The Global Risks Report 2025: A World of Growing Divisions

Supercharged Economic Tensions (Part 3)

Greater economic uncertainty 
The World Economic Forum’s September 2024 Chief Economists Outlook found that most of the chief economists surveyed (54%) expect the condition of the global economy to remain unchanged over the next year, but four times as many expect conditions to weaken (37%) rather than to strengthen (9%). This outlook aligns closely with the latest IMF forecast, which has economic growth stable at 3.2% annually in 2024 and 2025. Even without accounting for the potential impacts of downside risks, this growth rate is tepid compared to the long-term average growth rate of 3.8% from 2000-2019.

The IMF notes rising risks to the economy posed by conflict escalation, tariffs and trade policy uncertainty, lower migration, and the tightening of global financial conditions. The latter could pose a challenge to financial stability given that valuations are elevated in several asset classes and the amount of leverage used by financial institutions is significant. The rapid growth in the private credit market is one area to monitor. More generally, both government and private-sector debt levels continue to rise globally. There have been early signs that fiscal concerns could re-emerge over the next two years as markets will face a high volume of sovereign debt supply.

Globally, Economic downturn tops the EOS global risk ranking in the next two years. This risk ranks first in five regions: Latin America and the Caribbean, Northern America, Oceania, South- Eastern Asia and Southern Asia. It also ranks first in three out of the four country income groups, with the only exception being lower-middle income countries. Respondents in 25 countries see Economic downturn as the leading risk, including developed economies such as the United States and United Kingdom, and emerging markets such as Brazil, Kenya and Malaysia. 

In the short term, higher import tariffs cause an increase in the price of imported goods. The impact on global GDP depends on factors including the substitutability between imported and domestic goods; the response of exporting firms facing tariffs; and monetary policy reactions.36 When it comes to the latter, monetary policy-makers are in the fortunate position of having just brought inflation back under control. The International Monetary Fund (IMF) projects headline global inflation to fall to 3.5% by the end of 2025, which is lower than the average in the two decades prior to the COVID-19 pandemic. However, one risk is that an escalating trade war will lead to another upturn in inflation, forcing central banks to halt or even reverse course from cutting interest rates. If this is associated with a strengthening US dollar, there could be knock-on risks for countries and companies with US dollar debt refinancing needs. 

Indirect impacts of tariffs include a fall in productivity, due to a change in the allocation of productive resources from more to less productive, more protected sectors and firms; a rise in the cost of capital caused by financial stress; and a drop in investment due to an increase in uncertainty about future business conditions, which causes firms to adopt a “wait-and-see” approach. The latest World Investment Report, released in June 2024, cites fragmenting trade and regulatory environments as among the key drivers of a 10% slump in global foreign direct investment last year.

Analysis by the World Trade Organization (WTO) of the phase of the US-China trade conflict from 2018-2020 indicates that the direct impacts on the global economy of tariff increases during this period were far outweighed by the impacts of broader uncertainty around trade policy. With these broader impacts, the loss to global GDP was estimated at 0.34-0.50% during this period. A true global trade war would have correspondingly more severe impacts, with estimates of global GDP losses highly uncertain but potentially much higher.

The US-China trade conflict since 2018 also had clear business impacts: exits of foreign companies from China increased by 34% compared to pre- 2018 levels.Importantly, the impacts were much broader than only in the specific sectors targeted by US tariffs on Chinese products and affected non- US companies as well as US companies. These findings suggest that even the “scalpel” approach – levying tariffs on specific sectors – does not have a well-targeted outcome in terms of either sector or geography. To reiterate, a broader global trade war would magnify these impacts on businesses. 

Actions for today 
A. Foster multilateralism 
The GRPS finds that the approach that has the most long-term potential for driving action on risk reduction and preparedness regarding Geoeconomic confrontation is Global treaties and agreements. A specific area to prioritize would be a revival of reforms at the WTO to address dispute resolution, tariff-setting rules and digital trade issues. With US-China Geoeconomic confrontation at the core of a fragmenting world, more opportunities will open up for rising powers, such as India or the Gulf countries, to fill the void and propose multilateral alternatives to the current global political economic order. These countries can also benefit by acting as a bridge between West and East, even though they too will suffer many of the negative impacts of the fragmenting environment. Smaller countries will face increasing pressure to align with the West or the East in their trade relationships. 

B. Develop strategic relationships 
Governments could consider further prioritizing efforts to develop strategic regional or bilateral ties with countries that offer complementarity in terms of sectoral strengths, natural resource endowments and skills. “Deep” regional trade agreements – outside the WTO but consistent with WTO requirements – and WTO-based plurilateral or “minilateral” agreements can be considered. Even at these levels, multistakeholder dialogue needs to be deepened to reinforce the message that well- designed deepening of trade can lead to mutually beneficial economic and social outcomes. 

​C. Strengthen domestic economic resilience 
In an environment where trade becomes more costly and cumbersome, emphasis needs to be placed on policies that strengthen the domestic economy, such as financial sector development or investment in education, health and infrastructure. On the supply side, developing greater self-sufficiency in key strategic sectors such as Energy, Agriculture, and Défense will increasingly become an important aspect of resilience at the national level. 
 
Reference: The Global Risks Report 2025 20th Edition. World Economic Forum.