Can the global economy continue growing?

As concerns about escalating trade wars diminish, the global economy in 2025 still seems on course for continued growth. Several factors appear to contribute to positive economic news, including increasing European government-led investments.

Global activity held up through last year’s mix of trade frictions and geopolitical uncertainty. But the backdrop is shifting again. A renewed energy-driven inflation impulse – linked to Middle East tensions – is reintroducing near-term uncertainty and once again testing the durability of the expansion.

Against this backdrop, the International Monetary Fund (IMF) continues to expect global growth to remain positive this year, albeit at a more moderate pace. For central banks, however, the timing has become more complicated. Inflation risks have resurfaced just as policymakers were gaining confidence in a gradual easing path, forcing a renewed balancing act between supporting growth and maintaining price stability.

Even so, the global economy continues to show underlying stability. The question is no longer whether growth slows, but by how much – and whether it can remain on a steady footing as risks evolve.

“We see a soft-ish landing for the U.S. But for its trading partners, the stakes are much higher,” says Beth Ann Bovino, chief economist for U.S. Bank. “We have a 30% risk of recession for the U.S. economy, or a one-in-three chance and worse than its historic average of around one-in-seven.”

Bovino notes that the probability of recession is even higher for its trading partners, those importers who are also more energy dependent. “Europe is a net importer, though their oil consumption has declined since the late ‘80s. The tariff impact is still felt, but it’s less painful than was feared earlier with most tariff costs passed through to consumers."

A slower, but still expanding global economy

Recent developments point to a world economy that is slowing modestly, rather than stalling. Higher energy prices – pushing oil back into the $100–$110 range for the first time since 2022 – are weighing on household purchasing power and raising costs for businesses. These pressures are expected to temper growth in the near term, particularly in regions more dependent on energy imports.

“That said, the key point is that the global economy is still growing,” says Bovino. “We’re seeing a moderation in activity, not a contraction.”

The IMF now projects global growth of 3.1% this year and 3.2% next year – a step down from recent performance, but still consistent with continued expansion.¹ Consumer spending has generally held up, labor markets – while cooling – remain stable, and real-time indicators such as global business surveys and PMIs continue to signal expansion, rather than contraction.

In this environment, growth is likely to settle into a more sustainable pace – slower than in recent years, but still positive. As Bovino notes, “For businesses, this still looks less like a downturn and more like a normalization after a strong period of growth.”

Inflation pressures complicate the global economic outlook

While growth has shown resilience, inflation remains an important constraint. The recent rise in energy prices is already feeding into headline inflation, interrupting earlier progress on disinflation and keeping overall price growth elevated across many economies. The IMF expects global inflation to reaccelerate from 4.1% in 2025 to 4.4% in 2026, before easing back to 3.7% in 2027 – reflecting this near-term energy-driven pressure.

“Right now, inflation is being driven more by energy than by underlying demand,” says Matt Schoeppner, senior economist at U.S. Bank. “That distinction matters, because it suggests the current pressure may prove temporary – but it’s not guaranteed.”

For now, much of the impact remains concentrated in energy and related categories, with more limited signs of broad-based inflation pressures. But that differentiation – between headline and underlying inflation – is key. If higher energy costs begin to pass through more broadly into goods, services or wages, the path back to central bank targets could be delayed. If not, disinflation is more likely to resume as energy markets stabilize.

Diverging regional dynamics

The world economy may be slowing in broad terms, but the experience is far from uniform. Much of the variation comes down to how economies are exposed to – and absorb – the current energy shock. In regions where energy costs feed quickly into consumer prices, the impact on both inflation and growth is more immediate. Elsewhere, stronger domestic demand, policy buffers or different energy dynamics are helping to cushion the effects.

“We’re not looking at a synchronized global cycle right now,” says Bovino. “What we’re seeing instead is a more uneven adjustment, where some economies are feeling the impact of higher energy prices much more directly than others.”

In the U.S., growth remains relatively resilient. A large, domestically driven economy and comparatively lower sensitivity to imported energy have helped limit the immediate impact on inflation and activity. By contrast, Europe faces a more challenging backdrop. Greater reliance on energy imports – and a faster pass-through into consumer prices – has contributed to a more pronounced combination of slower growth and elevated inflation.

Across Asia, the picture is more mixed. Some economies (including parts of East Asia such as Taiwan and South Korea) continue to benefit from strength in exports and technology-related investment, while others (such as India and parts of Southeast Asia) are more exposed to higher energy costs and softer global demand. In some economies, government support and pricing policies have helped cushion the impact, slowing how quickly higher energy costs reach consumers.

“The key difference across regions isn’t just growth – it’s how inflation is being transmitted,” notes Schoeppner. “In some economies, higher energy costs are hitting consumers quickly. In others, those pressures are being absorbed or delayed, which changes the policy response.” These differences are leading to a more fragmented global landscape, where growth, inflation and policy paths are increasingly shaped by regional dynamics rather than a single global cycle.

Central banks: A more complicated path forward

That fragmentation is now playing out in global monetary policy. Across major economies, central banks are facing a more complex backdrop than at the start of the year – one where inflation pressures have re-emerged just as confidence in a gradual easing path was beginning to rebuild. As a result, policy trajectories are becoming less synchronized and increasingly dependent on regional conditions.

“This has not been a typical easing cycle,” says Bovino. “Central banks may still be broadly oriented in the same direction, but the path forward is much less linear – and less aligned – than expected.”

In the U.S., the Federal Reserve has adopted a more patient stance, waiting for clearer evidence that inflation is returning to target before continuing to ease policy. In Europe, the challenge is more acute. Greater exposure to higher energy costs is pushing inflation higher even as growth remains soft, leaving policymakers navigating a more difficult tradeoff – with a continued emphasis on guarding against inflation risks.

Elsewhere, policy paths are diverging further. The Bank of Japan, for example, continues to move gradually toward policy normalization, reflecting changing domestic inflation dynamics, while many emerging market central banks are balancing inflation risks against already-softening growth.

“The key issue for policymakers is confidence,” Bovino adds. “They want to be sure inflation is moving sustainably lower and that expectations remain grounded – and right now, that confidence has been challenged.” For now, this points to a more cautious and uneven policy backdrop, with a wider range of potential outcomes as central banks respond to evolving domestic conditions.

Investment remains a key source of support

One of the more important forces supporting global growth is the ongoing strength in business investment. Spending tied to technological development has remained relatively strong globally, though it is heavily concentrated in the U.S., which continues to dominate investment in artificial intelligence and related infrastructure. In those economies, this spending is helping to offset weakness in more interest-rate-sensitive sectors such as housing and traditional capital spending. While AI is expected to be disinflationary later on, it is adding near-term inflation pressure to chips and other components needed for the build, especially since many components are imported.

“Investment tied to AI and infrastructure is doing a lot of the heavy lifting right now,” notes Schoeppner. “It’s supporting growth – but in a more targeted way, not as a broad-based global cycle.”

Over time, this strength could broaden into more generalized investment activity, providing a more durable foundation for growth. For now, however, it remains largely concentrated – serving as an important counterbalance to the drag from tighter financial conditions in the economies where it is most pronounced.

The importance of energy – and its duration

A central question for the global economic outlook is not just where energy prices go next, but how long they remain elevated. Short-lived increases in oil prices tend to act as a manageable headwind, pushing headline inflation higher while only modestly weighing on growth. In that scenario, the recent interruption in disinflation would likely prove temporary, allowing inflation to resume its downward path as energy markets stabilize.

“The key issue isn’t just the level of energy prices – it’s both how long they remain elevated and whether they move materially higher,” says Bovino. “The global economy can likely absorb a temporary increase, but if prices persist and rise further – such as oil moving above $130 – the impact becomes much more meaningful for inflation and growth.”

A more prolonged period of elevated energy costs would have broader consequences. Over time, higher input costs could feed more fully into goods, services and wages – delaying disinflation and reinforcing a more cautious policy environment. At the same time, the drag on consumer spending and business margins would become more pronounced, weighing more directly on global growth.

“In this environment, the outlook seems increasingly conditional,” Schoeppner notes. “If energy prices stabilize or move lower, the global economy can remain on a steady – if slower – growth path. But if they stay elevated, the risks to both inflation and activity rise, reinforcing a more uncertain and uneven global backdrop.”

Bottom line: What this means for businesses

The global economy remains on a growth path, but the environment is becoming more complex and less predictable. While activity has proven resilient – supported by targeted investment and stable labor markets – new pressures are emerging. Higher energy costs are interrupting disinflation, policy paths are less synchronized, and regional dynamics are increasingly shaping outcomes. As a result, the outlook is defined less by a single trajectory and more by a wider range of potential outcomes.

For businesses, this means navigating a more uneven backdrop. Borrowing costs may remain elevated in some markets, while input costs – particularly for energy – are likely to stay volatile. At the same time, demand conditions are becoming more differentiated across regions and sectors, requiring a more localized and flexible approach to planning.

Ultimately, the global economy has shown it can absorb a series of shocks. The challenge now is navigating what comes next – where resilience remains intact, but the path forward is less certain and increasingly dependent on how key risks, particularly energy prices and inflation, evolve.