medium-sized companies, was somewhat higher, averaging at 51.1 points for the year. Both indices were in expansionary territory in the last three months of 2024. The Caixin index even climbed to 52.2 points in December, its highest level since March, which indicates that the economic stimulus measures of the government had a tangible impact in the last quarter.
Excess capacities are not just increasing tensions with China’s trade partners but are also becoming increasingly problematic for China itself. NBS puts capacity utilisation for 2024 overall at an average of 75 percent, which is barely any lower than last year. Utilisation is therefore still above the record low
of 2016 (excluding the Covid shock) of 73.3 percent, at which point China’s heavy industries had particularly high surplus capacities. However, the aggregated utilisation rate is only a rough indicator. In individual sectors such as solar and batteries, capacity utilisation is considerably lower. Other indicators are also pointing towards surplus capacities. Corporate earnings, for example, dropped by an average of 4.7 percent between January and November compared to the previous year, according to NBS. 2024 thus constituted the third year of falling profits in a row and this trend is set to continue this year in view of the deflationary pressure.
To break out of this dangerous spiral, Beijing will have to move the focus of its industrial policy support efforts from the supply side to substantially and sustainably stimulating demand.
Chronically weak demand and persistent deflation risks
Domestic consumption remains the biggest weakness for economic development in China. According to figures from the PBOC, around 70 percent of the assets of private households was in property in 2020. The collapse of the property market has therefore been a huge damper for private consumption. High youth unemployment (16 1 percent in November 2024, according to NBS), uncertainty on the labour market and stagnating wages have all additionally intensified consumer restraint.
Retail sales increased in 2024 overall by 3.5 percent compared to the previous year, according to NBS, which is only half as much as in 2023. However, the monthly figures improved towards the end of the year. The reason behind the improvement was primarily an expansion of the trade-in subsidy programme in the second half of 2024 with which the government subsidised new acquisitions to replace old products. Sales of household appliances consequently grew by 12.3 percent in 2024 according to data from the Ministry of Commerce. The government intends to extend this programme and include additional product groups in 2025. However, these measures mainly pull purchases forward rather than strengthening domestic consumption for the long term.
Deflationary tendencies are magnifying the country’s economic challenges. The consumer price index only increased by 0.2 percent in 2024, well below the official target of about three percent. Producer prices dropped by 2.2 percent in 2024 and have been downward for 27 consecutive months as of December. Deflationary pressure is persisting and putting China at risk of falling into a deflationary spiral.
Investments mixed, lending surprisingly weak
In 2024, fixed asset investment grew by 3.2 percent year on year, according to NBS figures. Although this represents a slight improvement, the increase was modest by long-term Chinese standards. The overall result was pulled down particularly by the property sector which recorded a fall in investment of 10.6 percent. Infrastructure investment increased by 4.4 percent. High investments in the high-tech sector of eight percent reflect the priorities of the government. The large divide between public and private fixed asset investment indicates a lack of confidence particularly in the property sector and the traditional manufacturing industries. While public investment increased by 5.7 percent, private investment stagnated.
International investors are also being reticent. In the first eleven months of 2024, foreign direct investment in China dropped by 27.9 percent compared to the previous year, down to 749.7 billion yuan (99.4 billion euros), as shown by figures from the Chinese Ministry of Commerce. Foreign direct
investment nonetheless expanded markedly in some areas. Medical technology, for example, registered an increase of 53.4 percent. Countries bringing in the most foreign direct investment were Germany, which account for 10.9 percent, followed by Singapore and Switzerland. In the first six months of 2024, China recorded its first net outflow of foreign investment for a long time. It amounted to 33.7 billion yuan (4.5 billion euros). Foreign capital has long ceased to play an important role in China’s economic development. The downward trend over the last few years is still cause for concern What is more, China, akin to the official US approach with the Inflation Reduction Act, is unofficially stipulating localisation requirements which tend to attract foreign direct investment.
Lending levels were unusually weak last year. According to figures from the Chinese central bank, the PBOC, China’s banks issued loans to the volume of 18.1 trillion yuan (2.35 trillion euros) last year which corresponds to a decrease of around 20 percent compared to the previous year. This is not just the first decrease in lending since 2011 but has never happened before on this scale in the recent economic history of China. Lending over the last years in China remained on a stable upward path even during the pandemic and despite the property crisis, primarily because China’s state-dominated banking system was able to swiftly compensate the collapse of the property sector with a targeted shift towards the industrial sector. Since the fourth quarter 2023, however, demand for loans among companies and households has dropped off steeply.
Exports an engine of growth with an uncertain future
The export industry proved to be a central support for the Chinese economy last year, fuelled by low prices at home and relatively robust demand from abroad. Goods exports increased by 7.1 percent in terms of value, according to the NBS. The high growth rate was driven primarily by the export of mechanical and electronic goods, which together accounted for 59.4 percent of total exports and grew by 8.7 percent. Car exports were a major driver of growth here, rising by almost 20 percent in 2024 to reach around five million vehicles, according to China Association of Automobile Manufacturers Around 1.28 million of these vehicles were New Energy Vehicles. Exports surged higher towards the end of the year. In December, China’s exports were 10.7 percent up on the previous year. Exports to the United States increased particularly (15.6 percent), likely on account of purchases brought forward in view of impending US tariffs. Imports only increased by a moderate 2.3 percent, thus producing a record trade surplus of 964.70 billion euros.
A trend that continued in 2024 was the shift of China’s trade relations towards developing and emerging countries. Exports to ASEAN countries and to Latin America increased by twelve and 13 percent respectively, while exports to advanced economies grew very modestly (United States up 4.9 percent, EU up three percent, Japan down 3 5 percent). Trade with partner countries of the Belt and Road Initiative accounted for half of all trade for the first time in 2024.
The importance of exports for China’s economy has steadily decreased over the last two decades. Since peaking in 2006, exports as a proportion of GDP had dropped by around half by 2019 (to 18 4 percent). The prolonged downward trend in exports has since stopped. In 2024, the share of exports in GDP was at 18.9 percent The comeback of exports as China’s engine of growth is a doubleedged sword. Resistance against China’s industrial policy-induced export gluts is growing, not just in the United States and in the EU but also in a number of developing and emerging countries such as Brazil.
Outlook: a dynamic start to a difficult year
In the fourth quarter 2024, GDP increased by 5.4 percent year on year which is the steepest quarterly growth seen since the second quarter of 2023. China’s economy has thus started out the new year with momentum. It is not improbable that the government will again set a target growth of ‘about five percent’ for 2025 at the plenary meeting of the People’s Congress in March. However, the downward pressure remains, particularly from weak consumption and ongoing deflationary pressure. The World Bank and the IMF are both forecasting lower growth of 4.5 percent for China in 2025. The BDI concords with this estimate as a baseline scenario. A major factor of uncertainty is the risk of a tariff escalation with the United States. The resulting impact on growth would depend not only on the level of the tariffs but also on the ability of Chinese exports to find alternative markets and Beijing’s economic policy response. In the event of medium tariff increases, we expect growth to drop to 3.5 percent.
China’s economic priorities and strategies for 2025 were presented at its Central Economic Work Conference (CEWC) in mid-December 2024. The CEWC report defined the strengthening of domestic demand as number one of nine strategic priorities, ahead of the development of strategic industries and technologies which Xi Jinping has made the focus of economic policy. The government announced that it will intensify its fiscal and monetary measures in 2025. The PBOC has changed its monetary policy stance to ‘moderately loose’ for the first time in 14 years. According to media reports, Beijing is planning to increase the budget deficit from three to four percent this year. In the second half of the year at the latest, when the 15th five-year plan (2026-2030) is defined, it should become clear whether the declared focus on stimulating demand represents a tactical adjustment or whether it will constitute a more far-reaching adjustment in economic policy.
Euro Area
Caught between muted economic recovery and structural challenges
In 2024, the euro area recovered slightly from the low growth of only 0.5 percent the previous year. In the first quarter, EU GDP increased 0.5 percent and then continued to grow 0.6 percent in the second and 0.9 percent in the third quarter.
This upward trend in growth reflects a certain degree of easing in the supply shock, which had previously encumbered economic performance. Disruptions in supply chains during the pandemic and the energy crisis triggered by the Ukraine conflict considerably buffeted production and trade. The stabilisation of supplies is supporting the economy on its slow road to recovery. Consumer-driven growth remains weak nonetheless, with private consumption only picking up pace very slowly. Investment levels also remained subdued throughout the year, while net exports even made a negative contribution to growth in the third quarter 2024 of 0.9 percentage points.
The structural weaknesses of the euro area are again very prominent. Even though energy prices have dropped, the competitiveness of the region is low overall, while geopolitical tensions are presenting a growing challenge to the trade-based economic model of many euro area countries (DB Research 2024). Mario Draghi’s report on competitiveness does show that the issue mas moved to the top of the agenda but political fragmentation and the need for budget consolidation among many Member States is making implementation very difficult. Structural problems could well continue to burden growth in the euro area for the long term.
Gross domestic product* of the euro area
Source: Macrobond * year-on-year change, calendar and seasonal adjusted
Subdued growth prospects for the euro area
Despite the slight recovery, the euro area does not have any strong drivers of growth. Private consumption has been slow to expand on the back of the latest real wage increases. Competitiveness, or rather the lack of it, remains a core problem in many Member States and particularly in Germany.
Development in real economic growth*
Source: Macrobond
In this situation, additionally exacerbated by geopolitical tensions and a possible escalation of trade disputes, it seems unlikely that exports will lead the path to recovery and corporate investment levels
are also subdued. What’s more, many countries, including France and Italy, need to drive a course of fiscal consolidation, which will additionally weigh down any growth momentum there is.
Overall, the economic recovery in the euro area is looking to be a lot slower and flatter than in the United States which will further heighten the divergence between the two economic regions. For the euro area, we estimate growth of 0.7 percent for 2024 overall and forecast an increase of one percent (with no new US tariffs) for 2025, close to the ECB’s latest forecast of 1.1 percent (2024a)
US tariffs and geopolitical tensions pose risks for growth in the euro area
US tariffs pose a significant risk to the economic prospects of the euro area. Depending on the level and scope of the new tariffs on European products, they will certainly pull down the already weak growth prospects of the region.
Tariffs are not the only risk for the euro area. Geopolitical tensions, such as the Ukraine conflict and the situation in the Middle East, jeopardise energy security, particularly through disruptions to oil and gas supplies. Political instability and increasing polarisation have the potential to damage confidence in the economy and curb investment and consumption. Furthermore, structural challenges, such as in the automotive sector, and slow productivity growth also jeopardise the competitiveness of the EU (European Commission 2024). The fiscal course could become more restrictive, particularly in highly indebted countries such as France, which would also pull down the economic prospects of the EU.
The fact that political risks are currently particularly prominent in Europe is reflected in the Economic Policy Uncertainty (EPC) Index. Political uncertainties have risen sharply in the last few months, particularly in Germany, France and the United Kingdom, while the indices in the United States and Japan have remained moderate. In Germany, the EPC Index reached a record high in November 2024 and, in December, stayed well above the levels seen during the global financial crisis and the Covid crisis.
Source: Macrobond
Economic Policy Uncertainty Index
Selected EU countries and the United Kingdom
The situation in France remains challenging. GDP growth in 2024 was subdued at 1.1 percent and is likely to tail off further in 2025 before possibly picking up slightly in 2026. Prospects are being weighed down by high deficits and a high government debt ratio, which is heading towards 120 percent of GDP by 2026 (OECD 2024a; European Commission 2024). Foreign demand remained the main driver of growth in 2024, while pressing fiscal consolidation measures are set to curb growth from 2025 onwards by weakening the positive effect of monetary easing on investment levels (OECD 2024a). Furthermore, political uncertainty following the government crisis is additionally exacerbating the challenges regarding economic development.
Italy is on a path of moderate economic growth with an increase in GDP of 0.5 percent in 2024 and prospects of a rise of one percent in 2025 (OECD 2024a; European Commission 2024). The drivers of growth are investments, supported by the NextGenerationEU (NGEU) programme, solid wage increases and low inflation, all factors which stimulate private consumption (OECD 2024a). Italy’s deficit is estimated to have dropped to 3.8 percent of GDP in 2024, after coming in at 7.2 percent the previous year. It is expected to continue declining until 2026, while the government debt ratio is set to increase to around 139 percent of GDP by 2026 on account of the long-term effects of tax credits for housing renovation (European Commission 2024).
Spain stood out in 2024 with solid growth of three percent, fuelled by consumer spending, robust investment levels, more favourable financing costs and the EU recovery plan (OECD 2024a; European Commission 2024). Spain’s budget deficit is estimated at three percent for 2024 but is expected to drop slowly until 2026 with healthy tax revenues and a slower growth in expenditures. The government debt ratio is scheduled to drop slightly down to around 101 percent of GDP in 2026 (European Commission 2024).
The United Kingdom’s economy exceeded expectations in 2024 by growing just under one percent, following a small technical recession in 2023 (European Commission 2024). According to the OECD (2024a), it could grow by as much as 1.7 percent in 2025, buoyed by the increase in public expenditure agreed in the autumn budget. Inflation will probably remain over the target of two percent due to wagedriven price pressure and fiscal stimulus measures. Large public deficits of foreseeably 4.5 percent of GDP in 2025 and 3.9 percent of GDP in 2026 will bring the government debt ratio to over 100 percent of GDP (OECD 2024).
Germany
In 2024, the German economy contracted for the second year in a row. Aside from the crisis years in 2002 and 2003, Germany has not delivered such a bad performance for a very long time indeed. While negative growth was only at 0.1 percent and 0.2 percent, only half as much as 20 years ago, economic output has only increased by 0.2 percent over the last five years and that has never happened before in post-war Germany.
Prospects for 2025 give little cause for hope. Although consumer spending could well increase on the back of rising nominal wages and moderate inflation, it is far from certain. In similar circumstances in the past, consumer spending has not always increased in line with rising real incomes, with consumers preferring to save their money. According to the consumer market research company, GfK, consumer sentiment is as bad as it was during the Covid pandemic. Public consumption expenditure is also set
to rise less than last year in real terms as last year services were expanded in the area of care and municipal benefits in kind which increased expenditure
With capacity utilisation rates low in the manufacturing sector, investment in plant and equipment is likely to fall further. Although the construction industry is receiving a little momentum from investment in transport and grid expansion, residential construction, which is a major part of the industry, is still struggling under high material costs and high interest rates. Investments in other assets (software, patents, etc.) are the only type of investments that are likely to show any growth this year, and not much at that. Foreign trade will not be delivering any tangible momentum. Although the global economy heading for further growth, the German economy is set to benefit less than in the past, particularly given its lower price competitiveness. All in all, we expect real GDP to drop by 0.1 percent year on year in 2025. In the event of a protectionist trade policy on the part of the United States, Germany’s economic output could drop further, as described above.
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Imprint
Federation of German Industries e.V. (BDI)
Breite Straße 29 10178 Berlin
T: +49 30 2028-0 www.bdi.eu
German Lobbyregister Number R000534
Authors
Dr. Klaus Günter Deutsch
T: +49 30 2028 1591 k.deutsch@bdi.eu
Julia Howald
T.: +49 30 2028 1483 j.howald@bdi.eu
Thomas Hüne
T: +49 30 2028 1592 t.huene@bdi.eu
Anna Kantrup
T: +49 30 2028 1526 a.kantrup@bdi.eu
Frederik Lange
T: +49 30 2028 1734 f.lange@bdi.eu
Ferdinand Schaff
T: +49 30 2028 1409 f.schaff@bdi.eu
Editorial / Graphics
Marta Gancarek
T: +49 30 2028 1588 m.gancarek@bdi.eu
This report is a translation based on „Globaler Wachstumsausblick, Wachstum der Welt bleibt verhalten | Antriebskräfte Konsum und Export erholen sich allmählich“, as of 28 January 2025.