Michael Roberts. Economic Forecast 2025: Roaring or Tepid

Forecast 2025: roaring or tepid?

It’s time to make some forecasts on what will happen to the world economy and its major countries in 2025. Many people reckon that it is waste of time making such forecasts as they are never accurate and quite often the opposite happens. Of course, forecasts are wrapped in error, given the many variables involved that drive economies. Weather forecasts are still difficult to make and meteorologists are dealing with physical events and not (at least directly) with human actions. Nevertheless, weather forecasts up to three days ahead are now pretty accurate. And longer term climate change forecasts have been broadly borne out over the last few decades. So if we consider that economics is a science (albeit a social science) and I do, then making predictions (the long and the short) is part of testing theories and evidence in economics too.

This is what I said in a post for the forecast of 2024: “In sum, 2024 looks like being one of slowing economic growth for most countries and probably more slipping into recession in Europe, Latin America and Asia. The debt crisis in those countries in the so-called global south that don’t have energy or minerals to sell will worsen. So even if the US avoids an outright slump again this year, it won’t feel like a ‘soft landing’ for most people in the world.” I think that turned out to be broadly correct (for a change!).

2024 was the year of elections. There were 40 national elections, covering 41% of the world’s population and representing 42% of global GDP. And my forecasts for the outcomes in these were also pretty accurate. On the most important, the US presidential election, this is what I said: “there is no certainty about who will win; or whether Biden will actually stand again; or whether either Trump or Biden would even serve another full term.” So not very clear, but at least not wrong. Biden did not stand, Trump won (narrowly on the popular vote) and we don’t know if he will serve a full term.

The results of other elections were much more easily predicted: the UK, India, Indonesia, South Korea, Taiwan, South Africa came out as forecast. The surprises were the victory of a leftist party in Sri Lanka and the victory of the left as the largest party in the snap election in France. Nearly everywhere, the incumbent governments lost vote share and/or were defeated; and voter turnout was down, revealing the disillusionment of citizens with all the mainstream political parties. That trend is likely to continue in 2025 with elections in Germany, Canada, Australia, Czech and Norway; and in Latin America too (Ecuador, Chile and Bolivia).

What about the economy? 2024 ended with six out of the top seven capitalist economies either in stagnation or in outright recession, as measured on the basis of gross domestic product (GDP). And when measured on GDP per person, then even the US, the best performing of the G7 economies, did not do so well, while the rest were all stagnant at best. The reason for that was not an increase in populations through births and deaths, but through net immigration. Immigration boosted the labour force and national output in 2024 in the US, the UK, Australia and Canada. The long depression that started after the Great Recession of 2008-9, resumed after the pandemic slump of 2020 and continued in 2024.

The World Bank presented a dismal picture of the situation for most people in the world. In 2024, “Global extreme poverty reduction has slowed to a near standstill, with 2020-30 set to be a lost decade.” Around 3.5 billion people live on less than $6.85 a day, the poverty line more relevant for middle-income countries, which are home to three-quarters of the world’s population. “Without drastic action, it could take decades to eradicate extreme poverty and more than a century to eliminate poverty as it is defined for nearly half of the world.” With little progress on controlling global warming, “1.2 billion people faced climate-related hazards and high vulnerability, with South Asia and Sub-Saharan Africa among the most affected regions.”

Then there is the debt burden for so-called ‘developing countries’ – something I argued would worsen in 2024. The World Bank again: “The COVID-19 pandemic sharply increased the debt burdens of all developing countries—and the subsequent surge in global interest rates has made it harder for many to regain their footing. At the end of 2023, the total external debt owed by low- and middle-income countries stood at a record $8.8 trillion, an 8 percent increase from 2020. Interest payments for developing countries surged by nearly a third to $406 billion, leaving countries with less funds to invest in critical areas such as health, education, and the environment.”

The International Labour Organisation (ILO) found that in 2024 most working people suffered a reduction or no improvement in their wages after inflation is accounted for; and that is unlikely to improve much in 2025. Real wages remain below their pre-pandemic levels in many parts of the world. And the gaps in earnings between the world’s best and worst paid workers remains wide. The ILO calculated that in 2021 (adjusted for purchasing power), the bottom 10% of workers earned $250 per month, while the top 10% earned $4,199 per month for full-time work. “This means that the purchasing power of the median wage earner in low-income countries is about 6 per cent of the purchasing power of the median wage earner in high-income countries.” Globally, the lowest-paid 10% of workers earned just 0.5% of total wages, while the highest-paid 10% received 38% of the global wage bill.

In the first half of 2024, real wages remained lower than in 2019 before the pandemic in Germany, France, Italy and the UK, as well as in Japan and South Korea. Real wages were higher in the US, but only by 1.4%. Indeed, real wages in some countries—the UK, Japan and Italy—remain below levels recorded in 2008, the year of the Great Recession! By contrast, Chinese real wages were up 27% from 2019, while Brazil also recorded a big rise.

The World Inequality Lab updated its latest estimate of the inequality of income and wealth globally. The United States is the most unequal country in the OECD, with 21% of national income going to the richest 1% – the same as in Mexico (21%) and slightly more than in South Africa (19%). While real incomes for billions of people were stagnant or rose only slightly, incomes and wealth for the super rich rose at a record pace. The US stock market hit new highs and US oligarchs like Elon Musk and Jeff Bezos etc saw their net wealth rocket by billions to new grotesque highs.

In 2024, the US economy rose by about 2.5% in real GDP in 2024, creating the image of US ‘exceptionalism’: a strong economy, a strong dollar and fossil fuel and AI-driven expansion. So confident that the US economy will continue in this vein that BlackRock, the world’s largest investment fund, in its forecast for 2025, reckon that “Boom and bust cycles in capitalism are over”. BlackRock believes the world economy is currently in the process of being entirely “reshaped” by the emergence of five new “mega forces,” including the shift to net zero carbon emissions, geopolitical fragmentation, demographic trends, digitization of finance and AI. Apparently, this means that the global economy will break away from “historical trends” that have seen markets go through cycles of boom and bust for centuries.

BlackRock’s optimism is hardly surprising considering the huge gains in financial asset prices that they benefited from in 2024. But the major international economic agencies are less excited. In its latest World Economic Outlook, the IMF expects global economic growth to stay steady at about 3.2% this year. That growth rate is the weakest in decades and “downside risks are increasing and dominate the outlook.” The IMF expects that, while the US will continue to lead the way on growth among the advanced economies in 2025, US real GDP growth will slow to 2.2% in 2025, while the rest of the G7 will struggle to get above 1% a year. The US economy may still be expanding but not its industrial sector, the productive part. Industrial production sharnk in 2024, as it did in all the major economies.

The IMF is also worried that Trump’s plans to increase tariffs on the imports of goods from countries that do not play ball with his aim to ‘make America great again’ will lead to “lower output relative to our baseline forecast. Monetary policy could remain too tight for too long and global financial conditions could tighten abruptly.” That could halve the projected growth rate for 2025 and onwards.

The OECD takes a similar position on the global economy, if slightly more optimistic. The OECD expects the world economy to grow by 3.3% in 2025, a pickup from the 3.2% rate in 2024, with the US slowing just slightly to 2.4%. UNCTAD is much more pessimistic. “The global economy faces a new normal of low growth, high debt, weak investment and disrupted trade”. Its economists expect global growth to be 2.7% in 2025, which is down from the 3.0% annual average between 2011 and 2019 and well below the 4.4% average seen before the global financial crisis. For developing countries, the slowdown is sharper: “between 2024 and 2026, countries that make up more than 80 percent of the world’s population and global gross domestic product would still be growing more slowly than they did in the decade before COVID-19.” 

What are the key economic factors that can help us judge how the major economies will perform in 2025? The first is international trade. Between 1995 and 2007, trade grew at twice the rate of global GDP. But since the 2008–2009 financial crisis, trade growth relative to GDP has stalled. Trump’s plans, if implemented (there is some doubt about that) would accelerate de-globalisation and the stagnation of world trade, particularly hitting the Global South economies. The investment bank, Goldman Sachs, usually very optimistic, sees a sizable blow to US GDP from a potential 10% tariff on all imported goods — in part due to higher consumer prices, which would reduce spending by Americans. And “this could end in a global trade war which, while it could take many forms, at the extreme could knock 2-3% off global GDP,” said consultancy Capital Economics. Based on current forecasts as above, a 3% hit to the world’s output would erase economic growth in 2025.

Behind the tariff war risk, is war itself. The Russia-Ukraine conflict is reaching a head – what Trump will do there remains uncertain. But he clearly intends to back Israel all the way even if that means open conflict with Iran next year. If that happens, then oil prices could jump, pushing up inflation again. And this is when the so-called ‘war against inflation’ launched by the major central banks of the world has not been won. 

Yes, inflation of goods and services prices has fallen from its heights in 2022, but it has not fallen back to pre-pandemic levels, let alone to the central bank targets of 2% a year. Indeed, in the major economies there are signs that the inflation rate is turning back up. ‘Going the last mile’ on inflation, as it is called, is proving impossible. If that continues through 2025, then central banks will stop cutting their policy interest rates and so borrowing costs for companies and households will stay high. 

This will increase the difficulty of servicing existing debt, especially for the Global South countries, as the dollar is likely to stay strong if US interest rates stay high and geopolitical conflict worsens.

If the cost of borrowing and servicing debt does not come down, there is an increased risk that the so-called ‘zombie’ companies (which do not make enough profits to cover their debt costs and must keep borrowing) will start to go bust. Over 40% of the top 2000 companies in the US are unprofitable, the most since the pandemic. At the same time, interest expense as a % of total debt of these firms hit 7.1%, the highest since 2003. US company bankruptcies in 2024 surpassed 2020 pandemic levels. Gross leverage—the ratio of debt to assets (and earnings) —of all US publicly traded nonfinancial firms remains high and hedge fund leverage is at or near the highest level in the past decade. So the risk of a financial crash is rising.

As Ruchir Sharma of the Rockefeller Foundation put it: “Awe of “American exceptionalism” in markets has now gone too far….Talk of bubbles in tech or AI, or in investment strategies focused on growth and momentum, obscures the mother of all bubbles in US markets. Thoroughly dominating the mind space of global investors, America is over-owned, overvalued and overhyped to a degree never seen before. As with all bubbles, it is hard to know when this one will deflate, or what will trigger its decline.” And there are signs. The US stock market index, the S&P, 500 fell 1.6% in December, with 6 or more sectors down 5% or worse.

The most important factor in looking at prospects for the world economy in 2025 must be global corporate profits (and profitability), as this is the driver of capitalist production and investment. If profits in the major companies of the world continue to rise in 2025, then financing debt and absorbing weak international trade can be coped with for another year.
I regularly do an estimate of global profits based on company profits in the US, Germany, the UK, Japan and China. Global profits growth as an average has been slowing towards zero. However, in the first three quarters of 2024, US corporate profits still rose 1.5% compared to 2023; China and the UK had a 5-6% rise, while German profits were stagnant and Japan’s fell.

Will profits pick up in 2025? The optimists like BlackRock are confident. They base their expectations on a seeming rise in labour productivity in the US in the last year, driven by gains from diffusion of AI across sectors. They see this as the start of a “Roaring Twenties” as happened in the US after the end of the Spanish flu epidemic in the 1920s.

There are few things to say about this apparent productivity boom. First, it is confined to the US. Europe’s economies are not experiencing such a boom – on the contrary. Second, the recent rise in productivity growth still puts the US trend pretty much the same as before the pandemic.

So there are no confirmed signs yet of a ‘step jump’ in productivity growth. Indeed, as I have discussed in previous posts, the diffusion of AI productivity gains could take a long time to emerge (if it emerges at all). It’s unlikely that AI investment will do the trick in 2025 – and certainly not outside the US, especially if there is no sustained pick-up in the profitability of capital in the major economies.

My best estimate of the average rate of profit on capital in the G7 economies does indicate a recovery from the depth of the pandemic slump. But this is led almost solely by a large rise in US profitability, as the other G7 economy profit rates have mainly stagnated. According to AMECO forecasts, the US rate of profit in 2025 will be 10.7% higher than in 2019, but 2-8% lower in the UK, France, Germany and Italy, with Canada and Japan up only 1-2%.

So what my profitability estimates suggest is that a recession in 2025 is unlikely; but on the other hand, it is too early to argue for any sustained rise in profitability across the G7 that could drive productive investment and productivity growth to new levels.

Most likely, in 2025, growth in Europe and Japan will continue to be close to stagnation; as well as Canada and Australia. Also economic growth and trade expansion in every country of the BRICS will be slower than in 2024. So rather than the start of the Roaring Twenties in 2025, more likely it will be a continuation of the Tepid Twenties for the world economy.