Global growth is likely to be around 3% in 2025 and 2026, as tariff and immigration policies begin to slow the U.S. economy late next year, and China’s underperformance restrains emerging markets.
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.
Source: Morgan Stanley
