By Francesco Guerrera
LONDON- In 2025, the global economy will be in a much better place than at any time since the outbreak of Covid-19. Growth will be solid, and inflation will finally abate. Those are ideal conditions for central banks to lower interest rates. But the virtuous circle of an easier monetary policy feeding faster expansion will hit a big snag: governments’ inability, or unwillingness, to reduce their huge debts.
Barring a major external shock – and there are plenty of candidates to supply one – 2025 could be a placid year for the world economy. Global GDP will expand by 3.2 percent – keeping pace with 2024 and faster than the 2.9 percent recorded in 2019, according to the International Monetary Fund. Advanced economies are on course to grow by 1.8 percent in 2025, not far from the 1.9 percent cruising speed they had reached in the nine years prior to the pandemic.
Admittedly, world growth will still be below its long-term average, largely because China’s days as an economic locomotive are behind it. And developed economies’ performances will vary widely, with yet another strong showing by the United States offsetting weakness in Europe and Japan. Still, the relatively benign outlook should also be accompanied by subdued price growth. Inflation will be around the 2 percent level targeted by major central banks in all advanced economies in 2025, the IMF reckons.
This economic environment is usually blissful for central bankers. After playing the Grinch for a couple of years, squeezing living standards with sharp hikes in interest rates, the likes of US Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde should be in a position to dole out presents to citizens and businesses by lowering borrowing costs. Indeed, the Fed, the ECB and the Bank of England have all begun cutting rates and markets expect them to continue doing so in the next 12 months.
In normal times, steady growth, low inflation and falling rates would have another positive outcome: encouraging governments to cut public debt. But politicians, especially in developed countries, will squander the chance to tighten their belts. — Reuters
