What Are the Risks Threatening the Global Economy in 2025?
Once the global economy began to weather the COVID-19 pandemic, a completely new set of challenges awaited 2025. In 2024, global central banks were able to start cutting interest rates, having largely succeeded in curbing inflation without causing a global recession. Stocks hit record highs in the US and Europe, with “Forbes” declaring 2024 a “special year for the extremely wealthy,” with 141 new billionaires joining its list of the richest.
The year 2024 was a busy election year, as voters punished ruling governments from India to South Africa, through Europe and the United States, for the economic reality they live in because of a severe cost of living crisis caused by accumulated price increases after the pandemic. The fear is that things will become more difficult in 2025. If US President Donald Trump follows through on promises and threats to increase tariffs on US imports, it will undoubtedly trigger a trade war, leading to a new dose of inflation or a global economic slowdown if not both. Unemployment, currently near historic lows, may also begin to rise. The conflicts in Ukraine and the Middle East, the political stalemate in Germany and France, and questions about the Chinese economy are adding to the uncertainty.
According to the World Bank, the poorest countries are experiencing their worst economic situation in two decades, failing to capitalize on the post-pandemic recovery. The last thing these countries need are new challenges, such as deteriorating trade or difficult financing conditions. In rich economies, governments must find solutions to deal with the conviction of many voters that their purchasing power, standard of living, and future prospects are declining. Failure to address these issues could lead to a rise in the influence of extremist parties that are already causing divided and suspended parliaments.
New spending priorities are looming that are squeezing national budgets already strained after the COVID-19 pandemic, including combating climate change, strengthening military capabilities, and caring for the elderly. Nevertheless, this can only be achieved through strong economies capable of generating the necessary revenues. If governments decide to continue with their years-old approach – increasing debt – sooner or later they risk falling into a financial crisis.
China, the world's second-largest economy, is facing increasing pressure to start a profound transformation as its growth momentum has waned in recent years. Economists say it should reduce overdependence on industry and direct more money into the pockets of low-income citizens.
Europe, whose economy has lagged further than the United States since the pandemic, must address the root causes of that gap – from underinvestment to skills gaps. Yet, the first step will be to resolve the political deadlock in the Eurozone’s two largest economies, Germany and France.
For many other economies, the prospect of a stronger U.S. dollar – if Trump's policies cause inflation and slow the pace of interest rate cuts by the Federal Reserve – is bad news. This will lead to divestment and an increase in the cost of their dollar-denominated debt.
Finally, there is the largely unpredictable impact of conflicts in Ukraine and the Middle East, both of which could affect the cost of energy, which is the lifeblood of the global economy.
For now, policymakers and financial markets are betting on the global economy to overcome all these challenges, as central banks complete their return to normal interest rate levels. However, according to the International Monetary Fund in its latest World Economic Outlook: "Prepare for Times Full of Uncertainty"?
