Inflation dips, growth drags: 2025-2026 forecasts reveal a fractured global recovery

Global economic growth is projected to remain subdued, holding at 3.3% for both 2025 and 2026, well below the historical average of 3.7% from 2000 to 2019. This forecast, largely unchanged from October 2024, reflects a mixed bag: an upward revision for the United States countered by downward adjustments in major economies like China, India, and the euro area.

The United States stands out with a projected growth rate of 2.7% in 2025, buoyed by strong consumer spending and robust labor markets. By contrast, growth in China has been revised slightly upward to 4.6% due to fiscal support, though a sluggish property market and weak consumer confidence remain significant hurdles. India, with a forecasted 6.5% growth in 2025 and 2026, continues to lead among emerging markets, though industrial activity has softened.

Global headline inflation is expected to ease, reaching 4.2% in 2025 and 3.5% in 2026. Advanced economies are likely to hit inflation targets earlier, while emerging markets may face delays. Persistent inflation in services and pockets of emerging markets, driven by supply disruptions and geopolitical factors, complicates the outlook. Central banks are treading cautiously, balancing rate adjustments with inflation and growth objectives.

The euro area and Japan face their own struggles. Weak manufacturing and trade headwinds have kept the euro area’s growth forecast at just 1.0% for 2025, with hopes of a modest rebound to 1.4% by 2026. Japan’s output contracted amid supply chain disruptions, highlighting the vulnerabilities of advanced economies.

Trade volumes are expected to decline in 2025 and 2026, as elevated trade policy uncertainty dampens investment and disrupts supply chains. This uncertainty is particularly pronounced in Europe and China, where geopolitical tensions and protectionist measures weigh heavily. Meanwhile, the strengthening US dollar, driven by expectations of rising interest rates and new tariffs, has tightened financial conditions for emerging markets.

In the medium term, risks remain skewed to the downside, with geopolitical tensions and fiscal constraints posing significant threats. Commodity price volatility, particularly in energy and agriculture, is another critical factor influencing global inflation and trade patterns.

Policymakers face a delicate balancing act. While monetary policy must curb inflation without stifling growth, fiscal consolidation is necessary to ensure long-term debt sustainability. Structural reforms in labor markets, digitalization, and education can provide a much-needed boost to productivity and economic resilience. Multilateral cooperation remains crucial to reducing trade tensions and fostering global stability.

Despite the challenges, opportunities exist. A cooperative global trade environment and targeted reforms could enhance medium-term growth, but immediate action is needed to navigate an uncertain and uneven recovery.