US dominates but risks lie in wait

Given the radical agenda of incoming US President Donald Trump, a remarkable feature of the latest quarterly IMF Outlook for the world economy is how much continuity there is in global economic trends, carrying from those of 2023 and 2024. The report opens by stating that ‘the global economy is holding steady’.

One cause is that many investors and economists correctly anticipated Trump’s victory in the November election, so some of the changes are already priced in.

There is a consensus that US growth will continue to be greater than that of other western economies, and that the US will not have its economic or geopolitical hegemony significantly threatened.

The IMF notes that, globally, growth is slowing, although slightly, with GDP growth for the final quarter of 2024 just 0.1% below the projection. The Fund anticipates global growth of 3.3% for 2025, compared with an average of 3.7% for the period 2000-2019. An upward revision in the USA offsets downward revisions in other major economies. Global headline inflation, meanwhile, is expected to fall to 4.2% this year, and to 3.5% in 2026, but the report notes unquantifiable inflationary risks emerging.

Across the globe there is some divergence, notably on inflation and monetary policy. There are inflationary pressures in the USA and some other western economies, while low inflation is expected to persist in China and some other economies.

The very high public debt, and deficit, of the USA, is set to continue, and potentially increase. The dollar is the world’s reserve currency, giving the US more ability to borrow than other economies, but running a high deficit over a prolonged period comes with risks. High US borrowing could increase demand for capital globally, leading to an increase in interest rates and possibly depressing economic activity elsewhere, the IMF notes.

There is, perhaps, a certain western bias among some economists in describing US growth of just under 3% as strong, and Chinese growth of 4.7% as weak. The reality is, however, that China does need a higher level of GDP growth to generate equivalent improvements in living standards. More of its economy is export-focused, and there is a smaller internal market compared with the USA.

The forecast of 2.7% US growth in 2025 is 0.5% higher than the projection made in October – but the strong growth prospects for the US economy are tilted towards the short term, the IMF observes. A loose fiscal policy, deregulation of business and financial markets, and the unpredictability of tariffs all incur medium- and long-term risks. In the case of deregulation, the report states that an excessive encouragement of risk-taking and debt accumulation ‘may generate boom-bust dynamics for the United States in the longer term, with repercussions for the rest of the world’.

The effect of tariffs on inflation is difficult to anticipate. Policy responses from affected countries are not known, and resulting dynamics can be complicated. The IMF warns that the cyclical positions of many major economies are more prone to inflation than in 2016, when Trump was first elected with a protectionist policy agenda. There could be retaliation against the US on materials that are difficult to substitute.

The USA continues to dominate the world economy in part because of significant challenges facing other large economies. Geopolitically, China is the only power with the potential to rival the USA. Europe has continued to experience sluggish growth, and is in need of restructure if this is to change. The other emerging economies denoted by the BRICS acronym in addition to China – Brazil, Russia, India and South Africa – have had varying fortunes, most negatively Russia, severely impaired by the human and economic cost of its invasion of Ukraine.

China has made major strategic decisions for political reasons, that have hampered economic growth. It continued with strict Covid-19 pandemic lockdown measures longer than other nations, and the state has exerted greater control over businesses. Now there is a US Presidency determined to curb imports from China. For several reasons, the world’s second largest economy has become a less attractive destination for foreign direct investment. A belligerent and confrontational US President, who sees China as the great rival, requires adroit policy responses from Beijing.

Overall, as 2025 begins with the global economy appearing to be ‘steady’, this may not last.