This article is written by Mohamed El-Erian, the president of Queen's College at the University of Cambridge and an advisor to Allianz.
The global economy in 2025 is destined to be unusual. Market confidence in the outlook for stable economic growth and declining inflation has been shaken, replaced by expectations of various potential outcomes.
The question is not whether the U.S. will continue to outpace most other countries. More importantly, it is about the degree of divergence in economic growth and inflation among countries, as well as the extent to which the global economic and financial architecture is being disrupted. These impacts extend far beyond short-term economic welfare.
What we currently see is a rather unusual combination: on one hand, American exceptionalism, and on the other hand, deeper fissures in the Western-dominated, U.S.-favorable global architecture. This is an unstable combination that is derailing due to intensifying internal contradictions, leading to broader global fragmentation in trade, technology, and payment systems, while also resulting in slower growth and heightened inflation in the U.S. and elsewhere.
Another option is that, through timely policy action, the world economy could stabilize in the form of 'mild globalization' reached through negotiations among countries—rather than in the form of global fragmentation. This could root economic growth on a deeper basis, stabilize prices, and address systemic risks.
As the global economy enters 2025, there has been considerable divergence in economic growth and financial markets among economies. Last month, the International Monetary Fund raised its forecast for the U.S. growth rate in 2024 to 2.8%, a figure that may be revised upwards again. In the Eurozone, growth stagnates at only 0.8%, and in emerging markets, even star economy India faces the risk of failing to achieve the expected growth rate of 7%.
At the policy level, there is almost no indication that this international situation will change. France and Germany's economic policy-making is hindered by considerable political uncertainty.
Meanwhile, the 'last-mile' work of major central banks to achieve low and stable inflation is proving to be tricky, as they are reluctant to decisively change their overly data-dependent reaction patterns for policymaking. Especially due to a lack of strategic and forward-looking approaches, the Federal Reserve has sent a series of signals of change, exacerbating volatility in the bond market. Due to a lack of reliable forward-looking policy guidance, the debate over whether the Fed should continue, skip, or pause rate cuts in December is growing—let alone what might happen afterward.
All of this is happening just before the new U.S. government is about to take office. For investors, analyzing these issues is particularly complex because the potential shifts in U.S. trade, immigration, and fiscal policy interact with a range of reactions involving corporate pricing, supply and demand elasticity, game theory, and national strategies.
Another question is what long-term changes will be caused by the economic pressure exerted by Trump—especially the shift of international reserves from the dollar to diversification, and the growing interest in non-dollar payment systems. This is why Trump issued a warning to the BRICS nations over the dollar issue last weekend. Trump wrote, 'We need these countries to commit that they will neither create a new BRICS currency nor support any other currency to replace the strong dollar, or they will face 100% tariffs and should expect to say goodbye to a great American economy.'
If you believe that policymakers have the capacity to understand these unusual dynamics and adjust accordingly, including through reasonable, preemptive negotiations with the incoming U.S. government that align with common interests, then the questions about this uncertain outlook can be answered easily.
The longer the delay, the greater the obstacles to the existing economic growth and financial stability drivers, making it increasingly difficult for exciting future engines of prosperity like artificial intelligence and life sciences to take effect. Political leadership, flexibility, and reasonable negotiations can create a path to a brighter medium-term outlook.
Article forwarded from: Jinshi Data