From the Federal Reserve’s rate cuts to labor market resilience over the last 12 months, Bryant University’s Allison Kaminaga, Ph.D., Economics lecturer within the College of Arts and Sciences’ Mathematics and Economics department, provides an economic forecast for 2025:

As we prepare for the new year, what predictions do you have for the U.S. economy?

The Bureau of Economic Analysis’s most recent Gross Domestic Product (GDP) data from the third quarter of 2024 shows that the United States grew at 2.8 percent, and I would expect a similar level for 2024 in total. 2.8 percent is pretty robust for a developed economy like the U.S. We're growing faster than most other developed countries, so we've certainly achieved that soft landing. For 2025, we do expect the level of economic growth to slow but remain strong and on trend with historical averages. The Organisation for Economic Co-operation and Development (OECD) is predicting 2.4 percent economic growth for the U.S. for 2025. Meanwhile, the International Monetary Fund, in their World Economic Outlook, is projecting 2.2 percent for the U.S. in 2025.

What do you foresee for the global economy?

For the world as a whole, the OECD is predicting 3.3 percent economic growth for 2025. That's higher than the past few years, which is a good sign. The main drivers of growth include the lower levels of inflation, and that trend is expected to continue. Because we're seeing lower levels of inflation, that's going to lead to lower interest rates. Many central banks, including the Fed, are easing monetary policy, and we're also seeing really continued increases in employment. Combined, those factors contribute to higher levels of demand and spending.

Now, the economy looks a little different depending on where you are in the world. While the U.S. has grown relatively fast, other developed countries have grown slower. In the eurozone, for example, they've been successful at bringing inflation down but, because of monetary policy and slowdowns in manufacturing, they've experienced lower levels of growth; we're expecting that lower level of growth to continue in the eurozone for 2025. China has also seen slower growth than normal this past year. Their government recently passed fiscal and monetary stimulus to enhance growth in 2025, so you might see a pickup in China. At the same time, depending on the new tariff policies we have for China, those could slow growth a little bit.

How might recent geopolitical events influence the 2025 global economy?

Conflicts in the Middle East and Russia's war in Ukraine could pose a risk to the global economy, particularly in how those conflicts might impact energy prices. For instance, if we see oil prices increase due to those conflicts, then that could lead to a resurgence in inflation across the globe. Higher inflation would lead to less growth. It lowers confidence, and it could mean a halt or even a reversal of this easing of monetary policy.

Another potential risk is trade tensions. Trade policy uncertainty has spiked over the past few months, and these policies have the potential to impact prices. We know tariffs are usually passed on to consumers, so that could lead to inflation. Also, if we have trade restrictions, that could lower cross-border investment and potentially lead to lower innovation and productivity.

Are there any economic indicators we should closely monitor?

I always pay close attention to unemployment. Unemployment in the U.S. right now is 4.2 percent, which is low by historical averages. The reason we should care about unemployment is that the U.S. is a consumption-driven economy; 70 percent of our economy is based on consumer spending by households. When you have changes in unemployment, that's going to impact consumption, GDP, and the overall economy. Unemployment is also linked to social issues that we care about. For example, there's a strong relationship between unemployment and poverty, health, and crime. 
Given the past few years, the other economic indicator to monitor is inflation. Consumer Price Index inflation is currently at 2.7 percent, so inflation has come significantly down (we were up at 9 percent in June of 2022). There's been a lot of good progress, but it seems like the last mile is proving the most difficult. Within the past few months, we've not seen much progress on inflation, so monitoring prices over the next year will be important.

Will we hit the Federal Reserve’s 2 percent inflation target?

I do think we'll continue to see inflation fall over the next year, but I don't think we're going to hit the Federal Reserve’s 2 percent target. Part of the reason why we haven't seen inflation go down as much as we would have liked over the past year is because of shelter inflation. Housing prices tend to be sticky, and we don't see them fall as quickly as in other sectors. Part of that has to do with how the government measures — they don't do it at the same frequency that they do other types of goods or services.

The other thing is if you're renting an apartment, you're probably negotiating that rent once a year or once every other year. So, when prices come down, it doesn't reflect immediately. Also, because people spend so much money on housing, it takes up a big component of the Consumer Price Index — so it disproportionately influences inflation. Recently, we've seen good progress on shelter, so that’s one reason to be optimistic.