WORLD ECONOMIC OUTLOOK 2 International Monetary Fund | January 2025 Where inflation is proving more sticky, central banks are moving more cautiously in the easing cycle while keeping a close eye on activity and labor market indicators as well as exchange rate movements. A few central banks are raising rates, marking a point of divergence in monetary policy. Global financial conditions remain largely accommodative, again with some differentiation across jurisdictions (see Box 1). Equities in advanced economies have rallied on expectations of more businessfriendly policies in the United States. In emerging market and developing economies, equity valuations have been more subdued, and a broad-based strengthening of the US dollar, driven primarily by expectations of new tariffs and higher interest rates in the United States, has kept financial conditions tighter. Economic policy uncertainty has increased sharply, especially on the trade and fiscal fronts, with some differentiation across countries (Figure 1). Expectations of policy shifts under newly elected governments in 2024 have shaped financial market pricing in recent months. Bouts of political instability in some Asian and European countries have rattled markets and injected additional uncertainty regarding stalled progress on fiscal and structural policies. Geopolitical tensions, including those in the Middle East, and global trade frictions remain elevated. The Outlook IMF staff projections assume current policies in place at the time of publication. They incorporate recent market developments and the impact of heightened trade policy uncertainty, which is assumed to be temporary, with the effects unwinding after about a year, but refrain from making any assumptions about potential policy changes that are currently under public debate. Energy commodity prices are expected to decline by 2.6 percent in 2025, more than assumed in October. This reflects a decline in oil prices driven by weak Chinese demand and strong supply from countries outside of OPEC+ (Organization of the Petroleum Exporting Countries plus selected nonmember countries, including Russia), partly offset by increases in gas prices as a result of colder-than-expected weather and supply disruptions, including the ongoing conflict in the Middle East and outages in Figure 1. Policy Uncertainty (Index, unless noted otherwise) Sources: Baker, Bloom, and Davis 2016; Caldara and others 2020; Refinitiv Eikon; and IMF staff calculations. Note: The uncertainty measures are news-based indices that quantify media attention to news related to an issue, in which a value of 100 corresponds to 1 percent of news articles that reference the issue. In panel 1, the euro area and the rest of the world (ROW) are based on the earnings-calls-based indicators, representing the proportion of firms that mention trade policy uncertainty (TPU) in their earnings calls. This measure reflects companies’ concerns regarding TPU, based on the dictionary developed by Caldara and others (2020, https://doi.org/10.1016/j.jmoneco.2019.11.002). The ROW encompasses 22 countries, including the US. In panel 2, US fiscal policy uncertainty is a subcomponent of the Economic Policy Uncertainty Index developed by Baker, Bloom, and Davis (2016, https://doi.org/10.1093/qje/qjw024), whereas the indicator for the world is based on Hong, Ke, and Nguyen (2024, https://doi.org/10.5089/9798400288128.001). 0 2 4 6 8 10 12 0 100 200 300 400 2016: Q1 18: Q1 20: Q1 22: Q1 24: Q1 24: Q4 World: News based Euro area: Earnings calls based (right scale) ROW: Earnings calls based (right scale) 1. Trade Policy Uncertainty (Percent on right scale) 2. Fiscal Policy Uncertainty 0 100 200 300 400 500 98 100 102 104 106 108 World United States (right scale) Jan. Jan. Jan. Jan. Jan. Dec. 2016 18 19 21 24 24
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