The Peterson Institute for International Economics (PIIE) is forecasting that the world's economy will continue to expand at its current pace through 2025. Real global GDP is projected to increase by 3.2 percent in both 2024 and 2025. Inflation has receded further toward target levels in most countries, bolstering real incomes and allowing many key central banks to begin cutting their policy rates. These factors should support widespread economic growth.
The baseline forecast assumes that current US policy prevails with only modest changes, but bigger changes may well occur depending on the outcome of the 2024 US elections—and, through their impact on the US economy, would affect economic outcomes around the world. A Harris administration would likely make limited changes to current policies on immigration, trade, and Federal Reserve independence. However, in the unlikely event that Democrats also win control of both chambers of Congress, there could be higher federal spending, taxes, and deficits, leading to modestly higher growth, inflation, and interest rates. A Trump administration would likely introduce deportations of immigrants, higher tariffs, lower taxes, and, and if Republicans also control both houses of Congress, much larger deficits—along with pressure on the Fed to keep rates low. These steps would push up US inflation and interest rates significantly in the short term (for further analysis, see the PIIE study by McKibbin, Hogan, and Noland).
DETAILS ABOUT US ECONOMIC PERFORMANCE
Karen Dynan, PIIE nonresident senior fellow, says incoming US data suggest the economy is growing briskly again this year, with US real GDP projected to rise by 2.8 percent in 2024. The pace of economic expansion should moderate in 2025 to a solid 2 percent. Favorable supply-side developments, including high immigration and increased labor force participation, have helped to better align supply with demand. Accordingly, inflation has fallen and should continue to decline. Personal consumption expenditures (PCE) inflation is forecast to fall to 2.3 percent in 2025, remaining slightly above the Fed's target as further progress 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.
DETAILS ABOUT THE GLOBAL FORECAST
Although overall global growth is likely to remain steady, momentum is softening in some countries and picking 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 typical pace next year, after contracting slightly this year, as earlier fears of a hawkish policy shift have eased. In contrast, the United Kingdom is likely to see continued muted growth due to ongoing fiscal challenges and the lingering effects of Brexit.
Among 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 economic policy changes in the United States—pose downside 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 disruptions to supply chains, triggering broader inflationary pressures.
LATIN AMERICA
Alejandro Werner, PIIE nonresident senior fellow, discusses the economic outlook for Latin America. Werner focuses on Mexico's short- and medium-term outlook as President Claudia Sheinbaum starts her 6-year term. Her implicit mandate is to continue to support the "Fourth Transformation," the term used by her predecessor Andrés Manuel López Obrador, or AMLO, for his sweeping agenda of institutional and economic change. Central to this agenda is a strategy built on stability, redistribution, and increased government participation in the economy.
AMLO's strategy delivered on some fronts, but it also led to a decline in average real per capita income. In terms of stability, AMLO's fiscal and monetary policies were, for the most part, as conservative as those of his predecessors. In his last year in office, however, AMLO ran a fiscal deficit of almost 6 percent of GDP. AMLO's redistribution efforts relied on increasing social spending and raising the minimum wage.
Sheinbaum will face a tougher fiscal landscape and massive challenges in the energy sector. Mexico's oil production fell from almost 3.5 million barrels per day in 2004 to less than 2 million barrels per day in 2024, and significant investments are needed for the generation and transmission of electricity to accommodate the increased demand from the potential reallocation of manufacturing production from Asia. Mexico's external balance was supported by a large inflow of remittances, which increased by 2 percentage points of GDP over the course of AMLO's presidency. It is unlikely that remittances will continue to grow at this rate over the next six years. The space for redistribution through social transfers, pensions, and wage hikes is also shrinking. Other important sources of risk are the significant uncertainty created by implementation of judicial reform, and the prospects of a Trump presidency and renegotiation of the United States-Mexico-Canada Agreement (USMCA) on terms that would not be favorable to Mexico.
CHINA: EXPORT CONTROLS, INVESTMENT SECURITY, AND SANCTIONS
Martin Chorzempa, PIIE senior fellow, reviews the expansion of US restrictions on China related to investment and exports/transfers of technology.
Chorzempa surveys US policies aimed at China, including stepped up national security reviews on foreign investment in US companies, restrictions on US investment into China, export controls and sanctions that target specific Chinese entities, bans on exports and technology transfers that apply to all of China, and the expansion of extraterritorial measures affecting goods made outside the United States.
On investment security, Chorzempa shows the dramatic rise in national security reviews of foreign investment in the United States—a timely topic due to the current review of Nippon Steel's proposed acquisition of US Steel. The number of such reviews rose from 136 in 2016 to 348 in 2022. The rise accelerated under President Trump and rose further under President Biden, driven by concerns about China. However, most investments reviewed are proposed by companies from US allies like Japan, the United Kingdom, and countries in the European Union. Chorzempa also previews forthcoming work characterizing Chinese firms on key US restrictive lists, including the export control entity list and the Specially Designated Nationals (SDN) list. Both lists were rarely employed against Chinese firms until Trump took office, but they now include hundreds of Chinese entities. The SDN has been applied to mostly small firms posing urgent national security threats, including fentanyl smuggling and the proliferation of weapons of mass destruction, but no important Chinese technology firms have faced these most restrictive sanctions, which would cause severe unintended consequences. Technology firms have been instead cut off from certain US exports by being placed on the more targeted entity list under Presidents Trump and Biden.
In all three areas—investment security, export control, and sanctions—the Biden administration largely continued and expanded Trump-era policies, with more multilateral coordination but also with restrictions that apply extraterritorially, on goods made outside the United States but with US technology. This empirical result, combined with a bipartisan consensus in Congress that more restrictions are needed, leads Chorzempa to forecast that restrictions on China will expand regardless of the election outcome. Harris's debate critique of Trump for selling advanced semiconductors to China suggests limited space for scaling back any of these measures, likely continuing an approach similar to Biden's if she is elected. A Trump administration would likely use restrictions even more extensively to accelerate decoupling between the US and Chinese economies, as former president Trump has vowed to "completely eliminate dependence on China in all critical areas." Such rapid decoupling would lead to sizable cost and disruption to the economies of the United States, China, and the rest of the world.
Media Contact
Carlos Gomez, PIIE media relations and Outreach Manager, [email protected]
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