Global recovery is steady but slow and differs by region:

The baseline forecast is for the world economy to continue growing at 3.2 percent during 2024 and 2025, at the same pace as in 2023. A slight acceleration for advanced economies—where growth is expected to rise from 1.6 percent in 2023 to 1.7 percent in 2024 and 1.8 percent in 2025—will be offset by a modest slowdown in emerging market and developing economies from 4.3 percent in 2023 to 4.2 percent in both 2024 and 2025. The forecast for global growth five years from now—at 3.1 percent—is at its lowest in decades. Global inflation is forecast to decline steadily, from 6.8 percent in 2023 to 5.9 percent in 2024 and 4.5 percent in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developing economies. Core inflation is generally projected to decline more gradually.

The global economy has been surprisingly resilient, despite significant central bank interest rate hikes to restore price stability. Chapter 2 explains that changes in mortgage and housing markets over the pracademic decade of low interest rates moderated the near-term impact of policy rate hikes. Chapter 3 focuses on medium-term prospects and shows that the lower predicted growth in output per person stems, notably, from persistent structural frictions preventing capital and labor from moving to productive firms. Chapter 4 further indicates how dimmer prospects for growth in China and other large emerging market economies will weigh on trading partners.

Chapter 1: Global Prospects and Policies:

Economic activity was surprisingly resilient through the global disinflation of 2022–23. As global inflation descended from its mid-2022 peak, economic activity grew steadily, defying warnings of stagflation and global recession. However, the pace of expansion is expected to be low by historical standards and the speed of convergence toward higher living-standards for middle- and lower-income countries has slowed, implying persistent global disparities. With inflationary pressures abating more swiftly than expected in many countries, risks to the global outlook are now broadly balanced compared with last year. Monetary policy should ensure that inflation touches down smoothly. A renewed focus on fiscal consolidation is needed to rebuild room for budgetary maneuver and priority investments, and to ensure debt sustainability. Intensifying supply-enhancing reforms are crucial to increase growth towards the higher pracademics era average and accelerate income convergence. Multilateral cooperation is needed to limit the costs and risks of geoeconomics fragmentation and climate change, speed the transition to green energy, and facilitate debt restructuring.

Chapter 2: 

Feeling the Pinch? Tracing the Effects of Monetary Policy through Housing Markets.

Why are some feeling the pinch from higher rates and not others? Chapter 2 investigates the effects of monetary policy across countries and over time through the lens of mortgage and housing markets. Monetary policy has greater effects where (1) fixed-rate mortgages are not common, (2) home buyers are more leveraged, (3) household debt is high, (4) housing supply is restricted, and (5) house prices are overvalued. These characteristics vary significantly across countries, and thus the effects of monetary policy are strong in some and weak in others. Moreover, recent shifts in mortgage and housing markets may have limited the drag of higher policy rates up to now in several countries. The risk that households may still feel the pinch should be taken seriously where fixed-rate mortgages have short fixation periods, especially if households are heavily indebted.

Chapter 3: 

Slowdown in Global Medium-Term Growth: What Will It Take to Turn the Tide?

The world economy's growth engine is losing steam, prompting questions about its medium-term prospects. Chapter 3 delves into the drivers behind the growth decline and identifies a significant and widespread slowdown in total factor productivity as a key factor, partly driven by increased misallocation of capital and labor between firms within sectors. Demographic pressures and a slowdown in private capital formation further precipitated the growth slowdown. Absent policy action or technological advances, medium-term growth is projected to fall well below pracademic levels. To bolster growth, urgent reforms are necessary to improve resource allocation to productive firms, boost labor force participation, and leverage artificial intelligence for productivity gains. Addressing these issues is critical, given the additional constraints high public debt and geoeconomics fragmentation may impose on future growth.

2025 Recession Risk Factors:

Many factors can trigger or contribute to a recession, but two specific factors are likely the biggest risks to economic stability in 2025.

Inflation

Any investor who hasn't been living under a rock for the past two years is already aware that the primary economic risk factor in 2025 is inflation. After reaching a 40-year high of 9.1% in June 2022, year-over-year consumer price index inflation has fallen to just 2.6% as of October 2024.

The Federal Reserve can celebrate the progress it made in 2024, but the latest core personal consumption expenditures (PCE) price index reading in late October suggests it's too early to declare victory over inflation just yet. Core PCE, which excludes volatile food and energy prices and is the Fed's preferred inflation measure, was up 2.7% year over year in September, above the FOMC's 2% target.

Tariffs

The second economic risk factor in 2025 is tariffs. President-elect Donald Trump has pledged to implement aggressive tariffs on goods imported from China and other U.S. trade partners around the world, making tariffs a central part of his economic plan. Supporters of this tariff strategy say it will help U.S. businesses compete with lower-cost international businesses and encourage American companies to hire American workers. However, critics of the tariff strategy argue the tariffs will force U.S. companies to pay higher prices for imported goods and components, and many of these companies will simply pass on those higher costs to consumers by raising prices. Widespread price hikes could be a nightmare scenario for an economy that is already dealing with elevated inflation.

To make matters worse, the last leg of the inflation battle may be the most difficult period for the Fed thanks to so-called sticky inflation. Sticky inflation is inflation in goods and services that have prices that are not very responsive to monetary policy adjustments, such as children's clothing, auto insurance and medical products. Even as inflation in other areas of the economy continues to fall, sticky inflation may keep the Fed from reaching its inflation target for longer than investors had hoped and force the central bank to slow the pace of its rate cuts.

Preparing for Recessions:

Recessions can be challenging periods, but there are strategic ways for individuals and businesses to brace themselves against economic downturns. One crucial step is strengthening balance sheets to ensure a more resilient financial foundation. A diversified portfolio, including high-quality assets and investments in recession-resistant sectors, can also help protect against volatility.

Keeping informed about economic news, including shifts in fiscal and monetary policies, allows for timely adjustments. On a personal level, maintaining a clear monthly budget and exploring additional income streams can provide stability. For businesses, adopting a proactive risk management strategy, including scenario planning, can be essential. Maintaining a long-term perspective helps weather temporary setbacks and positions both individuals and companies for recovery once the economy rebounds.

How do recessions end?

Central Banks can lower short-term interest rates. This can increase consumer confidence and stimulate spending, as the cost of borrowing is lower, meaning the cost of buying items such as cars and homes is also less.

To keep unemployment at bay, governments can introduce policies such as tax cuts to help consumers, or launch infrastructure programmed, including construction of roads and railways.

Recessions end when growth resumes again, no matter how slowly this happens. During the Great Recession of 2008, for example, pumping trillions into the global economy in an attempt to resuscitate it. Following this unprecedented level of stimulus, markets began to recover, although lingering scars like higher unemployment and lower average income levels remained many years later.

Will There Be a Recession in 2025?

Fortunately, inflation and elevated rates have not yet dragged down the U.S. economy, but investors should continue to monitor the labor market and other economic data in the coming months as tight monetary policy often has a lagging impact on growth.

The U.S. economy added just 12,000 jobs in October, its worst month of jobs growth since December 2020, though that figure was likely skewed lower from the effects of hurricanes and a strike at Boeing Co. (Ticker: BA). The U.S. unemployment rate remained at 4.1%. U.S. GDP growth slowed from 3% in the second quarter to 2.8% in the third quarter of 2024. The latest Federal Reserve economic projections suggest that growth will slow to an annual rate of 2% in 2025.

After spending more than two years inverted, the U.S. Treasury yield curve flipped back to positive territory in the second half of 2024, a positive sign for the economy. U.S. credit card debt stands at an all-time high of more than $1.17 trillion, but delinquency rates on that debt improved from 9.1% to 8.8% in the most recent quarter. Auto loan delinquencies recently hit a 15-year high, another potential red flag investors should monitor to gauge U.S. consumer strength. A 4.1% unemployment rate is not historically high, but it is well above 2023 lows of 3.4%.

Data Trek Research co-founder Nicholas Colas says U.S. searches for "remote work" are at a five-year high, an under-the-radar indication that the economy is healthy in 2025.

"The real 'tell' about the trajectory of the U.S. economy likely lies in American workers' return to the office. If a recession is close, we should see office occupancy turn meaningfully higher as employees trade remote work for job security," Colas says.

The S&P 500 is on track to deliver its second consecutive year of 20%-plus gains as investors cheer earnings growth, Fed rate cuts and Trump's plan to extend the 2017 corporate tax cuts that are set to expire at the end of 2025. However, the New York Fed's recession probability model suggests there is still a 42%Chance of a U.S. recession sometime in the next 12 months.

Bill Adams, chief economist for Comerica Bank, says the economy is in good shape heading into 2025, and Trump's election victory may have his wealthy supporters in the spending mood in the coming year.

"A lot of dudes will be buying new trucks, bigger boats and nicer jets next year. It's hard to put a number on this tailwind for high-end consumer spending, but it will almost certainly be a tangible support to economic growth in 2025," Adams says.

What to Invest in During a Recession

While it's never something to wish for, if a recession does materialize, there are several general strategies investors can take to manage risk and take advantage of opportunities should the U.S. economy falter in 2025.

First, consider reducing exposure to volatile stocks and increasing cash holdings. Cash may not be the most exciting play, but it reduces market risk and provides financial flexibility if a recession creates potential buying opportunities in 2025. In addition, investors can earn more than 4% interest on a one-year certificate of deposit right now, potentially locking in that yield even as the Fed continues cutting rates.

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