From Trade Wars to Inflation: Key Risks Facing 2025

Image Credit: Reuters

As the global economy began to recover from the aftermath of the COVID-19 pandemic, fresh challenges have emerged, setting the stage for a turbulent 2025.

In 2024, central banks worldwide managed to reduce interest rates after largely overcoming inflation without triggering a global recession. Stock markets in the U.S. and Europe soared to record highs, and Forbes declared it a "banner year for the mega-wealthy," with 141 new billionaires added to its ranks.

Despite these financial milestones, voters worldwide remained unconvinced. In a year packed with elections, incumbents in nations such as India, South Africa, European countries, and the U.S. faced backlash for the relentless cost of living crisis stemming from cumulative post-pandemic price increases.

The economic outlook for 2025 suggests even tougher times ahead. A potential Donald Trump presidency could introduce U.S. import tariffs that risk igniting a trade war, leading to renewed inflation, a global slowdown, or both. Unemployment, currently near record lows, could also rise.

Compounding these uncertainties are conflicts in Ukraine and the Middle East, political gridlock in Germany and France, and mounting concerns over the Chinese economy. Climate-related costs are also rising as a pressing issue for many nations.

WHY IT MATTERS

According to the World Bank, the poorest nations are facing their worst economic conditions in two decades, having largely missed out on the post-pandemic recovery. New obstacles, such as weakened trade or tighter funding conditions, could exacerbate their struggles.

In wealthier nations, governments must address widespread voter dissatisfaction over declining purchasing power, living standards, and economic prospects. Failure to do so risks fueling the rise of extremist parties, further fragmenting political systems and parliaments.

National budgets, already strained from COVID-19 responses, face new spending demands, from combating climate change and bolstering defense to addressing aging populations. Sustaining such priorities requires robust economies capable of generating necessary revenues.

Governments that opt to continue relying on increased debt accumulation risk triggering financial crises down the line.

WHAT IT MEANS FOR 2025

European Central Bank President Christine Lagarde has forecast "an abundance of uncertainty" for the year ahead.

One key question is whether Trump will proceed with tariffs of 10-20% on all imports, rising to 60% on Chinese goods, or if these threats are merely a negotiation tactic. The economic impact will depend on which sectors are affected and how other nations respond.

China, the world’s second-largest economy, faces growing pressure to shift away from manufacturing reliance and focus on boosting incomes for its lower-income population to sustain growth.

In Europe, where the economy has lagged behind the U.S. since the pandemic, the ability to tackle deep-rooted issues like underinvestment and skill shortages hinges on resolving political stalemates in key economies like Germany and France.

For many countries, a stronger dollar—driven by inflationary pressures from Trump’s policies and a slower pace of Federal Reserve rate cuts—could spell trouble. A robust dollar would draw investment away and increase the cost of dollar-denominated debt.

Additionally, the ongoing conflicts in Ukraine and the Middle East could significantly influence global energy costs, a critical driver of economic activity.

While financial markets and policymakers hope the global economy can weather these challenges, central banks aim to normalize interest rates. However, as the International Monetary Fund recently warned in its World Economic Outlook: "Brace for uncertain times."

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.