The world economy now faces a complexity riddled with extremes in 2025, with signs of a slowdown in major economies and the threat of intensified trade conflicts. As US, European, and Chinese policymakers strive to bring their economies back to stability and growth, severe economic headwinds and systemic risks work at cross-purposes, placing the world on the brink of a deeper slowdown.
US Lag: Growth Deceleration Remains with Fed Keeping Rates Steady
In the US, the Federal Reserve remains on the defensive, keeping the primary interest rate unmoved at 4.25-4.50%. This action follows increased signs of economic deceleration such as a slowdown in job opportunities, increased financial obligations default rates, and weakening consumer spending – the growth engine of the US economy.
Noticing these signs of a cooling economy, the Fed has also decided to slow down the pace of its quantitative tightening measures, indicating less aggressive monetary policy. Even though core inflation remains high, projected at a still-sticky 2.8% for the year, the central bank believes there is room for two interest rate cuts in the next year with Krungsri Research analysts forecasting the first cut to be as early as mid-2025, which would potentially lower rates to the 3.50-3.75% range by year-end.
Eurozone’s Fragile Recovery: Trade War Fears Loom
The economic narrative remains notably grim in the Eurozone. Inflation is beginning to ease with the headline Consumer Price Index (CPI) at 2.3% and the core inflation easing to its lowest in almost three years, but the recovery is fragile and poses significant risks. European Central Bank (ECB) President Christine Lagarde has raised the alarm on the growing global trade tensions, a by-product of the ongoing tariff wars, that are bound to cut somewhere between 0.3–0.5% of the Eurozone’s GDP while simultaneously fueling inflationary pressures.
The sluggish activity of the services sector coupled with weak consumer confidence and limited investment continues to diminish the Eurozone’s ability to Recovery. Although the largest economy in the bloc, Germany, has implemented a significant stimulus plan of EUR 500 billion, its effect on the economy of the Eurozone will remain limited within a short time frame. In reaction to lower inflation and subdued growth, the ECB is expected to put a cautious forecast on its inflation, predicting a decrease in the key deposit rate to 2.0% by the conclusion of the fiscal year.
China Tames Herald: Reviving Domestic Demand
In the face of a tough external environment paired with weak domestic demand, China is easing its focus outward to prepare for new stimulus aimed at reigniting private consumption as the domestic focus shifts. This recognizes the need that the country needs to focus internally and that a strong domestic market is crucial for supporting global economic headwinds.
Both retail sales and consumer confidence in China are still lagging far behind the figures from before the COVID-19 pandemic, signifying a sluggish return to spending patterns prior to the crisis. In response, Chinese banks have begun granting substantially lower rates on consumer loans, while income support as well as trade-in subsidies are being introduced by the government to facilitate spending. Exports have recently performed strongly, including a notable increase of 14% in February, but the lingering risk of increasing trade tensions casts a cloud over future prospects. The authorities are now focused on stimulating internal demand to achieve the 5% GDP growth target for 2025, though full recovery in consumer spending could remain an enduring challenge.
A Global Balancing Act: Navigating An Uncertain Future
The economic prognosis of the world remains volatile while China’s economy experiences a strained structural rebalancing alongside major economic powers, the US and Europe, on the verge of potential recession. Whether the global superpowers can tame the ever increasing risks and contours of a more severe economic downfall in the coming months lies within the effectiveness of the implementations made in policy responses. The cat’s cradle of international trade, stimulating growth, and inflation management will determine the global economic path in the second half of 2025 and beyond.
