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A muted global economy in 2025 will take its toll on global trade

 

By Carly Fields

 

The World Economic Forum's Chief Economists Outlook offers up a subdued picture for the global economy in 2025, characterised by muted growth expectations and significant regional divergence – both of which have implications for global trade. While the US economy is projected to maintain robust growth, and South Asia, led by India, is expected to continue its strong trajectory, Europe faces a gloomy outlook with a majority of economists predicting weak or very weak growth. China's growth is also anticipated to slow gradually. 

Adding to these concerns is a persistent threat of global economic fragmentation.

Geopolitical rivalries and domestic policy choices are increasingly driving this trend, with 94% of chief economists expecting further fragmentation in goods trade over the next three years.

This fragmentation is expected to manifest in various forms, including increased barriers to labour mobility, technology transfers, and data flows. 

The primary impact of this rising fragmentation, according to the chief economists, will be a likely increase in costs for both consumers and businesses. Moreover, it is expected to hinder international collaboration on critical global challenges, such as climate change. In response, multinational companies are anticipated to adapt by restructuring their supply chains and making significant organizational changes.

 

Shadow of trade wars

The report highlights a significant intensification of trade-war dynamics as a key driver of this fragmentation. While the expectation is that global trade volumes will continue to increase, protectionism is seen as a major force shaping future trade patterns. 

"A trade war is already under way," the report states, pointing to the recent surge in trade-distorting policies among G20 countries. While the harshest tariffs promised during the US presidential campaign are unlikely to be implemented, the report emphasises that protectionist trade policy, particularly towards China, has become a defining feature of recent US administrations, regardless of political affiliation. 

The survey reveals that 89% of chief economists expect a tit-for-tat trade war between the US and China,

and 68% anticipate a broader escalation of trade restrictions. However, despite these looming threats, global trade has shown remarkable resilience in recent years. 

While protectionism is identified as the most significant driver of lasting changes to global trade patterns, the report emphasises the influence of other crucial factors. Supply chain restructuring (93% of respondents), conflict and sanctions (83%), and national security concerns (77%) are all seen as major forces reshaping the global trading landscape. 

“Clearly, there are close interconnections between many of these,” said the report. “For example, national security concerns are an increasingly prominent justification for protectionist trade restrictions, such as US tariffs on Chinese electric vehicles. Conflict can lead to significant supply-chain changes, as was the case following Russia’s invasion of Ukraine in 2022.”

Interestingly, the survey suggests that the influence of traditional economic drivers, such as global growth dynamics, may be diminishing relative to these more structural factors. Only a small majority (54%) of chief economists expect global growth to have a significant impact on trade patterns. This suggests a “trading environment in which the influence of traditional economic drivers may be diminishing relative to a range of more structural factors”, said the report.  

 

Rise of services trade

The report also highlights the gradual shift in the composition of trade from goods to services, a trend that is expected to continue. While merchandise exports still dominate, services trade is growing at a faster pace. The deepening digitalisation of economies has been a key driver of this growth, particularly in the area of digitally delivered services. 

While developed economies currently benefit more from services trade, the report acknowledges the increasing importance of services as a driver of economic development in developing countries. This is attributed, in part, to the relatively higher employment intensity of services compared to goods production.

The Chief Economists Outlook underscores the significant uncertainty surrounding the future of global trade, warning of potential disruptions from escalating trade wars, geopolitical tensions, and the ongoing fragmentation of the global economy.  

However, it also acknowledges the resilience of global trade in the face of recent challenges. 

“Against the challenging recent backdrop of sharp geopolitical tensions and rising protectionism, global trade has been quite resilient,” said the report. “As a percentage of GDP, it stood at 58.5% in 2023, down from 62.8% the previous year but still above the 55.8% recorded in 2017.53.”

While geopolitical tensions have “exerted a drag” on trade, the effect has been offset by growing trade between countries that are “geopolitically aligned”.

The report concludes that the risks may not be as dramatic or disruptive as some might fear. 

The report also stresses the need for policymakers and businesses to navigate this complex and evolving landscape by adapting to changing trade patterns, diversifying supply chains, and fostering greater international cooperation on critical global challenges. 

Meanwhile, the continuing trend of "friend-shoring”, where countries prioritise trade with geopolitical allies was noted in the report, is likely to further fragment global supply chains and could have significant implications for businesses and consumers. 

With the global trading system facing a period of uncertainty, the report acknowledges the resilience of global trade while warning of significant headwinds in the years to come. Policymakers and businesses must navigate these challenges by embracing a more nuanced approach to trade policy, fostering greater international co-operation, and adapting to the changing realities of the global economy.