Global economic outlook: strategies to thrive in a new normal

While we anticipate a slight GDP growth acceleration across advanced economies from 1.5% in 2023 to 1.6% in 2024 and 1.8% in 2025, we expected a simultaneous slight deceleration among emerging markets from 4.2% in 2023 to 4.1% in 2024 and 2025.

The key growth drivers in advanced economies will be gradually looser monetary policy and rebounding inflation-adjusted income growth, especially in Europe and the UK. Across emerging markets, we anticipate the structural slowdown in mainland China to offset robust momentum in India and a slight growth acceleration across the Latin America (LatAm) and Middle East and North Africa (MENA) regions into 2025. 

We expect global inflation will cool from an average pace of 6.2% in 2023 to 4.6% in 2024 and 3.5% in 2025. Inflation is expected to decline faster in advanced economies and approach central bank targets in 2025 as persistent services inflation gradually dissipates while core inflation stickiness remains a key feature of the outlook across emerging markets. Easing supply constraints, reduced labor shortages, lower energy prices and moderating demand growth are expected to keep inflation in check, even if risks are tilted to the upside.

Central banks are expected to ease monetary policy gradually as disinflation continues apace. Still, with risks to the inflation outlook tilted to the upside, policymakers are likely to take the “escalator on the way down,” easing policy in a measured way.

Following several high-stakes elections, we had initially anticipated a tightening of fiscal policy in many economies aimed at managing high government debt with lower government spending and potentially higher taxes. The reality may be different, with less fiscal tightening in the wake of the French and UK elections and in Mexico, where President-elect Claudia Sheinbaum could take advantage of her large electoral win to favor more fiscal largesse. In the US, averting a fiscal cliff at the end of 2025 could mean greater fiscal spending.

To succeed, business leaders must adapt to the realities of a new normal in several key areas:

• Economic activity:  While demand drivers had dictated the pace of growth from the 1990s through the 2010s, supply conditions will play an increasingly important role driving economic activity. In a supply-fragile world increasingly influenced by political and geopolitical factors, economic desynchronization will likely be a key feature of the outlook. Regions and sectors that previously shared common business cycles may suddenly be exposed to diverging forces, forcing business leaders to consider the broader ecosystem in which they evolve.
• Talent: The value (and cost) of talent has increased post-pandemic, with business leaders having struggled to hire, train and retain during a period of elevated churn and tight labor market conditions. Given the investment in labor, we foresee ongoing labor preservation efforts, with business leaders increasingly focused on how to manage costs via greater process efficiency and stronger productivity growth via the adoption of new technologies like generative AI (GenAI) as well as wage growth compression.
• Inflation: While the global disinflation process will continue into 2025, structural factors will likely lead to inflation being a few tenths of a percentage point higher than central banks’ targets over the next five years. The five Ds of structurally higher inflation are demographics, debt, de-risking, decarbonization and digitalization. Aging populations requiring more private and public spending, elevated levels of public spending for domestic and industrial policy, a growing focus on de-risking and building resilience in a geopolitically fragmented world, the greening of the global economy via greater outlays to reduce carbon emissions, and capital investment to develop GenAI will likely push inflation structurally higher.
• Central banks: Easing inflation and slower economic momentum will push central banks to ease monetary policy gradually over the next couple of years. Still, given lingering fears of cyclical inflation resurgence and the reality of structural upside inflation risks, central bankers will favor a careful and measured easing of their policy stance in the coming years. Barring a pronounced economic slowdown, we anticipate policy rates will converge toward levels higher than at any time since before the global financial crisis of 2007–2009.
• Fiscal policy: Elevated levels of debt and pro-cyclical budget deficits are concerning, as they will lead to increasing government funding costs, moving otherwise productive government investment away from social programs, defense, climate and digitalization toward interest payments on the debt and increase financial stability risks. We anticipate the new normal for fiscal policy will have to balance the populism-driven desires for greater social spending along with governments’ industrial policy aspirations against markets pressures pushing for fiscal consolidation.
• Geopolitics: Geoeconomic fragmentation has grown since the onset of the US-China trade dispute in 2018. With cross-border trade and investment flows slowing, there is a growing risk of rising cost pressures, reduced productivity and slower efficiency gains. Industrial policy is likely to catalyze reduced competition in certain sectors while preventing gains from specialization and global economies of scale. Meanwhile, the growing influence of geopolitical swing states and smaller players seeking to challenge the status quo will likely create a more complex geopolitical multiverse.