2025 Global Economic Outlook: U.S. Policies May Temper Global Growth

Two narratives dominated markets in 2024: elections and inflation. Looking ahead, the effects of both should continue to echo through the global economy to varying degrees over the next few years.

“The outcome of the U.S. election is going to usher in policy changes with implications that will reverberate through the global economy,” says Seth Carpenter, Morgan Stanley’s Chief Global Economist. “Drivers of growth are changing in the U.S., where we expect the economy to slow in 2025 and even more in 2026 as the imposition of new tariffs and immigration restrictions take hold. Globally, we see growth around 3% in 2025 and 2.9% in 2026, with investors likely facing increasing uncertainty and regional disparities.”

Inflation, which has concerned policymakers and investors in the past few years, continues to normalize. Progress may slow, however, and the specifics will vary from country to country. In the U.S., inflation may rebound at the end of 2025 because of higher prices and labor costs resulting from new tariff and immigration policies, before it resumes its downward trend in 2026 as growth slows. In the euro area and the UK, inflation should recede steadily amid underlying growth risks.

In Japan, where deflation has been the dominant economic issue for decades, inflation may fall just slightly below the Bank of Japan’s 2% target in 2026. China, meanwhile, continues its own battle with deflation. Morgan Stanley economists expect the GDP deflator in China to barely recover to positive territory as excess supply reemerges due to trade disruptions.

Against this backdrop, central banks may take divergent actions. Fed rate cuts are likely to be on hold by the middle of 2025, while the European Central Bank and Bank of England may continue cutting. Meanwhile, economists anticipate the Bank of Japan will raise rates twice in 2025.

Here are some of the economic developments around the globe that will matter for investors in the coming year. 

Election Hampers U.S. Outlook

The baseline outlook for the U.S. is little changed from Morgan Stanley’s midyear forecast, which called for 2.1% growth in 2025, through the first half of the year. Following that, the risks to growth increase. Economists continue to expect 2.1% GDP expansion overall, with gradual slowing that drags down growth to 1.6% for 2026, well below the economy’s potential.

The U.S. has benefited from strong consumer spending, but a range of influences are in play. Fiscal impetus, which helped the U.S. economy in the aftermath of the pandemic, is fading. The Republican sweep of Congress and the White House is likely to bring an extension of the 2017 Tax Cuts and Jobs Act, provisions of which would otherwise expire in 2026. However, this is unlikely to prompt additional fiscal fuel since this extension will maintain the status quo.  

The change in power in Washington and anticipation of hawkish trade policy is likely to weigh on the consumer spending engine as the years carries on, Morgan Stanley economists predict, as the impact of taxes on imported goods, such as clothing, automobiles and steel starts to show up in real prices.  

“We think the first round of tariffs from the new administration will mostly target imports from China, followed by a gradual expansion to goods from other countries,” says Carpenter. “As this increase in cost for sellers is passed on to consumers in the form of higher prices, we see inflation picking back up in the second half of 2025, pushing down consumer spending and in turn production and employment. The drag on growth becomes evident in 2026.”

Changes in immigration policy, meanwhile, are also expected to impact growth starting in the second half of 2025 and into 2026. The midyear outlook highlighted how elevated levels of immigration were making faster employment growth possible without excessive inflationary pressure. Expected new restrictions on immigration create the potential for the opposite effect.