PIIE projects continued economic expansion as inflation falls, but US election uncertainty looms

The world's economy remains on track for steady growth in 2025, but the outlook could shift depending on the results of the 2024 US elections.

Real global GDP will increase by 3.2 percent in both 2024 and 2025, according to an analysis presented at the Peterson Institute for International Economics (PIIE) Fall 2024 Global Economic Prospects (see figure below). Inflation has receded further toward target levels in most countries, bolstering real incomes and allowing many major central banks to begin cutting their key interest rates. These factors should support widespread economic growth.

However, this baseline forecast assumes that current US policy prevails with only modest changes. That could change after the elections, affecting the US and other economies around the world.

The two leading US presidential candidates—Vice President Kamala Harris and former president Donald Trump—would likely pursue different policies on immigration, trade, the Federal Reserve, regulation, taxes, and spending.

A Harris administration would likely make limited changes to current policies on immigration, trade, and Fed independence, leaving the baseline forecast intact. In the unlikely event that Democrats also win control of both houses of Congress, policy changes could result in somewhat higher federal spending, taxes, and budget deficits, leading to modestly higher economic growth, inflation, and interest rates.

A Trump administration would likely introduce deportations of immigrants and higher tariffs, as well as pressure the Fed to keep interest rates low. These changes alone would tend to boost US inflation and interest rates. If Republicans control both houses of Congress, significant tax cuts are likely, leading to a much higher budget deficit and pushing up US inflation and interest rates significantly in the short term (for further analysis, see the PIIE study by McKibbin, Hogan, and Noland).

US ECONOMIC OUTLOOK

Real US GDP growth is likely to slow to a solid 2.0 percent next year, moderating from its brisk pace of 2.8 percent this year and 2.9 percent in 2023, assuming current US government economic policies continue, according to the PIIE forecast.

The increased availability of workers due to immigration and higher labor force participation has helped to better align economic supply with demand. Accordingly, inflation has fallen and should continue to decline. Inflation—as measured by the Commerce Department's personal consumption expenditures (PCE) price index—is forecast to fall to 2.3 percent in 2025, remaining slightly above the Fed's target as further declines in the services category will be slowed by the housing shortage and wage growth above pre-pandemic norms.

The Fed's rate-setting panel, the Federal Open Market Committee (FOMC), is expected to cut rates gradually over the next year, with the federal funds rate likely to stabilize slightly above 3 percent. The US unemployment rate is projected to hover just above 4 percent through the end of next year.

GLOBAL ECONOMIC OUTLOOK

While real global GDP rises steadily through next year in the baseline forecast, economic growth slows in some countries and picks up in others.

In the euro area, strains on the German manufacturing sector are expected to continue, but economic activity more broadly should gradually increase as lower inflation supports real incomes and the European Central Bank eases interest rates. Japan's economy is likely to grow at a more typical pace next year, after contracting slightly this year, as earlier fears of a hawkish policy shift have eased. The United Kingdom is likely to see continued muted growth due to fiscal challenges and the lingering effects of Brexit.

Among major emerging economies, India remains the strongest performer, with robust growth driven by domestic reforms and foreign investment. In contrast, China faces economic headwinds, as fiscal and monetary stimulus have not fully offset weaker consumer demand, a sluggish real estate sector, and reduced foreign investment. Meanwhile, Brazil and especially Russia will likely see growth constrained by inflation and monetary tightening in the coming year.

More broadly, geopolitical factors—including potential US economic policy changes—pose risks to global forecasts. Changes in tariffs and industrial policies in the United States, China, and Europe raise the likelihood of a global trade war. Meanwhile, continued conflict in the Middle East and Russia's war in Ukraine could lead to further spikes in energy prices and supply chain disruptions, triggering broader inflationary pressures.