Macroeconomic Developments

Global Economy

In 2024, despite rising geopolitical risks, ongoing trade tensions, and protectionist policies worldwide, the global economy remained stable but weak compared to long-term average growth rates. Divergences in economic activity were observed across different countries, while many global central banks began cutting interest rates in response to improving inflation indicators.
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The lagged effects of the tight monetary policies implemented and maintained decisively in recent years, particularly in advanced economies, along with the normalization of labor markets, contributed to significant progress in reducing inflation rates toward the targets set by global central banks. This development aligned with expectations of a soft landing, avoiding a large-scale slowdown or contraction in economic activity. Additionally, although price rigidity in the services sector has started to weaken in many countries, services inflation has not decelerated at the same pace across advanced economies. In this framework, central banks of advanced economies have signaled their intentions to pursue a cautious path in future rate cuts to achieve a permanent decline in inflation, yet they have also lowered interest rates amid improvements in the inflation outlook. As advanced economies continue to cut interest rates and anticipate further reductions, new central banks in emerging economies have also joined this trend.

However, many of these emerging market central banks are maintaining a cautious approach to rate cuts due to a slowdown in the improvement in the inflation outlook. Even though central banks continued to trim interest rates across the globe, the relatively high level of policy rates and the ongoing restrictive monetary policy environment put further downward pressure on global economic activity, with a more pronounced restrictive impact on manufacturing output in particular.
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Geopolitical risks are heightened by the ongoing Russia-Ukraine war and the comprehensive sanctions imposed by Western countries on Russia. Additionally, the escalating conflict between Israel and Palestine, coupled with mutual attacks between Israel and Iran, poses a risk of regional spillover. These developments continue to impact the global economy. Despite the supply cuts announced by the Organization of the Petroleum Exporting Countries (OPEC) and the OPEC+ Group, which includes other oil-producing nations, oil prices have remained volatile. This fluctuation is driven by increased production from major oil producers like the U.S., a weak global demand outlook, particularly due to a slowdown in China—the largest oil consumer—as well as rising geopolitical risks and trade tensions.
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In this context, the IMF indicated that global economic growth is anticipated to remain stable, albeit weak. In its Global Economic Outlook Report published in October 2024, the IMF confirmed its global growth forecast at 3.2% for 2024 and slightly revised its 2025 forecast down from 3.3% to 3.2%. Global economic growth in 2023 stood at 3.3%. The IMF noted that risks to the global economic outlook have displayed a downward trend in a period of intense policy uncertainty. The IMF has indicated that the global economic growth forecast for the next five years is weak, at just 3.1%, compared to the pre-pandemic average. This underscores that ongoing structural challenges, such as an aging population and low productivity, are impeding potential growth in many economies. Global economic growth forecasts remain below the 2000-2019 average of 3.8% and are expected to remain at multi-year lows in the medium term.
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In contrast, following the presidential election in the US in November 2024, Trump was re-elected as President and secured a majority in both the Senate and the House of Representatives. This shift has brought attention to the economic, trade, and foreign relations policies that the new Trump administration will pursue. As the Republican leader elected as the 47^th President of the United States, Trump is set to officially take office in January 2025. Initial reactions in global markets after Trump’s victory on November 5, 2024, suggest potential impacts of his forthcoming policies. Anticipated expansionary budget expenditures, tax cuts, tariffs, and relaxed financial regulations are expected to bolster growth in the US and sharpen its competitive edge against foreign countries. Trump has repeatedly stated during his campaign that he plans to impose tariffs of up to 60% on imports from China and 10% to 20% on imports from other nations.

Market players anticipate an increase in inflation in the United States under the new Trump administration, attributed to lower taxes and higher tariffs. This is expected to impede the Federal Reserve’s process of reducing interest rates. Market players also believe that Fed officials may pursue a more gradual rate cut trajectory, suggesting that the Fed could reduce rates less frequently and intermittently, in line with Trump’s planned policies. Recent market pricing indicates that the Fed may reduce interest rates less frequently in 2025. Specifically, Trump’s re-election as President has contributed to expectations that US interest rates will remain elevated. This outlook has triggered a selloff in the US Treasury bond market and accelerated the strengthening of the US dollar. During this new Trump era, the dollar has gained value against other currencies. As a result, advanced economies’ currencies have depreciated, and many emerging economies are also facing pressure against the US dollar.

Meanwhile, Trump’s plans, such as tariffs, tax cuts, and immigrant deportations, are likely to lead to slower growth and higher inflation globally, resulting in a stronger US dollar, a halt in the easing of monetary conditions—especially in emerging economies—and a reduced trade flow to the US. Consequently, it is anticipated that European countries and China may implement additional monetary and fiscal easing measures to stimulate their own economies in light of the downside risks that may intensify regarding economic activity, particularly in the European Union and China, which are among the US’s leading trading partners under Trump’s protectionist trade policies.

Growth in the Eurozone continues at a limited pace, primarily due to the sluggish performance of Germany, the region’s leading economy. The decline in industrial production persists, particularly in Germany, which has a manufacturing-based and export-oriented economy. The manufacturing sector in Europe is expected to face another challenging year in 2025. According to IMF forecasts, the Eurozone economy is projected to grow by 0.4% in 2023, with a slight increase to 0.8% in 2024. Growth is anticipated to recover to 1.2% in 2025, but it will still lag below pre-pandemic levels.
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The IMF forecasts indicate that Germany, the largest economy in the Eurozone, is expected to contract by 0.3% in 2023, followed by stagnation (0% growth) in 2024. However, a recovery is anticipated in 2025, with projected growth of 0.8%. This positions Germany among the countries with the slowest growth rates in Europe. Additionally, the German government’s official growth forecast, announced in October of last year, has been revised downward for 2024 from an expected 0.3% growth to a contraction of 0.2%. As a result, the country’s economy is projected to contract for two consecutive years, influenced by ongoing challenges in the industrial sector, weak investments, disruptions in the business environment, excessive bureaucratic procedures, and the competitive pressures from global markets, particularly from China.

The U.S. economy has continued to outperform other advanced economies, largely due to the strong trajectory of private consumption, which makes up a significant portion of the economy, and the sustained relative tightness in the labor market that continues to support consumer spending. According to IMF forecasts, the US economy is projected to grow by 2.9% in 2023, outpacing other developed countries. Growth is expected to slightly slow to 2.8% in 2024 and further to 2.2% in 2025.

The delayed effects of previous rate hikes and monetary tightening aimed at combating inflation have contributed to better inflation indicators in 2024. While geopolitical risks and fluctuations in commodity prices still pose significant threats to the disinflation process, moderate supply conditions and a careful monetary policy stance have been crucial in supporting global disinflation. Furthermore, while the global disinflation trend persists, inflation in the services sector remains stubborn, though it is rising at a slower pace. In this context, price rigidity in the services sector across many countries appeared milder, particularly as the supply-demand balance in labor markets normalized and wage pressures eased. Central banks, especially in advanced economies, began to cut interest rates in response to the improved inflation outlook.

They stressed a cautious approach to future rate cuts to ensure a sustained decline in inflation. However, variations in economic activity levels between countries, the slower decline in services inflation, and differing labor market conditions resulted in diverse rates of monetary tightening and future guidance from global central banks. As inflation decreased in 2024, central banks in advanced economies initiated a rate-cutting cycle and partially eased monetary tightness. Meanwhile, in emerging economies, new central banks joined the earlier rate-cutting process, although many maintained a cautious stance due to the slower improvement in the inflation outlook. Central banks in emerging economies like Russia and Brazil have raised interest rates in response to increasing inflationary pressures and heightened inflation expectations. In 2025, interest rate cuts are anticipated in both advanced and emerging economies as inflation is expected to decline. However, due to persistent inflation levels, rigidities in service prices, and the recent escalation of geopolitical and protectionist risks, any interest rate reductions will likely be implemented cautiously to maintain monetary tightness and support a sustained decrease in inflation.

The US Federal Reserve (Fed) initiated a cycle of interest rate cuts by reducing the federal funds rate range by 50 basis points at its September 2024 meeting, exceeding expectations. The Fed noted increased confidence that inflation was moving towards the 2% target sustainably, with risks to achieving employment and inflation targets being roughly balanced. Following this, the Fed unanimously cut the federal funds rate range by 25 basis points at its November 2024 meeting in compliance with expectations, and again by 25 basis points at its December 2024 meeting, bringing the rate down from 4.50%-4.75% to 4.25%-4.50%. This marked the third interest rate cut as of December of last year. In the December meeting’s decision text, the Fed acknowledged progress towards the 2% inflation target, though inflation remained somewhat elevated. It reiterated that risks to achieving employment and inflation targets were roughly balanced. Consequently, the Fed lowered the federal funds rate range by 25 basis points in December to support these targets, stating that future adjustments to the interest rate target range would be evaluated based on incoming data, the evolving economic outlook, and the balance of risks. According to the Fed’s new macroeconomic projections published in December, a 50 basis point rate cut is anticipated for both 2025 and 2026, followed by a 25 basis point cut in 2027. In total, this amounts to a projected 125 basis points in interest rate cuts over the next three years. The September projections anticipated a total of 150 basis points in rate cuts over the next two years, with 100 basis points expected in 2025, 50 basis points in 2026, and no changes in 2027. Fewer rate cuts are now projected over the next three years compared to the September forecasts. Fed Chairman Powell stated that the U.S. economy is in a good position, supported by resilient consumer spending, strong labor market conditions, and inflation that is much closer to the 2% target. He emphasized that the Federal Reserve may adopt a more cautious approach in evaluating interest rate changes in the coming period, due to elevated risks and uncertainty surrounding inflation. As a result, the Fed’s easing cycle is expected to slow, with decisions being made carefully on a meeting-by-meeting basis. The minutes from the Fed’s December meeting highlighted inflationary risks associated with President Trump’s trade and immigration policies, with nearly all members agreeing that the risks of rising inflation had increased. Consequently, the minutes revealed a consensus among members to slow the pace of interest rate cuts, as they approached the point where it would be appropriate to ease policy more gradually. However, some members advocated for maintaining current interest rates due to ongoing inflationary concerns.
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In September 2024, the European Central Bank (ECB) lowered interest rates for the second time this year, following its initial cut of 25 basis points in June. This decision, anticipated by many, was made in response to improved inflation in the Eurozone and a weak economic outlook. In September, the ECB reduced the deposit facility rate by 25 basis points and lowered both the key refinancing rate and the marginal funding rate by 60 basis points as part of a technical adjustment across interest rates, thus narrowing the spread between the deposit facility rate and other rates. At its October 2024 meeting, the ECB implemented another 25 basis points cut, marking the third rate reduction of the year. Similarly, at its final meeting of the year in December 2024, the ECB again cut rates by 25 basis points, bringing the total for the year to four cuts. Consequently, the key refinancing rate was lowered from 3.40% to 3.15%, the marginal lending rate from 3.65% to 3.40%, and the deposit facility rate from 3.25% to 3%. The ECB noted that the disinflation process is progressing well, with many indicators suggesting a stable inflation rate at the target of 2%. The removal of the phrase indicating that interest rates would remain “sufficiently restrictive” from the decision text implies that further rate cuts may be possible. However, the ECB emphasized a data-dependent, meeting-to-meeting approach moving forward. President Lagarde confirmed that while the disinflation process in the Eurozone continues, wage and price increases in certain sectors may impact inflation with a delay, and that inflation is expected to stabilize at the 2% target in the medium term. Lagarde clarified that the guidance on “keeping interest rates sufficiently restrictive for as long as necessary” no longer aligns with the current inflation outlook and associated risks. She noted that this guidance is no longer needed due to the ongoing disinflation process and the downside risks to growth. Instead of pursuing a restrictive policy, the ECB will focus on adopting an appropriate policy stance. Lagarde also emphasized that no specific path for interest rate cuts has been established; they will evaluate data leading up to the next meeting and make decisions on a case-by-case basis. In this vein, it appears that the ECB will adopt a cautious approach to interest rate cuts.

As the world’s second-largest economy, China ended 2023 with a robust growth rate of 5.2%, moving beyond the negative impacts of the pandemic. In 2024, the slowdown facing the global economy is exacerbated by weak consumer spending in China, persistently high unemployment, deflationary pressures, and significant debt problems within the real estate sector. Additionally, falling property prices, local government debt issues, and escalating trade tensions with Western countries have further underscored the downward risks to economic growth. The ongoing debt crisis in China’s real estate sector, which contributes significantly to the national income, along with elevated unemployment levels, suggests that the economic recovery could remain fragile. In this context, the Chinese government has implemented several measures to address the slowdown in the economy, stimulate economic activity, and achieve the 5% growth target for 2024. These measures include cutting interest rates throughout the year, reducing banks’ reserve requirement ratios, easing regulations on housing purchases, and increasing the loan quota for real estate projects. The government has announced the most comprehensive monetary and fiscal stimulus measures since the pandemic, which encompass enhanced borrowing facilities for local governments to support the housing sector, a refinancing program to restructure local government debt, support for stock markets, and cash assistance for individuals living in extreme poverty.
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In December of last year, while pledging support for the economy in 2025, the Chinese government announced plans to implement a moderately loose monetary policy. This shift suggests further interest rate cuts and a departure from its previously prudent monetary strategy. Additionally, the government highlighted its intention to actively stimulate consumption, enhance investment efficiency, and adopt a more proactive fiscal policy in 2025. During the Annual Economic Work Conference held in December, officials indicated that the budget deficit ratio should be increased to boost domestic demand and that domestic borrowing should rise to sustain investments. The conference also announced campaigns to encourage consumption in 2025 and emphasized that public expenditures would be increased to promote investment. Furthermore, the importance of maintaining stable economic growth, employment, and price stability in 2025 was underscored, along with a recommendation for timely cuts in interest rates and reserve requirement ratios. Conversely, market assessments have emerged suggesting that the Chinese government’s incentives may not be sufficient to revive the economy and that structural issues require attention. Market players increasingly believe that the government may struggle to achieve its economic growth target of around 5% for 2024, given the challenges posed by both domestic and external demand, despite its comprehensive support measures.

The International Monetary Fund (IMF) also contends that China’s monetary and fiscal stimulus will fall short, predicting a slowdown in the country’s economic growth rate to 4.8% in 2024 and 4.5% in 2025. In 2025, the focus will be on the government’s strategies to address weak consumption demand, local government debt issues, and challenges in the housing sector—factors that are undermining China’s economic stability. In light of weak external demand driven by a slowing global economy, along with ongoing trade tensions and protectionist policies, the country has shifted its focus to the domestic economy. In this context, the Chinese government’s extensive incentives aimed at stimulating domestic demand are anticipated to further strain public finances. At the same time, subsidies targeted at certain export sectors, particularly high-tech industries like chips and electric vehicles, may intensify tensions with China’s trading partners, notably the US and the European Union.