Global uncertainties loom in 2025, with economic and geopolitical challenges shaping the year ahead |
We always begin the calendar year with a degree of optimism. To live with hope is in the very nature of human existence. No matter how tough the challenges in the year ahead, the optimists outnumber the pessimists. No amount of gloom or doom prospects purveyed by dismal economists can deter the optimists.
Their confidence in the future is undiminished. In that spirit, here is a prognosis for the year 2025, full of tough challenges for the optimists to tackle and overcome.
The year ahead is full of uncertainty. Making an accurate prediction is foolish and sure to fail. The sources of global uncertainty are economic and geopolitical. In the latter category are many factors. These include the outcome of the endless war in Ukraine, the escalation of the Israel-Hamas conflict and its spillover into the wider region of West Asia, and the ascendance of far-right parties in many countries, most prominently in Germany. One of the largest economies in the world, the German government lost the vote of confidence in Parliament this month, leading to mid-term elections early next year.
The German economy will contract for a second year in a row, even as it grapples with a rising deficit, the need for greater funding of overseas wars, a shortage of skills, and underfunded education. Then there is rising anti-immigrant sentiment fueled by far-right parties. Will Germany tilt closer to Russia or to NATO? How will it deal with Iran and its competitor China? Will its economy bounce back?
Beyond geopolitics is the economic uncertainty that will be heightened by America’s new leader, Donald Trump, who takes the oath on January 20. He has promised higher import tariffs, slashing government funding, stronger anti-immigrant policies, and a withdrawal from most global climate treaties.
His government will be more protectionist. He is likely to engage in international diplomacy purely from an American transactional perspective. At the same time, his government will have to fight inflation along with recessionary winds.
Meanwhile, the American government debt has reached a new peak of 35 trillion dollars. Feeding this debt mountain are higher deficits and an insatiable appetite for borrowing. The interest on the debt alone is about 1 trillion dollars. The borrowing appetite keeps the American dollar strong, causing other currencies like the Indian rupee to fall. Weaker currencies worsen inflation.
Despite its economic woes, the American stock market clocked new highs during 2024, leading to the creation of more than 150 new billionaires. The twelve richest men in America are together worth 2 trillion dollars now. We thus have a cocktail mix of high inflation, high unemployment, wild asset market growth (stocks and real estate), and widening wealth and income inequality.
The stock markets have a habit of an abrupt and sharp correction when collective paranoia takes hold. That bubble burst could happen but is unpredictable. Not many saw the Lehman crash coming in 2008. China is also fighting a slowdown and a large debt with stress in its banking and real estate sectors.
It is also trying to transition into a new economy powered by renewable energy, artificial intelligence, and space technology. The other parts of East Asia and Japan are in relatively better shape and have better macroeconomic features.
Rising inequality is a global concern, and its removal or reduction is one of the Sustainable Development Goals (SDG) of the United Nations. The rise of populist leaders and higher welfare spending is a response to rising inequality. How to manage the fiscal burden of welfare spending is a new challenge. In India too, welfare spending has expanded hugely, both by the Union government and the States.
A recent report by the Reserve Bank of India cautioned against expanding subsidies and freebies indiscriminately. During 2024, sixty countries had national elections, including India, and in most places, rising inflation and inequality were big issues for voters. In many places, incumbents were thrown out (such as in America) mainly due to inflation and economic hardships.
In India too, the State assembly elections in Jharkhand and Maharashtra were swayed by promises of generous subsidies, especially targeted at women. We will have two other States, Delhi and Bihar, electing new legislatures, and there is already talk of income subsidies to the poor, women, and other sections of society. Who will pay for all of these is not a matter of debate, at least for now.
On India’s domestic front, there are many things to watch out for. Two State assembly elections have been mentioned. The much-delayed national census is likely to be kicked off. A revamp of the consumer price index and the index of industrial production is on the cards. Discussion will begin on the delimitation exercise of the readjustment of Parliamentary seats. The deadline is 2026.
The sixteenth Finance Commission will finalise its recommendations later this year. Will it assign assured funding to the third tier of government? In many States, elections to local bodies like municipalities and panchayats have been long delayed, affecting local governance.
The Indian rupee is expected to depreciate due to the strong dollar policies of the Trump administration compounded by a wider trade deficit in India. The worry about how to increase foreign direct investment will remain. It has been falling for several years. The outflow of capital as well as the flight of rich people to other countries is also a matter of concern.
Indians are expected to spend 70 billion dollars on the “import” of education, i.e. on students studying abroad. This is a major drain on the economy and reflects dissatisfaction with the quality of education in India, or its affordability and availability. On the technology front, we will see the proliferation of electric vehicles, greater ethanol blending with petrol, and perhaps the initiation of pilot projects for small and modular nuclear reactors.
One big economic development to watch for is the increase in private capital spending and the improvement in rural wages. The slowdown in urban consumption might call for a budgetary stimulus in the Union budget due to be presented in February.
In summary, a year filled with uncertainty about investment and growth, widening inequalities, the growing influence of geopolitics and conflicts, and ever-surging asset markets guided by a loose monetary policy.
(Dr. Ajit Ranade is a noted Pune-based economist)
(Syndicate: The Billion Press)
(Email: [email protected])
