In 2024, global inflation finally came back to down earth, without crashing the global economy, but with plenty of major disruptions that will guarantee that 2025 will be an eventful year for the global economy.
But, what exactly can we expect?
From the return of trade wars, potential austerity, and massive demographic change to an energy revolution, here are the 5 key trends, I believe will shape the global economy in 2025 and my predictions for their outcomes.
Starting with,
Prediction 1: demographic decline will start to bite in Europe, Japan, and China
Sure, the trend of population decline has been a long time coming. But, in 2025, it will be especially relevant for Europe, Japan, and China, all for different reasons.
First, while Europe’s population is still predicted to increase in 2025, calculations by economists Brakman, Kohl & van Marrewijk show that, compared to the world, Europe’s limited workforce increasingly has to work both for itself and an increasing share of pensioners.
Meanwhile, China’s population will continue to decline in 2025. But, it’s economic effect will not yet be too drastic in the upcoming year for two reasons. The first reason is that starting in January 2025, China will finally start raising its retirement age, offsetting for a large part the decline of its working age population. The second reason is, paradoxically, that Chinese fertility is falling so rapidly that, while its workers need to support more elderly people, they need to support fewer children. This is important because, from an economic perspective, children are just as much of a liability as the elderly. Of course, this will make China’s ageing problem much worse in the future. But, for now, it means that while headline population numbers in China will be bad, it’s economy won’t feel that in 2025 yet.
On the other hand, while Japan’s economy dealt pretty well with a falling population so far, 2025 will be particularly difficult for them because a lot of Japanese baby boomers will turn 75 next year. Up to 75, Japanese people are, on average, still pretty active and healthy. However, after 75 their health quickly starts to deteriorate, meaning that they will need much more support and healthcare interventions, which is very expensive.
Luckily, Japan might dodge a bullet with my next prediction, which is
Prediction 2: Trump’s trade war will start slow
In theory, the re-election of Donald Trump should supercharge the already existing trend of deglobalization, also known as fragmentation, which is characterized by tariffs, sanctions, and industrial policy, which is all contributing to a remarkable slowdown in international trade, compared to GDP. Trends that I discussed at length in several videos on this channel.
Now, the safe prediction would be that Trump makes deglobalization much worse in 2025. After all, this is what he literally promised to do when he said that:
“under my leadership we’ll take other countries jobs”
To bring factories home and get countries to comply with other objectives, Trump has already promised that he would increase tariffs against China, but also Mexico and Canada, when he becomes president in January. He also made Elon Musk head of the new Department of Government Efficiency. In this role, Musk promised to cut U.S. government spending by a whopping 2 Trillion Dollars. This could be devastating to global trade because it would make many Americans much poorer, meaning that they could import less stuff.
So, then, why would I predict Trump’s trade war will start slow? Well, when it comes to the tariffs, Trump’s new pick for Treasury secretary has said in an essay in the Economist that
“Completely abandoning the international trading system would be a disaster for the American people and our allies.”
In fact, in that same essay, he hinted that Trump’s most aggressive Tariff suggestions should be seen as more of a negotiating tactic than a real policy.
Second, when it comes to Musk, he has zero experience in government and politics. This is unfortune for him, given that most spending cuts will have to pass through congress, a place where many many ambitious austerity plans have died in the past. So, while he could eventually succeed, I think it is unlikely that he will figure out American politics in just a year.
On top of that, Trump has so far been quite sensitive to public opinion and keeping the stock market high. Both will likely take a big hit if he introduces giant spending cuts, and super high tariffs. On the other hand, his promised tax cuts will be popular and, crucially, will allow Americans to spend more on imports, which is good for globalization.
But, in spite of that good news, we have now arrived at
Prediction 3: The global economy will struggle
There are two reasons why I make this prediction. First, there is the global ageing problem that will continue to get worse. Second, there is a massive trend that global productivity is slowing down.
Indeed, as you can see here, corrected for inflation, all major advanced economies, including the U.S. have continuously grown more slowly over time.
This may seem obvious given that there are only so many resources on this planet. But, actually an economy can grow just fine without new resources, if it continuous to find new technologies which enable people to do more with fewer resources. But, despite great new technologies such as solar panels, the internet, smartphones, and A.I., global productivity just keeps slowing down. This could be because we have simply picked all the lowest hanging fruit of available technologies already, as the author of this book, Robert Gordon, has suggested. If that is true, it means we need to do more and more research every year for the same level of innovation. For example, inventing the wheel could be done by just one person. But, inventing the car needed a lot more researchers. Finally, inventing a jumbo jet needed a even more researchers, and so on. This means, that to keep technological progress going, we need more educated people to do research. But, with so much of the global population already educated, and population levels starting to fall in rich countries, and poor countries not catching up so fast anymore, keeping up the pace of innovation will be increasingly difficult.
Therefore, we have good reasons to suspect the low growth trend will continue in 2025. Of course, A.I. may change this. But, if it will, I think this will happen well after 2025, because there are more and more signs of an A.I. bubble. And, as the slow adoption of computer technology has shown, even if A.I. it is not in a bubble, it will take quite a lot of time to adopt new technologies on a massive enough scale to drive economic productivity.
Therefore, sadly, low growth leads to my next prediction, which is
Prediction 4: governments will face tough choices to reign in debt
After all, government debt in major countries is at an all time high, compared the size of their economies.
With interest rates higher than before, this high debt level is increasingly expensive to service. On top of that, high government debt, higher interest rates, and increased spending all increase the risk of a currency crisis, like the one we have seen in the UK in 2022.
So, how can government debt be brought down? The most attractive option by far is to grow the economy. However, if economic growth is slow, as I predict that it will be, only two unattractive options remain. The first is some form of austerity, meaning that the government will either increase taxes or reduce spending. The second option is something that we have almost forgotten about in the industrialized world, and it is known as financial repression. Financial repression is about driving down government borrowing costs by essentially forcing people to invest more in their debt and or currency. This can be done in not so subtle ways. For example, until they got their IMF bailout, Egypt prohibited people from investing or spending large sums of money abroad. But, financial repression can also be done in much more subtle ways. For example, in the UK politicians are actively discussing forcing pension funds to bring back money from overseas to invest more in the UK.
So, for 2025, I predict that governments will increasingly have to make this difficult choice: austerity or financial repression, where slow growing, high-debt countries such as Egypt, France, Italy, the UK, Canada, Japan, and Brazil are most at risk. This can happen either because their governments experience a debt-crisis or because they want to prevent one from materializing.
A pretty bleak prediction indeed. So, I think it is high time to counter that pessimism with my most optimistic prediction yet, which is
Prediction 5: the green energy revolution will continue to amaze
And, when I say continue to amaze, I primarily refer to the following three really optimistic sub-trends that provided a lot of reason for optimism in 2024 as well.
First, solar panel adoption across the globe continued its exponential growth path in 2024, mainly due to huge investments in China.
Sub-trend number 2: the costs of batteries continued falling in 2024, and we got a lot of really exciting announcements about continued investment in better and better batteries, that will be crucial to sustain the solar revolution, and to sustain
sub-trend number 3, which was that, while slower than solar panel adoption, global electric vehicle adoption continued to increase, despite a slowdown in Europe, which can largely be explained by the withdrawal of EV subsidies in Germany. On the other hand, like with solar panel adoption, most of the global increase of EV usage is thanks to massively increased adoption in China.
So, if most of solar, battery and electric vehicle adoption was driven by China in 2024, why am I predicting these trends will continue in 2025?
Well, there’s three reasons. First, I’ve already predicted that the trade war will start slowly. If that prediction comes true, tariffs on Solar panels, batteries and even electric vehicles won’t yet be able to hold back Chinese exports completely. The second reason is technology. Battery technology is rapidly getting better. And, with so much money invested last year in their continued improvement, it makes sense that they will get even better in 2025, driving more adoption.
Finally, the third reason is simple economics. People buy what is cheapest and most convenient. This means that if a certain threshold is reached, at which a new technology is cheaper than its established alternative, global adoption can really take off. In China, we have already reached this point for solar panels, batteries, and electric vehicles, partially due to government subsidies, sure. But, also due to it’s thriving industry. Rapid adoption is driving continued investments in these technologies, and the infrastructure needed to support them, like charging stations. Once batteries and EV’s become cost competitive in the rest of the world, we can be pretty sure that they will take over these markets as they are already doing in China.
Cheaper energy and cars, a great thing to look forward to, which rounds off my fifth prediction for 2025. But,
Can you trust my predictions?
Well, let me answer that question, by making a sixth prediction, which is that, most of my predictions will NOT come true. You see, the global economy is a so-called complex system, that consists of billions of interacting people, millions of firms, and, at least, hundreds of governments.
A non-human complex system, like, for example the weather can only be reliably predicted for just a few days ahead. The outcome of a really small human complex system, like a sports game, is notoriously hard to predict by both experts and scientists. So, to think that anyone can reliably predict the global economy for a full year ahead, is, frankly, madness.
So, then, why did I make this video?
Well, two reasons. First of all, I personally think end of year predictions like these are really fun. I love reading about them, so hey, I figured, you might enjoy watching some informed predictions as well. But, more importantly, a lot you told me that you watch this channel to stay up to date about the global economy and learn more about economics. Through these predictions, I’ve told you the major trends that I’m watching and hopefully gave some interesting perspectives about the economic dynamics driving them.
But, if you want a properly informed perspective about the global economy in 2025, I recommend checking out as many similar predictions by other economists as possible.
The best place to start with that, right now, is by checking out The World Ahead 2025 by The Economist, the sponsor of this video. Highlights in “The world ahead 2025” for me include 10 trends to watch, a calendar with all important upcoming global events, and detailed predictions for every major economic region in the world.
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