With so many potential disruptors of global stability in play, the economic outlook is looking anything but settled as we progress into 2025.
According to the IMF, the post-COVID economic cycle is ending. The largest inflationary surge in four decades and the synchronised monetary policy tightening that followed are culminating in what appears to be a soft landing. Inflation is returning to target in most economies and the global economy has avoided a major downturn or systemic financial crisis.
The January 2025 IMF World Economic Outlook (WEO) Update reports global inflation is expected to ease from 5.8 per cent last year to 4.2 per cent this year and then slow again to 3.5 per cent in 2026. At the same time, global growth is forecast to nudge up from 3.2 per cent in 2024 to 3.3 per cent in 2025 and 2026.
Australia is also on track for a soft landing. After peaking at 7.8 per cent in the fourth quarter of 2022, headline inflation had slowed to an on-target 2.4 per cent by the December quarter 2024, albeit benefiting from federal and state government interventions.
Less dramatically, underlying inflation has also eased, falling from 6.8 per cent to 3.2 per cent over the same period. Disinflation has been achieved without a recession and without significant labour market cost. As of the third quarter 2024, Australia had seen 12 uninterrupted quarters of real GDP growth.
The unemployment rate finished last year at just four per cent, well below the pre-pandemic (March 2020) rate of 5.2 per cent. But disinflation has not been costless. The price paid has been felt in faltering private sector economic activity manifested in a record-breaking seven quarter-long per capita recession.
The base case is for gradual economic recovery as monetary policy normalises and economic activity strengthens. But that benign central scenario is subject to a high degree of uncertainty for at least eight reasons.
Harbingers of unrest
1. As the latest WEO acknowledges, the end of the post-COVID cycle will be followed by more dispersion in policy settings as central banks respond to widening gaps in economic performance. In January 2025, for example, the Bank of Japan increased its policy rate to 0.5 per cent, its highest level in 17 years; the European Central Bank cut its benchmark rate by 25bp to 2.75 per cent and warned of economic headwinds; and the US Federal Reserve brought its sequence of three successive rate cuts to an end and signalled it was now on pause until it could assess the inflationary implications of the new administration. Diverging rate paths imply more volatility around capital flows, exchange rates and asset prices.
2. The Trump administration constitutes a major economic and financial uncertainty shock on its own. Most obviously, measures of trade policy uncertainty have jumped in response to a barrage of tariff-related policies and threats. But there are also substantial uncertainties around the future trajectory of US growth, inflation, debt and deficits, along with the nature of the new administration’s relationship with the Fed. And the uncertainties go well beyond economics.
3. The rapidly unfolding collapse of an already badly frayed rules-based international system raises the prospect of greater geo-economic disorder. Geo-economic fragmentation has been on the rise for some time, with evidence that significant segments of trade, financial and technology flows are splintering between different camps. Now, the rate of fragmentation could accelerate further as the US becomes an increasingly active member of the revisionist tendency seeking to disrupt the old status quo.
4. The ongoing demographic transition is making its presence felt with shrinking working age populations, ageing societies, mounting fiscal burdens, rising pressures on people movements and faltering economic growth.
5. The onset of a major tech revolution across a suite of technologies led by AI, but also including renewable energy and biotech, is a key source of uncertainty. There are important unknowns around the pace and costs of the transition to a new techno-economic paradigm, the implications for productivity growth and employment, the consequences for domestic social and political stability, and the international balance of power.
There are also near-term risks around financial market valuations and the attendant potential for destabilising speculative bubbles, with those dangers exacerbated by a growing interpenetration of the “attention economy” and financial markets, and the attendant meme stock surges and crypto scams.
6. The challenges posed by the energy transition and climate change continue to build, raising two broad sets of risks. First, there is another set of transition risks, as despite rapid advances in renewables technology, the domestic and international politics of the energy transition remain challenging and contested, involving complex trade-offs around energy security, availability and cost. Second, there are the immediate physical risks arising from the impact of climate change on the size and frequency of extreme weather events and natural disasters. Late last year, the Financial Stability Board warned the financial damage rising from such events threatened to trigger sizeable market disruptions.
7. Fears of geopolitical dangers and the threat of state-on-state violence are mounting. According to this year’s WEF Global Risks Report, state-based armed conflict is now ranked the top current risk by 23 per cent of respondents, ahead of extreme weather events (14 per cent) and geo-economic confrontation (eight per cent).
8. Domestic political uncertainty is on the rise, as legacy political systems and parties grapple with the new environment. Incumbent governments have suffered as voters have become disillusioned with the apparent inability of traditional politics to rise to the challenges posed by this new age of uncertainty.
John Burn-Murdoch noted in the Financial Times that in the 12 developed Western economies that held national elections last year, every incumbent suffered a fall in vote share. This hadn’t happened in 120 years of modern democracy.
This article first appeared under the headline ‘An age of uncertainty’ in the March 2025 issue of Company Director magazine.
AICD chief economist Mark Thirlwell GAICD has focused on the international political economy at the Bank of England, JPMorgan, Austrade and Export Finance Australia.
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