This article was written by Mohamed El-Erian, Master of Queens College, Cambridge and consultant to Allianz.
The global economy in 2025 is set to be unusual. Market confidence in the outlook for steady growth and falling inflation has been shaken, replaced by expectations of a wide range of potential outcomes.
The question is not whether the United States will continue to outperform most other countries. What matters more is the extent to which growth and inflation diverge across countries, and the extent to which the global economic and financial architecture has been damaged. These implications extend far beyond short-term economic well-being.
What we are seeing is a rather unusual combination of US economic exceptionalism on the one hand and deeper cracks in the Western-dominated global architecture that favours the US on the other. This is an unstable combination, derailed by growing internal contradictions, which will lead to wider global fragmentation of trade, technology and payment systems, while leading to slower growth and higher inflation in the US and elsewhere.
Alternatively, with timely policy action, the world economy could stabilize in the form of a negotiated “light globalization” — rather than global fragmentation. This could allow growth to take root on deeper foundations, stabilize prices, and address systemic risks.
As the global economy enters 2025, economic growth and financial markets in various economies have already diverged considerably. Last month, the International Monetary Fund raised its forecast for the US growth rate in 2024 to 2.8%, a figure that may be raised again. In the eurozone, growth stagnated at just 0.8%, and in emerging markets, even the star economy of India is at risk of failing to achieve the expected growth rate of 7%.
At the policy level, there is little sign that this international dynamic will change. Economic policymaking in France and Germany is hampered by considerable political uncertainty.
Meanwhile, the “last mile” of achieving low and stable inflation for major central banks is proving tricky as they are reluctant to decisively change their overly data-dependent, overreactive mode of making policy. In particular, the Fed, lacking a strategic, forward-looking approach, has sent a series of signal shifts that have exacerbated bond market volatility. In the absence of reliable forward-looking policy guidance, there is now growing debate over whether the Fed should continue, skip, or pause its rate cuts in December—not to mention what happens afterward.
All of this is happening just before a new U.S. administration takes office. Analyzing these issues is particularly complex for investors because potential shifts in U.S. trade, immigration and fiscal policy interact with a range of responses from corporate pricing, supply and demand elasticities, game theory and national strategy.
There’s also the question of what long-term changes Trump’s economic pressure will cause — notably the diversification of international reserves away from the dollar and growing interest in non-dollar payment systems. That’s why Trump issued a warning to the BRICS over the dollar last weekend. “We need these countries to commit that they will neither create a new BRICS currency nor support any other currency to replace the mighty Dollar, or they will face a 100% Tariff and should expect to say goodbye to the wonderful American Economy,” Trump wrote.
Questions about this uncertain outlook can be easily answered if you believe that policymakers have the ability to understand these unusual dynamics and adjust accordingly, including through sensible, preemptive negotiations with the incoming U.S. administration that serve their mutual interests.
The longer the delay, the greater the obstacles to existing drivers of economic growth and financial stability, and the more difficult it will be for exciting future engines of prosperity, such as artificial intelligence and life sciences, to work. Political leadership, flexibility, and sensible negotiation can create a path to a brighter medium-term outlook.
Article forwarded from: Jinshi Data
