The global economic outlook for 2025 is being viewed with cautious optimism, as experts predict that it may surpass the recovery phase seen post-pandemicAnalysts highlight a favorable combination of steady growth and tapering inflation, which ideally sets the stage for central banks to lower interest rates furtherHowever, this apparent momentum faces a formidable barrier: the staggering national debts that governments seem either incapable or unwilling to address.

Absent any significant external shocks, 2025 stands to be a year of steady growth for the global economyRecent data from the International Monetary Fund (IMF) indicates that the global GDP is expected to expand by 3.2%, mirroring the growth anticipated for 2024 and marginally increasing from the 2.9% recorded in 2019. Developed economies, in particular, are projected to experience growth around 1.8% in 2025, relatively consistent with the near 1.9% gain seen before the pandemic.

It is worth noting that even with these growth rates, the outlook still remains below the long-term average levels that economists hope for

Nevertheless, this comparatively moderate expansion is accompanied by expectations of reduced price increasesThe IMF forecasts that central banks across developed economies will rein in inflation to around 2.5% by 2025, providing some relief to households and businesses alike...

This economic landscape is typically a dream scenario for central banksFor instance, prominent institutions like the Federal Reserve, the European Central Bank, and the Bank of England have already commenced their rate-cutting journeysMarket analysts anticipate further reductions in the next year, signaling a shift towards a more accommodative monetary policy.

In ideal circumstances, the interplay of various positive economic factors would generate a virtuous cycleStable economic growth acts like a power-driven engine, energizing industries and invigorating the workforce; easing inflation boosts consumer sentiment and alleviates the financial strain on businesses, while declining interest rates lower the cost of capital for investments

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Additionally, such positive shifts could significantly benefit governments by providing an opportune moment to reduce public debt levelsThis crucial juncture would ideally serve as a necessary step towards optimizing financial standings and enhancing long-term economic vitality.

Unfortunately, the real picture cast a far gloomier shadowPoliticians, particularly those from developed nations, are likely to squander the golden opportunity to impose fiscal discipline as they continue to grapple with challenges stemming from high levels of debtThe present global fiscal landscape is nothing short of troubling, with the IMF projecting an alarming rise in global public debt—which may reach 100% of GDP by 2030, escalating from levels recorded in 2019 by a staggering 10 percentage points.

Politicians in developed economies have increasingly resigned themselves to a near-permanent state of fiscal expansion, fully aware that austerity measures could jeopardize their hold on power

Research conducted by economists such as Alberto Alesina reveals that a tax hike plan equivalent to merely 1% of GDP could result in ruling parties losing an average of 7% of their voter support in subsequent elections.

Taking the United States as a case study, data from the nonpartisan Committee for a Responsible Federal Budget indicates that current policy commitments could add an additional $15 trillion to the country's already massive budget deficit by 2035. Meanwhile, in the UK, the Labour government has proposed an annual increase of nearly 70 billion pounds in public spending until 2029, with plans to finance half of this surge through borrowing—a move that raises eyebrows regarding long-term sustainabilityGermany might be following suit, with expectations of a more fiscally liberal approach from its governmentIn Europe, seven countries, including France and Italy, have openly flouted EU budgetary rules.

Politicians' preference for fiscal expansionism, alongside the inflationary pressures that result, presents central banking officials a dilemma with no straightforward solution

On one hand, they might choose to overlook the ramifications of burgeoning deficits and continue to reduce interest rates, a pathway that could see inflation move beyond the 2% target—a scenario few policy makers feel comfortable navigatingThe concern here is the potential for sustained high inflation, which could erode central banks’ reputations, adversely affect living standards, and destabilize broader economic dynamicsBoth Jerome Powell of the Federal Reserve and Christine Lagarde of the ECB faced sharp criticism for their perceived inaction in 2022 and 2023 as inflation surged uncontrollably.

The alternative would involve a preemptive halt to rate cuts, even earlier than market participants have anticipated, perhaps reigniting interest rate hikes at the first signs of inflationary pressureThe UK seems to be enamored with this strategy as investor sentiment shifts, indicating that the Bank of England may forego a previously expected rate cut in response to the Labour government’s expenditure plans