The year 2024 was quite a challenging and complicated year. It was characterised by serious security risks and political uncertainty. Nevertheless, global growth remained nearly on par with 2023 at just over 3%, with unexpectedly strong growth in the US. Conversely, Germany and other countries continued to struggle with structural challenges. The decline in inflation enabled interest rate cuts, which had a strong impact on asset prices. The 2024 “super election” brought changes of government in many countries and strong voter expectations for price cuts, reforms and greater security. The sources of uncertainty and volatility will persist over the next two years. Short and medium-term growth will be affected by political, structural and cyclical uncertainties. The world will have to deal with both existing and new geopolitical conflicts and crises, according to SEB Nordic Outlook’s latest economic report.
US President Donald Trump has begun his second term in office with a series of executive orders, from which it is currently difficult to derive a clear picture of future US economic policy. The next four years might be characterised by rapid and unexpected political changes. Trump wants a strong economy and a growing stock market, which may deter him from making radical policy decisions. His policies, however, may pose risks to growth in both positive and negative directions. One of the biggest challenges for Mr Trump’s administration will be tax policy - because of the large budget deficit. A tougher stance on immigration policy is also expected, albeit without mass deportations of undocumented immigrants, which could hamper economic growth. US economic growth is being fuelled by tax cuts, deregulation and growing optimism among companies.
“US policy is currently fuelling global uncertainty, which is holding back growth in China, the European Union and elsewhere. China and Germany continue to struggle with structural problems. Market concerns over high levels of government debt are increasing, particularly in light of rising nominal and real interest rates and yields. We expect the US to increase tariffs, especially against China, but we will avoid an all-out trade war,” says Dainis Gašpuitis, economist at SEB banka.
The growth of the service sector in the world continues to outpace the industrial sector, contributing to high employment in both the US and Europe. The US economy continues to enjoy robust domestic demand, fuelled by real income growth and lower interest rates. Sentiment in the economy, particularly among small businesses, has improved. The eurozone economy is recovering, albeit in different countries. Structural and political challenges in Germany and France continue to hamper growth. However, lower inflation and lower interest rates will boost consumption and capital investment. Nevertheless, structural challenges such as demographics and weak productivity growth will prevent the eurozone from fully recovering the GDP growth lost in recent years.
China continues to tackle the challenges of the property sector, but economic growth is slowing. Chinese exporters are facing increasing external pressure. China has reached its growth target of 5% in 2024, but its economic growth will slow down in 2025 and 2026. Beijing’s attempts to support growth through stimulus measures are not enough to fully offset the problems in the property market or significantly boost domestic demand. Increased production and weak domestic demand are exacerbating global tensions, particularly in relation to trade and customs issues, as China’s production surpluses are exported.
Although economic activity is slowing, unemployment in the US and Europe remains low. The labour markets in the Eurozone are proving very resilient, maintaining employment at a high level and increasing incomes despite rising costs. Consumption remains an important driver of growth and is expected to increase as real incomes rise and household optimism improves.
Combatting inflation
Core inflation is now closer to the central bank’s targets. Inflation is continuing to fall and this problem is becoming less acute for households and businesses as well as for politicians. The differences between countries in core inflation are due to the dynamics of price adjustments and the impact of interest rates. Services inflation remains persistent due to various factors such as rising rents, rising wages and the economic situation. The strong US economy and labour market are driving service inflation, particularly due to rents. In the eurozone, service prices are a key driver of inflation and similar trends can be observed in the UK.
Prices for various commodities have changed very differently, especially for food. For some key commodities (such as wheat), prices have fallen to 2021 levels, while dairy prices have risen in 2024 and are almost back to their 2022 peak levels. Particular attention was paid to commodities such as coffee and cocoa. Although they only make up a tiny part of the basket of goods, their price increase has an impact on inflation. Food prices are expected to continue to rise at a moderate pace and a return to a lower price level is unlikely.
Prices for various commodities have changed very differently, especially for food. For some key commodities (such as wheat), prices have fallen to 2021 levels, while dairy prices have risen in 2024 and are almost back to their 2022 peak levels. Particular attention was paid to commodities such as coffee and cocoa. Although they only make up a tiny part of the basket of goods, their price increase has an impact on inflation. Food prices are expected to continue to rise at a moderate pace and a return to a lower price level is unlikely.
Interest rate cuts continue at different rates
The different dynamics of inflation and the economy are forcing the US Federal Reserve (Fed) and the European Central Bank (ECB) to cut interest rates differently. As inflation in the Eurozone approaches the ECB’s 2025 target, the pace of rate cuts will accelerate, with the ECB’s deposit rate likely to fall to 1.5% over the summer. The Fed will gradually lower its key interest rate until it reaches 3.5% in 2026, given the inflation risks posed by Trump’s policies. Monthly economic performance may lead to significant fluctuations in expectations for interest rate developments. The focus of the Fed and the ECB could shift from fighting inflation to supporting the economy. Tariffs are the main risk to inflation in the US, while inflation in Europe could be lower if China shifts exports from the US to the EU.
Fiscal headwinds
Fiscal policymakers are facing major challenges, as national budgets are already under pressure due to the crises and economic stimulus programmes of recent decades. After the “super election” in 2024, many governments are looking for ways to implement new policy measures to respond to the election results. This process will be complicated by rising populism, an ageing population, the transition to a green economy, rising defence spending, the pressures of global competition and the risks of trade wars.
Rising bond yields and reduced risk appetite (in response to geopolitical uncertainty) on the equity markets at the start of the year could cause volatility. However, US and European stimulus measures are expected to have a positive impact on global markets.
Acceleration of growth expected in the Baltics
Growth in the Baltic countries is expected to accelerate over the next two years. Lithuania will continue its targeted growth started in 2024. Consumer confidence is strong, which will further boost private consumption and investment. The housing market will also strengthen. Exports are recovering, but this will be influenced by geopolitical events and trends in the EU economy. Lithuania’s economy will grow by 2.8% and 2.9%, this year and in 2026, respectively. Latvia’s economy will gradually recover. The recovery will gain momentum and continue until 2026. Real wage growth will strengthen consumption, while the inflow of EU funds will boost investment spending. The recovery in exports will be slow. Latvia’s economy is expected to grow by 1.8% and 2.2%, this year and next year, respectively. A gradual recovery has also begun in Estonia. Its GDP will grow by 1.8% this year, fuelled by stronger exports. As household consumption increases, growth will accelerate to nearly 3% in 2026.
