Today’s volatile world – ongoing geopolitical conflicts, uncertainty around the path under a new US administration, and long-term challenges about an aging population and the emergence of artificial intelligence – make for any economic outlook for 2025 to be tentative. However, in economic terms the world is starting the year positively.

The global economy is completing one of the most successful soft-landings we have ever seen. There are few historical records of periods of global monetary tightening, with widespread interest rate hikes, that have been so successful in reducing inflation without a significant deterioration in economic activity or rise in unemployment.

The global interest rate hikes applied in 2022 and 2023 eventually managed to return inflation to acceptable levels. Today, it is already heading towards the 2% target in the United States and Eurozone. And it was achieved with the world growing at around 3% in 2024, a reasonable level of growth in the circumstances.

So, 2025 begins with the world at an advanced stage of interest rate cuts, declining inflation, sustained growth and low unemployment levels. The strength of the US economy means it is on a glide path so smooth that it seems it might not land at all.

Europe, on the other hand, is in a timid cyclical recovery, with two different realities between countries in the south and the north. Growth is strong in the south, especially in Spain, but Germany, which represents 30% of the region's GDP, is beset with structural problems and the political situation in France is delicate.

China continues its structural slowdown, moving from an annual growth rate of 5% to 4% in the coming years as its economy adapts to a more sedate middle-income country.

The big question this year will be what economic policies Donald Trump will finally implement. The market has anticipated the ‘Trump Trade’. This predicts the new administration will deliver more growth and deregulation in the short term but at the cost of slightly higher inflation. Interest rates will then settle slightly higher than previously expected, with consequences for the strength of the dollar worldwide.

The unknown is whether the considerable growth rate in the US will be to the detriment of growth in other parts of the world with weaker currencies – as we are already observing – and create a period of global divergence.

For Europe, Trump's arrival brings back to the table the Letta and Draghi reports that called for a total ‘reset’ of the region's competitiveness to avoid missing the growth train. In the last 13 years, the average growth of the U.S. economy was 1 percentage point higher than that of Europe.

Simultaneously, the fiscal pressure in the United States today is almost 15 percentage points lower than in Europe (25% of GDP in the US, against 39% on average in the five largest European countries). Europe must reset its economy based on higher productivity that stimulates competitiveness. Regulation must also be structured to retrieve Europe’s lost growth.

The countries in the region also face the effects of the new US administration’s policies. After successfully navigating the global interest rate hikes cycle, the strength of the dollar now puts pressure on some local currencies and central banks must stay focused on monetary policy and addressing the fiscal deviations inherited from recent years.

This, along with declining commodity prices, will require skilful management of economic policy. The region has good external fundamentals in terms of levels of reserves and trade balances, although it still needs to advance on the fiscal front to bring debt to sustainable levels in the long term.