Global Economic Outlook 2025: Subdued Growth Amid Trade Tensions and AI Exuberance

The latest projections from the International Monetary Fund (IMF) indicate a gradual deceleration from 3.3% in 2024 to 3.2% in 2025 and 3.1% in 2026 . The OECD echoes this subdued forecast, similarly predicting a drop to 3.2% in 2025, followed by a further slowdown to 2.9% in 2026 .

This weakening outlook is driven by a shift from the temporary factors that supported activity in early 2025, such as front-loading of trade ahead of anticipated tariffs . As these effects fade, the full impact of higher trade barriers and persistent policy uncertainty is expected to weigh more heavily on investment and global commerce.

Regional Growth Divergences

Advanced economies and emerging markets are facing distinct challenges, with growth rates diverging.

Key Risks to the Global Economy

Escalating Trade Tensions and Policy Uncertainty

A significant shift towards protectionist trade policies has introduced extreme uncertainty, hindering both short-term and long-term growth prospects . The IMF warns that "escalating trade tensions and elevated policy-induced uncertainty may further hinder growth" . While some temporary factors like stockpiling provided a brief respite, the underlying environment remains volatile, with downside risks firmly in place .

AI Market Exuberance and Concentration Risks

The global stock market rally, largely driven by enthusiasm for AI, shows signs of early-stage excess. Goldman Sachs Research notes characteristics like high valuation and market concentration, with the top 10 U.S. companies accounting for almost a quarter of the global equity market . However, it concludes that the appreciation has so far been driven by fundamental growth rather than the pure speculation that characterized past bubbles .

Despite this, prominent voices are raising alarms. Amazon founder Jeff Bezos has described the current environment as "kind of an industrial bubble," while OpenAI CEO Sam Altman has warned that "people will overinvest and lose money" . A critical risk is the complex web of multibillion-dollar investments linking a small group of tech giants, which could trigger a contagious chain reaction if AI promises fail to materialize .

China's Persistent Economic Struggles

China's economy continues to grapple with deep-seated issues, including an excessive debt burden, deflationary pressures, and a burst property bubble . The property market slump has triggered a significant negative wealth effect, depressing consumer confidence and spending despite government efforts to stimulate domestic consumption . With retail sales growth cooling and industrial overcapacity lingering, China's reliance on exports to support growth is exacerbating global trade frictions .

India's Mounting Fiscal Pressures

India's fiscal health is being tested as it pursues its ambitious economic goals. The central government's fiscal deficit for FY26 reached 29.9% of its full-year target in just the first four months, a sharp increase driven by higher defence spending, slower tax collections, and increased government expenditure to counter global headwinds . This raises questions about the feasibility of its 4.4% of GDP deficit target for the fiscal year . While short-term overshooting may be a strategic choice to protect growth and jobs, it highlights the difficult balance between fiscal prudence and pragmatic economic support .

Policy Priorities in a Volatile Environment

Navigating the current climate requires careful policy calibration. Key institutions urge:

- Restoring confidence through credible, transparent, and sustainable policies .

- Preserving central bank independence and remaining vigilant on inflation .

- Exercising fiscal discipline to rebuild buffers and ensure debt sustainability, while also making strategic investments .

- Promoting a stable trade environment through international cooperation to avoid further fragmentation .

The global economy stands at a critical juncture. The interplay of aggressive trade policies, a potentially overheated AI sector, and fiscal stress in major emerging markets will determine whether the current subdued growth forecasts hold or if the balance tips toward a more significant downturn.