I'm currently preparing my quarterly updates, which includes revising my outlook for the U.S, the Euro Area, China, India, and Australia, focusing on both GDP and inflation. When discussing inflation here, I am referring to the headline measure of CPI inflation.
Looking at the outlook for growth, it’s quite benign, and the same goes for inflation.
GDP Growth:
In 2024, the U.S. economy grew by 2.8%, but we anticipate it will slow down to about 2.3% in 2025. The Federal Reserve tightened monetary policy for an extended period to slow the economy to a level that wouldn't be inflationary. So, for this year, U.S. growth is projected at 2.3%, with expectations for 2% growth next year.
The model we use for U.S. GDP, is based on the Chicago Fed National Activity Index This shows significant fluctuations in growth projections. The pandemic shutdown drove growth much lower than the model predicted. As the economy recovered, there were large swings above the model's projections, particularly in 2021 when actual growth was much higher than expected, followed by a downturn in 2022. In 2024, growth was then higher than anticipated but is now aligning more closely with our model, which projects US growth at around 1.9% to 2.0%.
Turning to the Euro area, this has experienced a significant slump, with output in some countries even negative in prior years. However, growth picked up to 0.7% in 2024, and we're forecasting 1.1% for this year, with a slight increase to 1.4% next year. The key difference between Euro area growth and U.S. growth lies in population growth, which is about 1% faster in the U.S. than in the Euro Area. Much of the Euro Area’s growth is driven by productivity.
Officially China's growth was expected to be 5% last year. Amazingly , due to some unexpected lifts in output, it did ultimately reach 5%. Some believe that the actual growth rate was lower . This year, I expect growth to be around 4.5%, with a slight dip to 4.1% next year. For the second-largest economy in the world, a growth rate of 4.5% is still quite strong.
India continues to outpace other economies, with a growth rate of 6.3% last year. We forecast it will grow by 6.9% this year and next year as well.
Meanwhile, Australia has seen some interesting developments. Historically, Australia's economy follows the U.S. cycle, but this time, Australia is leading the U.S. cycle due to increased domestic demand driven by government spending. Growth in Australia was 1.1% last year, and we expect 2.4% this year, with growth stabilizing around 2.3% in the following years.
Inflation:
Now, focusing on inflation, we are primarily looking at Headline CPI inflation, which in the U.S. is projected to reach 2.5% over time. The Federal Reserve's target, however, is based on the Personal Consumption Expenditures (PCE) deflator, which is currently around 2.5% and should gradually decline to 2%. In the U.S., CPI inflation was 3% last year, projected to be 2.9% this year, and 3% again next year, before finally reaching the target of 2.5% by 2027.
In the Euro Area, inflation was 2.4% last year, with a slight decline to 2.1% this year. The Euro Area is targeting a CPI inflation rate of 2%, and we expect it to reach 1.9% by the end of 2025.
For China, inflation was much lower than expected last year, coming in at just 0.2%, compared to a target of 2%. It almost slipped into negative territory in the second half of the year. This year, Chinese inflation is expected to be between 0.6% and 1%, with a slight increase to 1.1% next year. The key issue in China is the lack of domestic consumption, which is necessary to drive economic growth.
India, which targets 4% inflation, saw 4.8% inflation last year. This year, inflation is expected to moderate to 4.3%, with a slight increase to 4.4% next year. India’s focus remains on growth rather than strict inflation control.
Australia’s inflation has been interesting due to government intervention. Last year, headline CPI came in at exactly 2.4%, but core inflation was much higher. This result was achieved through subsidies, particularly for electricity prices. If such subsidies continue into 2025, inflation will likely remain stable. However, without such support, inflation could rise to around 3.7% by 2025, potentially reaching 2.8% by 2026.
Overall, the outlook is one of moderate growth and moderate inflation across the major economies. Recession risks seem minimal, and the global economy is poised for steady, if unspectacular, progress in the coming years.
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