The International Monetary Fund (IMF) released, on January 17, 2025, an updated World Economic Outlook (WEO). The WEO is an analysis of global economic prospects and policies conducted by the IMF staff, typically published twice annually, with interim updates. It offers forecasts and assessments of the world economy in both the short and medium term, serving as a key component of the IMF’s monitoring of economic trends and policies in its member countries and the global economy. The report examines issues impacting advanced, emerging, and developing economies, while also addressing current and relevant global issues.
Divergent and Uncertain Global Growth
Global growth is projected to be 3.3 per cent in both 2025 and 2026, slightly below the historical average of 3.7 per cent (2000–19). The forecast for 2025 remains largely unchanged from October 2024 estimates, as an upward revision for the US offsets downward adjustments in other major economies. Global inflation is expected to decline, reaching 4.2 per cent in 2025 and 3.5 per cent in 2026, with advanced economies likely to return to target inflation levels ahead of emerging markets and developing economies.
In the medium term, risks to global growth are mostly negative, with the near-term outlook showing mixed risks. Positive developments in the US economy could boost growth in the short term, while other countries face downside risks due to ongoing policy uncertainties. Disruptions to the disinflation process could delay monetary easing, potentially affecting fiscal stability and financial health. Addressing these risks would require careful policy making that balances inflation control with sustaining economic activity, restoring financial buffers and promoting growth through structural reforms and stronger global cooperation.
Forces Shaping the Outlook
The global economy is steady, but growth varies significantly across countries. Global GDP growth in the third quarter of 2024 was 0.1 percentage point below October 2024 WEO forecast, mainly due to weaker-than-expected data from Asia and Europe. China’s growth fell to 4.7 per cent, below expectations, with a slowdown in consumption despite strong export performance. India’s growth also slowed more than expected, driven by reduced individual activity. The euro area remained static, with Germany underperforming, while Japan experienced a mild contraction due to supply disruptions. In contrast, the US economy grew at 2.7 per cent, fuelled by strong consumption.
Global disinflation persists; however, progress is slowing in some countries, with elevated inflation remaining in certain regions. The global median for core inflation has been just above 2 per cent for the past few months. Nominal wage growth is moderating, and labour markets are normalising. While core goods price inflation has returned to or fallen below trend, services inflation remains above the pre-COVID-19 levels, particularly in the US and euro area. Some emerging markets in Europe and Latin America also face persistent inflation. In response, central banks are cautiously easing rates or raising them, monitoring activity, labour markets, and exchange rates.
Global financial conditions are mostly accommodative, with variations across regions. Equities in advanced economies have risen due to expectations of pro-business policies in the US, while emerging markets have seen subdued equity valuations. A strengthening US dollar, fuelled by anticipated tariffs and higher interest rates, has kept conditions tighter in developing countries.
Economic policy uncertainty has risen, particularly regarding trade and fiscal policies, with variations across countries. Expectations of policy changes from new 2024 governments have influenced financial markets. Political instability in parts of Asia and Europe, along with geopolitical tensions and trade frictions, has added to uncertainty.
The Outlook
The IMF staff projections assume that current policies remain in place, factoring in recent market trends and the temporary impact of heightened trade policy uncertainty, which is expected to unwind in about a year. Energy commodity prices are forecast to decline by 2.6 per cent in 2025, driven by weak Chinese demand and strong supply from countries outside of OPEC+ (Organisation of the Petroleum Exporting Countries plus selected non-member countries, including Russia). Gas prices may rise due to weather disruptions and geopolitical factors like the Middle East conflict. Non-fuel commodity prices are expected to increase by 2.5 per cent mainly due to bad weather affecting food and beverage producers. Major central banks’ monetary policy rates are anticipated to decline, but at varying speeds due to differences in growth and inflation. Fiscal policies are expected to tighten during 2025–26 in advanced economies and, to a lesser extent, in emerging market and developing economies.
In the Euro area, growth is projected to be one per cent in 2025, revised down by 0.2 percentage points due to weaker-than-expected momentum, especially in manufacturing and ongoing geopolitical and political uncertainty. Growth is expected to rise to 1.4 per cent in 2026, supported by stronger domestic demand and improved confidence.
In advanced economies, growth forecasts remain stable due to recovering real incomes supporting cyclical recovery in consumption, while trade headwinds and increased trade policy uncertainty are expected to keep investment suppressed.
Growth in emerging markets and developing economies is expected to remain steady in 2025 and 2026, matching 2024 levels. China’s 2025 growth forecast is slightly revised upward by 0.1 percentage point to 4.6 per cent, reflecting fiscal measures offsetting trade policy uncertainty and property market issues. In 2026, growth is expected to stabilise at 4.5 per cent as the impact of trade policy uncertainty fades and rise in the retirement age helps slow the reduction in labour force.
India’s growth is projected at 6.5 per cent for both 2025 and 2026, in line with potential and unchanged from previous projections.
Growth in the Middle East and Central Asia is expected to be slower than anticipated mainly due to a 1.3 percentage point downward revision for Saudi Arabia, linked to OPEC plus production cuts. Latin America and the Caribbean’s growth is projected to accelerate slightly to 2.5 per cent, while sub-Saharan Africa’s growth picks up and the emerging Europe faces a slowdown.
World trade volume forecasts for 2025 and 2026 have been slightly downgraded due to increased trade policy uncertainty, which is expected to disproportionately affect investment in trade-intensive industries. However, this uncertainty is expected to be temporary, with some trade flows being brought forward due to expectations of stricter trade restrictions.
Disinflation progress is anticipated to continue, with minimal changes from the October 2024 WEO forecasts. As labour markets gradually cool, demand pressures should ease. Along with declining energy prices, headline inflation is expected to approach central bank targets. Though US inflation may remain slightly above the targeted two per cent in 2025, the euro area and China would experience more subdued inflation. This would widen the gap between policy rates of the US and those of other countries.
Risks to the Outlook
In the medium term, global growth risks are skewed to the downside, with growth expected to be lower than the 2025–26 average and five-year-ahead forecasts at around three per cent. Near-term risks, however, could lead to divergences across countries: upside risks in the US and downside risks in other economies due to heightened policy uncertainty and challenges like energy issues in Europe and real estate troubles in China. An escalation of protectionist measures, such as new tariffs, could worsen trade tensions, hinder investment, distort trade flows, reduce market efficiency, and disrupt supply chains, affecting growth differently across economies in both short and long term.
The US government’s expansionary fiscal policy, including tax cuts, may boost short-term economic activity and slightly benefit global growth. However, in the long term, it could require significant fiscal adjustments, disrupting markets, weakening the role of US Treasuries, and raising global capital demand, potentially increasing interest rates and slowing economic activity elsewhere.
In the US, deregulation and reduced business red tape could boost both demand and supply, spurring near-term growth through increased investment. However, dollar appreciation might cause capital outflows from emerging markets and raise risk premiums. Moreover, excessive deregulation could create boom-bust cycles and financial instability in the long run. Downside risks to macro-financial stability could worsen with a weak fiscal outlook or stalled progress in structural reforms. Additionally, supply-side shocks, such as reduced migration, could lower potential output and raise inflation.
A short-term US economic boost might highlight global growth divergences. However, in case tariffs and labour force reductions dominate, then both global and US activity could suffer. Uncertainty is high, as the effects would vary by country, influenced by trade, financial links and policy responses, including potential retaliatory tariffs and varying policy impacts.
Inflation dynamics could be influenced by various factors, with the impact of tariffs remaining uncertain. While studies show high pass-through to import prices, the effect on consumer prices is less clear. Compared to previous trade disputes, several factors suggest that tariff hikes could cause higher inflation this time. Firstly, the global economy is recovering from a major inflation surge, with inflation expectations above central bank targets of 2017–21, especially in advanced economies. Secondly, current cyclical conditions in major economies are more conducive to inflation than they were in 2016. Furthermore, retaliatory measures targeting specific goods may have a significant impact on overall inflation.
Renewed inflationary pressures may prompt central banks to raise policy rates, increasing monetary policy divergence and worsening fiscal, financial, and external risks. A stronger US dollar, driven by interest rate differences and tariffs, could disrupt capital flows and global imbalances complicating macroeconomic trade-offs.
Geopolitical tensions, particularly in the Middle East and Ukraine, may further spike commodity prices, impacting trade routes and raising food and energy costs, especially for commodity-importing countries. On the positive side, renegotiating trade agreements could boost global economic activity and ease uncertainty. Structural reforms in various countries could improve labour supply, competition and innovation, fostering medium-term growth and preventing economic divergence.
Policy Priorities
Amidst heightened uncertainty, policies should focus on mitigating short-term risks while rebuilding economic buffers and promoting long-term growth. Monetary policy must prioritise restoring price stability while supporting economic activity and employment. In economies with persistent inflationary pressures and rising risks of surprises, a restrictive approach should be maintained until inflation trends clearly return to target. However, in economies where activity is slowing and inflation is on track to return to target, a more accommodative stance is appropriate.
Fiscal policy should focus on consolidating public finances to ensure debt sustainability and create room for more flexible future responses. The consolidation process should be tailored to each economy’s specific conditions, ‘gradually yet significantly’—to avoid damaging economic activity. It should be clearly communicated to prevent disruptions in debt markets and must be credible to achieve lasting results. A growth-friendly approach that minimises negative impacts on vulnerable populations could help preserve economic potential and maintain public support.
Diverging monetary policies across countries could cause significant shifts in exchange rates and capital flows. The IMF’s Integrated Policy Framework recommends adjusting policy rates and allowing exchange rate flexibility for countries with deep foreign exchange markets and low foreign-currency debt. For countries with shallow markets and high foreign-currency debt, foreign exchange interventions, capital flow management or macroprudential policies may be necessary to maintain macro-financial stability. Long-term economic vitality requires decisive policy action to boost supply-side growth and counter medium-term risks. Reforms in labour markets, competition, health care, education, and digitalisation are crucial for improving productivity and attracting investment. Effective communication and stakeholder engagement are vital for designing and implementing policies that consider distributional impacts. Multilateral cooperation is essential to reduce fragmentation, sustain growth, and tackle global challenges. Trade policies should align with the World Trade Organization (WTO) guidelines, and be transparent and clear to minimise market uncertainty and distortions. Efforts should focus on restoring a fully functioning WTO dispute settlement system, ensuring fairness and fostering resilience in the global trading system.
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