2024 was quite a challenging and complicated year: The past year was characterised by serious security risks and political uncertainty. Nevertheless, global growth remained at the 2023 level, reaching 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, that strongly supported asset prices. The 2024 “super election” brought a change of government in many states 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 influenced by political, structural and economic uncertainties. As pointed out in the latest economic review of SEB Nordic Outlook, the world will have to address existing as well as new geopolitical conflicts and crises.
US President Donald Trump has begun his second term in office with several executive orders, from which it is currently difficult to derive a clear picture of future US economic policy. The next four years could be characterised by rapid and unexpected political changes. Trump is willing to see a strong economy and a growing stock market, which could prevent him from making radical policy decisions. However, his policies may harbour risks for growth in both positive and negative directions. One of the biggest challenges for Trump’s administration will be tax policy -- due to 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 will be driven by tax cuts, deregulation and growing business optimism.
“US policy is currently driving 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 government debt are increasing, particularly given rising nominal and real interest rates and yields. We expect the US to increase tariffs, especially against China, an all-out trade war, however, will be avoided”, says Dainis Gašpuitis, economist at SEB.
We expect global growth of just over 3% in 2025 and 2026, with the US continuing to show faster economic and productivity growth than the Eurozone. While GDP growth will remain stable overall, the differences between individual countries and sectors will be significant.
The growth of the service sector in the world continues to outpace the industrial sector and contributes to high employment in both the US and Europe. The US economy has maintained robust domestic demand, driven by real income growth and lower interest rates. The sentiment among businesses, 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 investment. Nevertheless, structural challenges such as demographic trends and weak productivity growth will prevent the Eurozone from fully recovering the GDP growth lost in recent years.
China continues to struggle with the challenges of the property sector, but economic growth is slowing. Chinese exporters are facing increasing external pressure. While China reached its growth target of 5 per cent in 2024, economic growth will slow 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 concerning trade and customs matters, as China’s production surpluses are exported.
Although economic activity is slowing, unemployment in the US and Europe remains low. The eurozone labour markets are proving to be very resilient, maintaining employment at a high level and increasing incomes despite rising costs. Consumption remains a key driver of growth and is expected to increase as real incomes rise and household optimism improves.
The fight against inflation
Core inflation is now closer to the central bank’s targets. Inflation continues to fall and this problem is becoming less acute for households and businesses as well as for policymakers. The differences in core inflation between countries are due to the dynamics of price adjustments and the impact of interest rates. Inflation in the services sector 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 major driver of inflation and similar trends can be seen in the UK.
Prices for various commodities have developed very differently, especially for food. Some key commodities (such as wheat) have seen prices fall to the 2021 level. Conversely, dairy prices have risen in 2024 and are almost back to their 2022 peak. 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 moderately and a return to lower price levels is unlikely.
After falling to around USD 70 per barrel last autumn, the price of Brent crude oil exceeded the USD 80 per barrel mark at the beginning of 2025. The main reasons were a poorer balance between supply and demand, which materialised at the end of 2024, and the tightening of US sanctions against Russian oil and gas production and transport. We believe that the OPEC+ cartel controls prices and USD 70 per barrel is a level below which it does not want to lower prices. Oil prices are expected to average USD 75 per barrel in 2025 and rise to over USD 85 by 2026. OPEC+ has sufficient reserves to overcome supply disruptions, and the cartel is trying to avoid excessive prices, as this could prompt other countries to increase their production, which would hurt prices in the long term. Such a price level is not historically high: the average over the last 20 years is USD 77 per barrel (USD 102 in real terms). Natural gas prices in Europe have skyrocketed due to US sanctions and concerns about a cold winter. Gas prices are expected to fall in the spring, although they might slightly increase in 2025 than in 2024.
Interest rate cuts will continue at different speeds
The different dynamics of inflation and the economy are prompting the US Federal Reserve (Fed) and the European Central Bank (ECB) to cut interest rates at different speeds. 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 cut its key interest rate to 3.5 per cent in 2026 given the inflation risks posed by Trump’s policies. Monthly economic performance can lead to significant fluctuations in expectations for interest rate movements. 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 recent decade crises and stimulus programmes. After the “super election” in 2024, many governments will be looking for ways to implement new policy measures in response 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 beginning of the year could cause volatility. However, US and European stimulus measures are expected to positively impact global markets.
Growth expected to accelerate in the Baltic countries
Growth in the Baltic countries is expected to accelerate over the next two years. Lithuania will continue its targeted development 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% this year and 2.9% in 2026. 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. The Latvian economy is expected to grow by 1.8% this year and 2.2% next year. A gradual recovery has also begun in Estonia. Its GDP will grow by 1.8% this year, driven by stronger exports. As household consumption increases, growth will accelerate to almost 3% in 2026.
