How the economy will develop in the world and in Ukraine’s largest partners in 2025

Under the conditions of war, the Ukrainian economy is even more dependent on the state of both the global economy as a whole and its largest partners Ukraine in particular. Next year promises to be little better than 2024, and for Ukraine it is even more difficult because of the high level of escalation of hostilities and the difficulty of continuing U.S. financial and military assistance, which will inevitably pose difficult questions for our country, to which there are no easy answers.

The state of the global economy

Despite geopolitical instability and relatively high inflation, the world economy is showing a fairly high rate of development. Major international organizations such as the IMF and OSER forecast a 3.2% y/y growth in global GDP in 2024, and 3.2.2% y/y – in 2025.

In 2025, the global economy will face largely the same influencing factors as in 2024:

1. Geopolitical instability. Military conflicts, trade wars and political instability pose significant risks to the global economy.
2. Continued inflation pressures. Thanks to a prolonged period of high interest rates, global inflation will be lower relative to peak levels but is likely to remain above central bank target levels in most countries. The IMF expects global inflation to be at 5.8% y/y and 4.3% y/y in 2024 and 2025, respectively.
3. Uncertainty about the green transition. Although the largest countries have been increasing investments in renewable energy and decarbonization until recently, there are increasing difficulties along the way. For example, the European Union, due to a long period of weak economic growth and high energy prices, and the United States, where the new administration is not very committed to green goals.

Ukraine, on the other hand, needs to understand what the macroeconomic situation will be like in the countries that are in one way or another important for the development of the Ukrainian economy.

EU economy

Assessments of the development of the European economy are extremely important for Ukraine. The European Union is not only the largest political partner of our country, but also the main market for Ukrainian goods, where more than 60% of our exports went by the end of 2023.

Forecasts for the EU economy remain restrained due to high dependence on energy imports, inflation and geopolitical tensions. The IMF lowered its forecast for eurozone GDP growth in 2024 by 0.1 p.p. – to 0.8% y/y. According to Eurostat, in Q1-Q2 2024 the GDP of the Eurozone increased by 0.5% y/y, in Q2-Q2 – by 0.9% y/y.

The key problems of the European economy development include the following:

1. Weak economic growth. The European economy is facing a slowdown in growth due to the accumulation of many problems: Brexit, Covid-19, global instability and then the war in Ukraine. The latter has brought additional instability, high energy prices and disrupted supply chains. As a consequence of all this, the EU now has a rather weak performance in industrial production and construction. EUROFER estimates that machinery and construction in the EU will contract by 4.1% y/y and 1.3% y/y respectively in 2024, although a slight increase of 1-1.3% y/y is still expected in 2025.
2. High energy prices. Although lower compared to the 2022 peak, they remain high and volatile, limiting the competitiveness of European products.
3. Weak position in global competition with China and the US.
4. Possible increase in import duties by the US.
5. Aging population. This puts pressure on the labor market and social programs.

Weak economic growth is expected to haunt Europe in the future. The IMF lowered its forecast for eurozone GDP growth in 2025 by 0.3 p.p. to 1.3% y/y, while Fitch expects 1.2%.

The weak economic growth outlook for the eurozone is largely due to the weakness of the German economy. Europe’s largest economy has contracted by 5% from pre-pandemic levels. The Kiel Institute for the World Economy (IfW) expects continued stagnation of the German economy – a contraction of 0.2% y/y in 2024 after a decline of 0.3% y/y in 2023. German GDP growth is expected to be zero in 2025. The main reasons for the worsening forecasts are the expected imposition of US duties, high energy prices, falling exports and the worsening crisis in German industry. Moreover, it looks like the German economy has already passed the point of no return, and it will drag down the whole of Europe with it.

At the same time, the situation in other major eurozone economies will be a little better. The IMF expects Spain’s economy to grow by 2.1% y/y, France’s by 1.1% y/y, and Italy’s by 0.8% y/y in 2025.

Supportive factors for the development of the European economy can be called such:

1. Lower inflation. Inflation in the European Union (HICP) in November amounted to 2.3% y/y, and it is approaching the desired level of 2%.
2. Lower interest rates. In December, the European Central Bank cut its discount rate by 25 bps for the fourth time in 2024. – To 3.15%. This contributes to stronger economic activity and lower borrowing costs. All other things being equal, further rate cuts can be expected.
3. Continued energy transition. Despite the challenges and emerging imbalances, the EU continues to invest heavily in renewable energy and reduce its dependence on external energy suppliers.

US economy

The US economy is in pretty good shape. The IMF has improved its growth forecast for 2024 from 2.6% to 2.8% y/y. Despite economic fluctuations, the U.S. labor market demonstrates stability – the number of jobs is growing and the unemployment rate remains relatively low (4.1%). The Fed is cutting interest rates (last round – by 25 bps to 4.25-4.5%) to balance inflation and economic growth, although further monetary easing will slow down. Complementing the picture are relatively low energy prices, allowing for a competitive advantage in input costs.

After the announcement of Donald Trump’s victory, stock indices rose, the dollar showed the largest growth since March 2020, bitcoin updated the maximum, and gold and oil fell in price. For their part, analysts improved their forecasts for the U.S.: the IMF raised its forecast for economic growth in 2025 from 1.9% to 2.2% y/y, the Fed – from 2% to 2.1% y/y.

At the same time, the world’s largest economy is facing several major challenges:

1. Geopolitical tensions in many regions of the world and with China, the Russian Federation, DPRK, and Iran.
2. Realization of Trump’s promises, in particular a sharp increase in import tariffs on goods from many countries. Increased import tariffs for China, Mexico, and Canada could create uncertainty for U.S. exports and imports. This will inevitably increase the cost of goods for U.S. consumers, reducing imports and exports as other countries begin to impose retaliatory restrictive measures. Moreover, it will lead to a loss of confidence of neighboring countries and partners.

If Trump’s other intentions are realized – the American economy could unbalance. For example, deportation of all illegal migrants threatens a labor shortage of farmers, as well as other “sharp moves” threaten to create various imbalances.

1. Possible rise in inflation. Although U.S. inflation (CPI) has declined in 2024 (estimated to 2.4% y/y, down from 3.4% y/y in 2023), there is room for it to rise. In particular, the Fed raised the US inflation forecast for 2025 from 2.1% to 2.5% y/y. The promised increase in import tariffs may lead to higher inflation, which may force the Fed to raise the discount rate. Recall that the target inflation rate is 2%.

At the same time, Ukraine will face more complicated relations with the new administration, reduction or even termination of financial and military aid. U.S. markets will remain closed for most positions of Ukrainian exports.

China’s economy

After decades of high growth rates, the Chinese economy is facing a slowdown. The IMF lowered its forecast for China’s economic growth in 2024 by 0.2 pp. – to 4.8%. The Chinese authorities are facing several massive challenges that are dragging down the country’s economy:

1. Tightening trade with the US and rising protectionism globally. Trade wars are creating uncertainty for the Chinese economy. The strongest challenge could be Trump’s promise to raise duties on Chinese imports to 60%, which could hit Chinese exports to the U.S. ($500 billion in 2023). In response to possible US trade sanctions, the Chinese authorities are even considering weakening the yuan. This would make Chinese exports cheaper, thereby mitigating the impact of tariffs, and create a looser monetary environment in China.
2. Slower economic growth. Due to the likely tightening of trade policy by a future U.S. administration, even the stimulus package enacted may not be enough.
3. Continued stagnation in the real estate sector. Unresolved problems with demand for real estate, large debts and a significant amount of unfinished projects of Chinese developers have a strong negative impact on the entire economy. However, the Chinese authorities are taking various measures to stabilize the real estate market, including financial support for troubled developers, preferential mortgage programs and sector reform.
4. Difficulties in reorienting to domestic demand. China is trying to shift from an export- and investment-based model to one based on domestic consumption, but this process is facing significant difficulties.
5. Demographic factor. An aging population and shrinking labor force will be long-term challenges to economic growth.

Nevertheless, under any circumstances, China now remains the engine of the global economy. In the fall of 2024, China announced a broad stimulus package worth $1.4 trillion. This should keep the economy growing at the government’s “target” of 5% in 2025, although the IMF expects growth of 4.5%.

Turkey’s economy

Turkey is an important economic and political partner of Ukraine, and for MMC it is a major consumer of the industry’s products, so the state of their economy is important to our country.

The key economic problem in Turkey is high inflation, which in November amounted to 47% in annual terms, which is fueled by devaluation (since the beginning of this year the lira has fallen in value by 17%), which creates risks for business and investment and leads to a decrease in the purchasing power of the population.

To fight inflation, the Turkish Central Bank has kept the key rate at 50% since March 2024, achieving some success as inflation has reached its lowest level since June 2023. Turkey’s inflation is expected to reach 44% y/y by the end of 2024.

Another challenge for Turkey is the cooling of the economy. According to TurkStat, Turkey’s GDP grew by 5.3% y/y in Q1 2024, while in Q2-Q3 it declined to 2.4% y/y and 2.1% y/y respectively. As a consequence, Fitch downgraded growth forecasts for 2024 from 3.5% to 2.9% y/y. Recall that by the end of 2023, the Turkish economy grew by 4.5% y/y. (+5.5% y/y in 2022).

Also significant remain high dependence on external factors – foreign investment and price fluctuations on world markets, as well as geopolitical instability in the region. The Turkish authorities are trying to actively increase their influence in the region, which is extremely saturated with military conflicts, although political instability scares away investors.

Geopolitical tensions in the region, inflation and a cooling economy will be key challenges in 2025 as well. In December, Fitch cut Turkey’s GDP growth forecast for 2025 from 2.8% to 2.6% y/y, with inflation forecast at 21% y/y by the end of next year.

Conclusions for Ukraine

Low European economic growth, geopolitical instability and relatively high inflation and interest rates globally will have a tangible impact on the Ukrainian economy. However, there is little evidence to suggest that the global environment will have a stronger impact on Ukraine than it did in 2024.

At the same time, Ukraine’s international political support is strong enough, and Western financial assistance for 2025 ($38.4 billion is envisioned in the 2025 state budget) looks sufficiently guaranteed. At the same time, the reduction or even termination of U.S. financial and military assistance will severely weaken Ukraine’s political and economic positions.

It is likely that the main factors of influence on Ukraine in 2025 will remain unchanged, so internal factors of development will be of greater importance – the defense situation, the level of energy and labor shortages, price dynamics, as well as the situation with logistics. At the moment, one can be cautiously optimistic about the economic prospects for 2025, as the National Bank in the fall improved its GDP forecast for 2025 from 4.1% to 4.3% y/y, compared to 4% y/y in 2024.