MASTERCARD ECONOMICS INSTITUTE

Economic Outlook 2025

Steering through change

Published: December 09, 2024 Download

The global economy has admirably navigated through a series of shocks over the past few years. With inflation nearly back on track across many economies and central banks recalibrating policy, the Mastercard Economics Institute (MEI) believes it is time for the economy to shift gears once again. MEI expects the global economy in 2025 to be defined by shifts in monetary policy, fiscal policy and a move toward equilibrium rates for growth and inflation. Here are the key economic forecasts for 2025:

• MEI forecasts 3.2% global GDP growth in 2025, following a 3.1% pace in 2024. Growth is expected to remain strong in the U.S., India, and the Gulf Cooperation Council (GCC), with modest expansion in Europe and much of Latin America and the Caribbean (LAC). In contrast, MEI expects a gradual stabilization in the Chinese Mainland on increased policy stimulus.

• Inflation eased significantly across the major economies in 2024, driven by lower prices for durable goods and easing inflation for nondurable goods. While tariffs continue to pose upside risks to goods prices, moderating wage growth is expected to ease inflation in select services industries. MEI forecasts trimmed global inflation at 3.2% (removing the top and bottom 10% outliers) and average weighted inflation for G10 countries at 2.4%.

• Consumers remain empowered as innovation and digitalization in the retail sector provide them with more choice and businesses with greater operational efficiency. MEI expects basket shifts; with lower prices and declining interest rates, spending on big-ticket items – electronics, furniture and appliances – will improve. While pent-up demand for experiences has diminished, MEI still observes a strong desire to prioritize spending on “big moments.”

• Of course, the outlook is not without risks. The geopolitical backdrop remains a significant issue in Europe, Asia and the Middle East. Additionally, there is uncertainty surrounding the costs and gains of the incoming US administration’s economic agenda.

While there is a common narrative around the world, it is crucial to recognize the important nuances by region and country. Our regional sections highlight these differences.

We also explore a few key themes shaping the 2025 global economy, leveraging Mastercard’s aggregated and anonymized data to provide a unique perspective. This includes cyclical changes – such as shifts in consumption as central banks lower rates or how consumers respond to price level changes – and structural changes, like the impact of migration on capital flows or workplace flexibility driving greater female workforce engagement. Finally, MEI addresses how trade policy will influence relative prices worldwide.

Mastercard Economics Institute 2025 forecasts by market

Notes: estimates are % change of annual average, color indicates variance above (green) and below (orange) an estimate of long-run growth.

Source: Mastercard Economics Institute for economies in our research coverage and IMF for rest. Long-run estimates from IMF and Oxford.

Map Source: Natural earth and highcharts

The boundaries and names shown on this map do not imply official endorsement or acceptance by Mastercard Economics Institute.

Global themes

• Pricing priorities: Travel twins and apparel +
  Consumers worldwide have been navigating a bumpy road of rising prices over the last five years, largely driven by the pandemic and geopolitical tensions. While inflation — the rate of increase in prices — has slowed significantly, price levels themselves remain elevated.

  As the prices of goods and services rise, purchasing behaviors are shifting gears. For essential goods and services with few substitutes, the quantities purchased are unlikely to decline significantly in response to price increases. However, for products and services with varied price and quality levels available, we may see a trend of "trading down," where consumers opt for more affordable versions. We examine this phenomenon in two specific sectors — travel and apparel — both of which are impacted by a growing number of options and more information, allowing consumers to seek the best value.

  In the travel economy, we explore the concept of duplication in destinations, which have been dubbed "travel dupes". But rather than focus on the unknown and hidden "dupes," we analyze "travel twins" which we believe are destinations that offer similar attractions and experiences at lower prices or with smaller crowds. MEI's analysis reveals that average annual year-to-date (YTD) growth in hotel transactions across duplicate destinations is nine percentage points higher compared to their more well-known counterparts.

  In Europe, the picturesque canals and bike-friendly atmosphere of Copenhagen mirror Amsterdam's charm, while in Mexico, Bacalar's crystal-clear waters and lush greenery rival the beauty of Tulum. Similarly, in Southeast Asia, Lombok's stunning beaches and serene landscapes offer an alternative to the bustling crowds of Bali.

  For the apparel sector, consumers can get access to the latest, most stylish fits in a timely fashion and at affordable prices, even after factoring in global transportation costs, thanks in part to the acceleration of e-commerce options. Using aggregated and anonymized Mastercard data, we segmented apparel brands into "high-end luxury" and "mass market" (more affordable). We then compared YTD spending growth on high-end luxury versus mass apparel brands across 26 countries. We found that spending growth on mass apparel brands is outpacing high-end luxury brands in 85% of these countries, with a seven-percentage point difference on average. However, there are some countries bucking this trend. In Mexico, high-end luxury spending is gaining traction, while in Japan, the depreciation of the yen is boosting visitor arrivals and visitor spending on high-end luxury goods. In fact, in Japan, spending on high-end luxury brands is outpacing mass brands by 14 percentage points.

  Will this continue in 2025? The sustainability of "trading down" will depend on whether consumers still view price levels as too high. With inflation rates easing and more time passing since the initial pandemic-induced shock, MEI expects this phenomenon to ease. However, consumers will remain savvy and informed, continuing to search for ways to make their dollars go further.

  Note : Growth differential calculated by subtracting 2024 YTD (Jan-Sep) spending growth on high-end luxury apparel from spending growth on mass apparel. Analysis covers both domestic and cross-border spending.

• Migration and money +
  The last few years saw significant movement in people and, by extension, capital. Notable standouts include net migration contributing 8.4% to Canadian population growth over 2019-2023, compared to 2.5% in the U.S. Without migration, population growth would have been only 0.7% in Canada and 0.8% in the U.S. The largest outflows of population came from India, Mexico, Russia, Syria, the Chinese Mainland, Bangladesh, Pakistan and Ukraine, driven by a variety of factors, including the search for better opportunities and security concerns.

  While migration results in a loss of human capital, it also generates substantial remittances, which serve as a lifeline for low- and middle-income communities in developing economies. According to the World Bank, remittances surged from $128 billion in 2000 to $857 billion in 2023, with an estimated growth of 3% in 2024 and 2025. The top five remittance recipients are India, Mexico, the Chinese Mainland, Philippines and Pakistan. Remittances are particularly important in South Asia, accounting for over 6% of Sri Lanka GDP and 5% of Bangladesh GDP. Economic recovery and local financial reforms are expected to sustain remittance growth in South Asia through 2025.

  In LAC, the U.S.-Mexico corridor is the world's largest remittance pipeline, with 95% of remittances to Mexico coming from the U.S., mainly from California and Texas. For lower-income households in Mexico, remittances constitute about a third of their income and are often essential for consumption. Remittances are also a vital component of GDP for many Caribbean and Central American countries. However, downside risks for remittances to LAC include a softening U.S. labor market and potential changes to immigration policies.

  There are cross currents for 2025. On the one hand, migration is likely to slow, particularly given changes in immigration policy in the U.S. and other developed economies. On the other hand, the continued digitalization of the payments industry allows recipients to shift to digital and mobile channels, considerably reducing frictions and costs.

  Natural change Net migration Population growth

  select

  •  Argentina
  •  Australia
  •  Austria
  •  Bahrain
  •  Belgium
  •  Brazil
  •  Bulgaria
  •  Canada
  •  Croatia
  •  Cyprus
  •  Czech Republic
  •  Denmark
  •  Egypt
  •  Estonia
  •  Finland
  •  Germany
  •  Greece
  •  Hungary
  •  India
  •  Indonesia
  •  Ireland
  •  Italy
  •  Kenya
  •  Kuwait
  •  Latvia
  •  Lithuania
  •  Mexico
  •  Morocco
  •  Netherlands
  •  New Zealand
  •  Nigeria
  •  Oman
  •  Poland
  •  Portugal
  •  Qatar
  •  Romania
  •  Saudi Arabia
  •  Slovakia
  •  Slovenia
  •  South Africa
  •  Spain
  •  Sweden
  •  United Arab Emirates
  •  United Kingdom
  •  United States

• The SHEeconomy +
  In the last several years, the global economy saw the "great resignation" turn into the "great return". To varying degrees across countries, there has been a return of workers, particularly in the younger cohort and, interestingly, women. This is known as the SHEconomy.

  Examining data from the OECD, we find that the "cyclical" labor force participation rate, which measures the percent of the population aged 25-54 that is working or looking for work, has exceeded its 2019 levels for women in 38 out of 46 countries in the sample, while only 23 out of 46 countries show a higher participation rate for men.

  Take India, which is a country of rapid labor force expansion and strong economic growth, the participation rate for women aged 25-54 is up 12 percentage points from 2019 to 2023, versus only a one percentage point gain for men of the same age. Even more starkly, in countries such as Chile, Turkey, South Africa and Finland, the female participation rate has increased, while the male participation rate has declined. There are several potential explanations for this phenomenon. For one, women's labor force participation is structurally lower compared to men globally, providing a longer runway for growth. More specific to this economic cycle, it likely reflects the disproportionate job creation in female-dominated sectors such as healthcare and education. Additionally, the rise of remote work may benefit women, as it expands job opportunities and makes it easier to balance the demands of work and family life. Many of these dynamics are expected to remain true in 2025, leading MEI to anticipate that this trend will persist.

  This increase in female participation is particularly important in advanced economies with low population growth. Greater participation in the workforce among young women will help counter the unfavorable demographics which, all else equal, reduce the size of the workforce.

  Labor force participation rate (Age 25-54)

  Change 2019 vs 2023 ● Male    ● Female

• Policy pivot +
  In 2024, central bankers began steering monetary policy away from rate hikes toward cuts. In 2025, MEI expects to see the consequences of these policy shifts. The reduction in interest rates has been observed across the globe in 2024, with the European Central Bank (ECB) on track to deliver 150 basis points (bps) of rate reductions, the Bank of England (BoE) a total of 100bps, the Bank of Canada 150bps, the Reserve Bank of Australia 100bps and, importantly, the Federal Reserve (Fed) cuts of 100bps.

  The reduction in interest rates aims to fine-tune monetary policy, keeping the economy on a smooth track as inflation cools and labor markets adjust. Importantly, central banks are aiming to reduce rates from a restrictive level to a "neutral" level, rather than a stimulative one. This means that while interest rate reductions will support the economy through easier financial conditions, central banks are intentionally not planning to reduce rates to the point where inflation and economic growth would reaccelerate above equilibrium. Nonetheless, lower rates translate to lower borrowing costs, influencing how consumers prioritize their purchasing power.

  At MEI, we have developed a framework to test the sensitivity of interest rate cuts to changes in the consumer basket. For simplicity, we focus on unanticipated policy shifts from the Federal Reserve and the spillover effects on other countries. In order to compare the relative sensitivities of various categories of spending in the U.S., Canada, and the U.K. to U.S. monetary policy surprises, MEI examined the impact of an unexpected 100bp cut in the Fed funds rate on overall financial conditions, which capture a combination of asset prices, interest rates, exchange rates and other market measures. MEI then analyzed the influence of changes in U.S. financial conditions on real spending growth over the next year in the U.S., Canada and the U.K.

  As expected, the U.S. is more sensitive to changes in the Fed's monetary policy than other countries. However, MEI observes spillover effects through the financial conditions channel that influence spending trends in Canada and the U.K. These countries are likely to show heightened sensitivity to U.S. financial conditions, given their historically higher ratios of household debt to disposable income. Because of this, MEI expects almost twice as much growth for personal consumption in the U.S. than for the U.K. and Canada, one year after a surprise rate cut by Fed. In the case of Canada, being the country with the highest debt to disposable income ratio among the three of them, MEI expects the least consumption growth to occur.

  A consistent theme across the U.S., Canada and the U.K. is increased spending on household appliances, electronics and computer software, driven by easier financial conditions in the U.S. Interestingly, the impact on travel differs by country. For instance, while easier financial conditions in the U.S. lead to a rise in international travel by Americans, a similar effect is not observed among travelers from the U.K. and Canada.

  It is important to underscore that this model is illustrative, designed to represent the sensitivity of the consumer basket to financial conditions often regarded as a key mechanism for implementing monetary policy.

  United States Canada United Kingdom

  Note: Gray shaded boxes represent categories that are not significant (responsive to the change in financial conditions)

• Trade tensions +
  MEI expects developments on U.S. trade policy to impact the economic outlook of most countries around the world. There has been discussion amongst the new U.S. administration to propose increasing tariffs on imports from the Chinese Mainland by 60% and tariffs on the rest of the world by 10% to 20%. In addition to the Chinese Mainland, countries most at risk are those with the largest share of goods exports heading to the U.S. relative to their total exports. Mexico and Canada are highly dependent on the United States, but as the revision of the USMCA approaches ("new NAFTA" trade agreement), their negotiation positions differ.

  These fresh trade risks emerge as global trade in goods is already facing headwinds from economic nationalism, supply chain reconfigurations and military conflicts. However, it is often overlooked that trade in services, where traditional tariffs do not apply, has continued to grow. This growth is driven by the rise of the digital economy and a shift in consumer preferences from goods to services, a trend that has been further reinforced by the pandemic.

  MEI expects that imposition of tariffs - and likely counter-tariffs - would serve as a downside to real global growth and an upside to inflation. Growth is likely to be further impacted by uncertainty that will weigh on investment until these policies become clearer. However, some impacts can be offset by greater intra-regional trade, a trend already underway, as well as by growing trade in data and in services, which can increase productivity and be deflationary. These potential benefits, however, will play out over a more extended period.

  Argentina Australia Austria Belgium Brazil Canada Chile Chinese Mainland Colombia Costa Rica Denmark Dominican Republic Ecuador Finland France Germany Guatemala Honduras Hong Kong SAR India Indonesia Iraq Ireland Israel Italy Japan Korea Malaysia Mexico Netherlands Norway Peru Philippines Poland Russia Saudi Arabia Singapore South Africa Spain Sweden Switzerland Thailand Turkey U.K. Venezuela Vietnam Euro Zone Taiwan United Arab Emirates

  Canada

  U.S. % of total exports and balance of payments

Regional themes

United States

United States: The laws of motion

Key messages:

• Fundamentals for the U.S. economy are favorable, but external factors, most notably policy changes, could alter momentum.
• Lower interest rates will support activity in interest-sensitive sectors, as well as consumers and businesses that depend on financing.
• MEI's analysis of aggregated and anonymized zip-code-level data reveals that gains in discretionary spending are driven by higher income populations, a trend that could continue in 2025.

To quote Newton, "an object in motion remains in motion at constant speed and in a straight line unless acted on by an unbalanced force." This principle can be applied to the U.S. economy in 2025. MEI anticipates that policy changes will play a pivotal role in shaping the nation's economic trajectory. On the one hand, MEI expects a positive boost from deregulation and its potential impact on sentiment. On the other hand, factors such as tariffs, shifts in immigration policy and heightened policy uncertainty could act as headwinds. Additionally, policies leading to an expanded deficit, including changes to the tax code, are likely to have a more pronounced impact on the economy in 2026 rather than 2025.

The combination of the favorable handoff from 2024 (MEI expects 2.8% real GDP growth in 2024) and expected policy changes leaves MEI to forecast 2.3% growth in real GDP in 2025. MEI expects CPI inflation of 2.7% and core CPI (ex-food and energy) inflation of 3.0% in 2025.

It is important to emphasize that consumers are experiencing the economy in markedly different ways. Those who own homes and financial assets have benefited from significant increases in asset values since 2019, making them more likely to spend on discretionary goods and services. In contrast, other consumers face economic pressures, including elevated prices for essentials and high borrowing costs.

MEI's analysis of aggregated and anonymized Mastercard data across the top 10% and bottom 20% of zip codes, ranked by income data from the Census Bureau, reveals the former outpacing in spending on discretionary categories and travel and experiences. However, the gap in spending growth between the top and bottom income cohorts on essentials is relatively narrow. We explore this differential by state, which shows a more uniform spending picture across the country for essentials. Indeed, the economic narrative is not one-story fits all.

In addition to carefully monitoring the policy environment, MEI is also focused on the path in the labor market. Job creation has moderated from its elevated levels at the start of 2024. While not our base case, if the hiring rate were to fall further, there is a risk of slowing net job growth and a further increase in the unemployment rate. This would impact wage growth and, therefore, consumption.

Discretionary retail and services Non discretionary retail and services Travel, entertainment and recreational services

Canada

Canada: Tailwinds stronger than headwinds

Key messages:

• In 2025, MEI expects the Canadian economy to grow at a moderate pace as the benefits of lower interest rates and easing inflation offset the effects of slower population growth.
• Lower interest rates should alleviate household stress by reducing the burden of debt payments outpacing income growth. The economic trajectory differs across provinces, driven by housing conditions.

MEI forecasts real GDP growth of 1.8% in 2025, slightly above the 2024 estimate of 1.6%. This modest uptick in growth reflects tailwinds expected to offset prevailing headwinds. On the upside, the Bank of Canada (BOC) is likely to continue cutting interest rates, reaching 2.75% by April 2025, as inflation aligns with its 2% target. MEI projects CPI inflation to ease to 2.1% year-over-year (YOY) in 2025, down from 2.5% in 2024.

MEI expects that recently announced tax-relief measures will boost consumption growth in the first half of 2025. Lower rates are expected to promote job growth, stimulate consumer spending and revive activity in the housing market. Business investment is also likely to rise, supported by lower interest rates and the anticipated pickup in economic growth. However, MEI expects these tailwinds to be partially offset by elevated debt burdens, slower population growth and heightened policy uncertainty. Notably, Canada's GDP per capita has declined, signaling underlying economic challenges.

The housing market remains a focal point due to the strain from elevated household debt. With debt payments outpacing income growth, consumers continue to feel the squeeze of past interest rate hikes. MEI's analysis of SpendingPulse insights, which track in-store and online retail sales across all payment methods, reveals robust consumer spending growth per capita in Quebec and the Maritimes between the first half of 2022 and the first half of 2024, contrasting with softness in BC and Ontario. This divergence stems from lower household debt-to-income ratios in Quebec and the Maritimes, while higher home prices in BC and Ontario have led to sharper increases in mortgage payments. Although lower rates should boost consumer spending overall, not all households will benefit equally. Consumers with five-year fixed rate mortgages renewing in 2025 will likely face higher debt payments, further limiting their spending power.

Beyond monitoring potential shifts in trade policy with the U.S., Canada's largest trading partner, MEI is focused on population growth trends. While a slowdown in population growth may weigh on aggregate economic growth, it could also reduce pressure on shelter inflation. This would support continued real wage growth, boosting consumer purchasing power.

Brazil

Brazil: Aiming to rebalance policies

Key messages:

• MEI expects Brazil's economy to slow down in 2025, after a period of overheating driven by fiscal policy.
• A more balanced outlook is anticipated as fiscal policy shifts to reduced stimulus, while higher rates help stabilize the economy.
• Consumer behavior in 2025 is likely to be more conservative, with higher rates and reduced fiscal transfers leading to softer consumption.

Brazil is projected to shift toward slower, more sustainable growth in 2025 as the economy adjusts from a period of overheating. MEI projects real GDP growth at 2.0% for the year, down from around 3.0% in prior years when Brazil repeatedly surpassed expectations. While this can be considered good news, it has also led to a tighter labor market and increased the usage of available capacity, which now limits the pace of future growth. Additionally, fiscal policy has been overused, requiring adjustments.

Inflation is signaling the need for correction. MEI projects inflation at 4.3% in 2025, following an estimated 4.7% in 2024 – above the central bank's target ceiling. Inflation tends to act as a thermometer of the economy; if it's too high, policy adjustments are needed. With the inflation target at 3.0% and inflation running around 4.0%, more policies may be implemented to rebalance the economy.

Regarding policies, MEI expects that the Brazilian central bank will continue to hike rates, while fiscal policy will be pressured to slow down. MEI forecasts central bank rates at 14% by May 2025 (with risks of more hikes needed.) Assuming a deceleration in fiscal policy, there may be room for rates to return to 13% by the fourth quarter in 2025. In terms of fiscal policy, a deceleration in spending growth is expected in 2025 after strong expansion in recent years.

In such a scenario, consumers tend to become more conservative. For 2025, MEI forecasts a deceleration in private consumption from its previous steep growth (chart below), reflecting more expensive credit and less support from fiscal transfers. Consumers will likely absorb the impact of higher rates in the coming quarters, which should soften consumption of durable goods and non-essential services.

Risks to the MEI forecast appear to be biased toward a more challenging outlook. On the positive side, a stronger harvest and faster macroeconomic policy adjustments could lower perceived risk, making the measures less costly and putting the economy in better shape by the end of 2025. On the more challenging side, smaller-than-needed fiscal adjustments could force the central bank to hike rates further, pushing growth to a softer pace and leading to a less organized adjustment.

Argentina Costa Rica Brazil Colombia Chile Ecuador Mexico Peru

Latin America and Caribbean

Latin America and Caribbean (excluding Brazil): Dealing with the consequences

Key messages:

• Countries in the region are expected to experience growth divergence in 2025 due to varying monetary and fiscal policy stances.
• Mexico and Central America will face potential impacts from changes in U.S. trade and migration policies.
• Fiscal policy will remain a key focus, with inflation serving as the primary thermometer of policy success.

LAC is a truly diverse region, with countries at various stages of development and different global connections. Despite these differences, all countries in the region will face the consequences of local and global policies in 2025. Locally, economies such as Chile and Colombia are expected to benefit from lower interest rates, while policy uncertainty may slow growth in Peru and Mexico. Argentina should benefit from strong macroeconomic and microeconomic reforms, leading to a rapid growth rebound.

Regarding inflation, the convergence debate will remain active. While inflation has been decelerating, most countries are yet to reach their targets for 2025. Peru's inflation is at desired levels, while Mexico, Colombia and Chile are still in the process of convergence, with inflation hovering around 4% and aiming for 3%. In Argentina, the ongoing disinflation process is expected to continue as policy adjustments take effect. MEI projects inflation at 35% in 2025, down from 120% in 2024, with risks skewed toward even lower inflation. Inflation remains a key indicator of success and the pace of convergence will guide the next steps in fiscal and monetary policy.

In LAC, fiscal policy performance will be a critical focus in 2025. While monetary policy is responding to inflation and could be adjusted if inflation stops converging (as seen in Brazil's recent shift), fiscal policy will require attention in many countries. In Mexico, the new administration will need to balance increased social spending with fiscal consolidation and may need to rely on new sources of revenue. Colombia is likely to continue discussions on tax increases. Chile has maintained a more balanced fiscal policy. Argentina has made strong fiscal adjustments but faces the challenge of ensuring long- term sustainability.

Furthermore, the region could benefit from the U.S. shift in focus towards the Chinese Mainland. While Mexico will likely be part of ongoing discussions about U.S. trade policy, the emphasis on reducing the Chinese Mainland's importance could, after some negotiations, be beneficial to Mexico and other countries in the region. However, global exposure of the region and social pressure against fiscal adjustments could hurt growth prospects. The Chinese Mainland's economic deceleration, coupled with U.S. policy discussions on trade and migration, could impact different countries in the region differently. Chile and Peru are more closely connected to the Chinese Mainland, while Central America and Mexico are more tied to the U.S. (see trade chart below). Policy changes in the U.S. could affect Mexico and Central American countries through trade and remittances. In Mexico, changes to the judicial system may also negatively impact business confidence.

Argentina Bolivia Brazil Chile Colombia Ecuador Mexico Panama Paraguay Peru Uruguay

United Kingdom

United Kingdom: Government spending to outweigh trade uncertainty

Key messages:

• MEI expects lower interest rates and higher government spending to support growth.
• Rising trade tariff concerns may elevate business uncertainty and dampen investment.
• Consumer spending is likely to strengthen, supported by wage growth and reduced savings rates.

In 2024, the U.K. economy experienced a strong rebound from the technical recession in 2023 driven by domestic demand. The cost-of-living crisis subsided, with consumers benefiting from elevated wage growth. Unlike in many European countries, U.K. consumers real disposable incomes — wage growth net of inflation — have recovered to pre-pandemic levels and are projected to continue to grow further, albeit at a slower pace, in 2025. MEI forecasts real GDP growth of 1.2% in 2025, up from 0.9% in 2024.

In 2025, MEI predicts U.K. households and businesses will continue to benefit from the Bank of England's (BoE) interest rate cuts that will further ease the mortgage squeeze and support investment. However, MEI expects the BoE to proceed more cautiously than other European central banks, cutting rates a cumulative 100bps in 2025. Not only is U.K. wage growth more stubborn, but MEI expects that the new government's inaugural budget, which delivered the biggest increase in spending, borrowing and taxation in post-war history, will increase inflation.

MEI expects expansionary fiscal policy to support growth next year, though some of the gains may be offset by heightened trade uncertainty stemming from proposed tariffs on European exports by the incoming U.S. administration. The implementation of such tariffs remains a key downside risk to MEI's outlook.

Despite purchasing power recovering to pre-pandemic levels, U.K. consumers have continued to save a higher proportion of their income compared to historic norms. According to MEI, lower interest rates should disincentivize some savings, thereby boosting household consumption. Similar to other Europeans, the Brits have also remained more price conscious during the period of elevated prices. However, as 2025 approaches, "trading down" behavior is giving way to a "trading up" mentality, with average transaction sizes increasing compared to last year, particularly in travel, hospitality and electronics. The chart below illustrates the YOY percentage change in average transaction size across spending categories, with bars representing each month from June to September 2024.

Europe

Europe: Fresh challenges

Key messages:

• MEI expects real GDP growth to accelerate, supported by declining interest rates, but remain soft as tighter fiscal policy and trade uncertainty will act as headwinds.
• MEI expects inflation to be close to target in most countries, but geopolitical risks and tightness in global liquified natural gas supplies pose upside risks.
• Consumer spending will benefit from a moderation in savings rates, reflecting domestic tailwinds.

In 2024, European economies emerged from nearly two years of stagnation as the impact of the large inflationary shock faded. Lower inflation allowed central banks to start cutting interest rates, which MEI expects to continue in 2025, supporting the recovery. MEI predicts the European Central Bank (ECB) to cut rates by a cumulative 125bps to 1.75% in 2025. MEI expects Eurozone real GDP growth of 0.9% in 2025, up marginally from an estimated 0.8% in 2024.

However, new headwinds to growth are expected. First, the re-introduction of EU fiscal rules means that several EU countries, including France and Italy, will need to cut government spending. The impact on GDP growth could be mitigated by the faster deployment of NextGen EU funds, particularly in southern and central and eastern Europe (CEE). Second, the new U.S. administration pledged implementing tariffs on European exports to the U.S. Even if the tariffs are delayed or only partially implemented, the increased uncertainty alone could delay investment decisions and boost precautionary savings among consumers. The full imposition of tariffs presents a key downside risk to MEI's outlook.

Meanwhile, consumer fundamentals remain strong. Unemployment rates may edge up, but MEI expects them to remain historically low. Real disposable income growth, the difference between wage growth and inflation, is likely to moderate but remain positive, meaning that consumer purchasing power will continue to grow. Furthermore, household savings rates, which remain elevated by historical standards, are likely to moderate as interest rates fall. Despite strong fundamentals, consumers remain price-sensitive, opting for budget rather than premium products and services, a behavior that should gradually unwind as purchasing power improves. The chart below illustrates how price-sensitive European consumers shifted to cheaper options in 2024, such as in fashion and restaurants.

MEI expects regional differences to persist. Uncertainty around trade policy will likely weigh more on manufacturing-heavy economies like Germany, whose car industry remains at the greatest risk of tariffs and less on services-driven southern European economies that may benefit from more U.S. tourists. MEI expects lower interest rates to reinvigorate housing markets and household consumption in the Nordics, where nearly all mortgages are at variable rates, with Nordic real GDP growth rising from 1.3% in 2024 to 1.7% in 2025. Household consumption will also drive growth in CEE, where real wage growth remains the strongest in the region, offsetting the uncertain trade outlook. MEI expects CEE real GDP growth to rise from 1.8% in 2024 to 3% in 2025.

Budget/Premium apparel Fastfood/Restaurants Vacation at home/abroad

Middle East and Africa

Middle East and Africa: Sustained growth

Key messages:

• Continued investment, public and private, will underpin solid non-oil GDP growth in the Gulf Cooperation Council (GCC).
• After progress on macroeconomic adjustment in Turkey and Egypt, both countries' central banks will be able to lower policy rates in 2025, supporting economic growth next year and into 2026. Tourism is likely to remain a bright spot for the region's economies.

In 2025, MEI expects real GDP growth to accelerate to 3.7% in the GCC, up from an estimated 1.8% in 2024, underpinned by robust non-oil economic activity and at least a partial recovery in oil production. Despite lower oil prices, diversification efforts should continue as governments leverage strong balance sheets to finance investment in infrastructure. Private sector investment should also benefit from lower interest rates, supporting employment and domestic consumption.

Population growth remains an important driver of economic activity for the region and particularly private consumption, even if the pace moderates. Demographic changes such as higher female labor force participation will also help to drive consumption growth by increasing households' disposable incomes.

Economic growth in Turkey and Egypt is constrained by macroeconomic adjustments including tight fiscal and monetary policies. With inflation moderating, monetary policy should ease in 2025, allowing growth to gradually rebound; however, geopolitical event risk in the Middle East and Africa region remains elevated.

According to the UN Tourism statistics, South Africa's outlook has improved following the formation of the national unity government which reduced uncertainty and boosted confidence, albeit from low levels. An improved electricity supply is encouraging, but a more meaningful rebound in activity remains constrained by lack of investment and structural reforms. ¹

MEI expects tourism to remain a bright spot for the region. The GCC's strong push to grow its tourism sector has made it one of the fastest growing destinations in the world. The strength of the USD-pegged currencies has also added to the demand for outbound travel also. Meanwhile, travel to Egypt has remained resilient and Turkey remains a favorite for European travelers. According to the UN Tourism statistics, South Africa is yet to recover to pre-pandemic levels, and tourism continues to represent a growth opportunity without capacity constraints seen in other countries.

Cross border Domestic Domestic and cross border

Select economies

•  Bahrain
•  Italy
•  Kuwait
•  Oman
•  Qatar
•  Saudi Arabia
•  United Kingdom

 ● Experiences  ● Things

Chinese Mainland

Chinese Mainland: Steering through uncertainty

Key messages:

• Official exit-entry immigration administration data highlights that there is still runway for travel recovery.
• MEI expects the Chinese Mainland's economy to stabilize at 4.5% in 2025, supported by increased policy stimulus.
• Consumer demand for domestic travel is likely to remain strong in 2025, while demand for discretionary goods is expected to stay weak.
• Re-escalating trade tensions could prompt the Chinese Mainland to intensify efforts to achieve greater economic and technological self-reliance.

MEI expects the Chinese Mainland's economy to stabilize at 4.5% in 2025, driven by increased government stimulus and more favorable base effects. However, there is a downside risk to this forecast if U.S.-Chinese Mainland trade tensions re-escalate. A potential U.S. decision to raise tariffs on all Chinese imports to 60% could significantly weigh down the Chinese Mainland's exports to the U.S., potentially reducing the Chinese Mainland's GDP growth by approximately 1.7 percentage points cumulatively during the 2025-2026 period.

There are three key factors currently weighing on the Chinese Mainland's economy: (1) weak consumer confidence, driven by rising concerns about job security and slower income growth; (2) a persistent housing market slowdown, with monthly housing sales falling by 60% from their peak in April 2021; and (3) disinflationary pressures, as the GDP output gap widened to -2.1% in the third quarter in 2024, eroding industrial profits and wage growth prospects for 2025.

To counteract these pressures, the Chinese Mainland has introduced a series of stimulus measures since September 2024, including a 20bps cut to the seven-day reverse repo rate; a 50bps cut in the reserve requirement ratio (RRR); establishing a CNY 500bn swap facility for non-bank financial institutions to borrow directly from the People's Bank of China (PBoC) to purchase stocks; and lowering the down-payment for second home purchases to a historic low of 15%.

These pro-growth measures are expected to help stabilize the Chinese Mainland's economy in 2025, but a significant reacceleration remains unlikely due to fragile consumer sentiment and structural headwinds. A sustainable recovery in the Chinese Mainland's economy will require substantial structural reforms to shift the country from an investment- and export-driven growth model to one focused on consumption and innovation.

Chinese consumer demand for domestic travel is expected to remain elevated in 2025, while the pace of international travel is likely to stay subdued due to budget constraints. The chart below shows our estimate of the Chinese Mainland's cross-border recovery rate based on official exit-entry immigration administration data. Consumer demand for home appliances and electronics may see a modest improvement, supported by the government's trade-in policy. Demand for healthcare and education is expected to remain steady. However, the likelihood of a material rebound in the Chinese Mainland's discretionary consumption in 2025 appears low, given the moderate economic outlook.

Asia Pacific

Asia Pacific: Divergent paths back to normal

Key messages:

• In 2025, Asia Pacific's (AP) growth is expected to align with 2024 levels, supported by lower inflation and interest rates.
• India is projected to remain the fastest growing major economy, both regionally and globally.
• MEI expects consumers to allocate more spending toward discretionary items, with travel continuing to be a priority.

2025 is set to be a year of discovering what normal looks like for economies that have been swinging around wildly since 2020. Many AP economies are likely to experience a slight pickup in GDP growth, though the Greater Chinese Mainland is likely to remain on a softening path. By comparison, India is likely to outperform, being less exposed to global demand and more driven by the structural rise of the middle class and investment. See the chart below for more insights on the overperformers versus underperformers in the region. MEI also anticipates Malaysia's economy will outperform in 2025, driven by a robust labor market and strengthening investment (projected 4.7% GDP growth with upside risks).

MEI expects consumer spending across AP in aggregate to remain resilient, supported by tight labor markets and a catch-up in inflation-adjusted wages. This trend is likely to be driven by declining inflation, while wage growth remains solid. This is especially the case in Australia, New Zealand and Singapore, where inflation is expected to ease to around 2-3% following more significant price shocks. By contrast, the Chinese Mainland, Hong Kong SAR and Taiwan experienced less price volatility. For additional details, refer to the Chinese Mainland section.

Meanwhile, expected lower interest rates in 2025 should bring some relief for households burdened by debt, freeing up consumers to shift some spend to discretionary goods and services. MEI expects interest rates to continue to fall, indicating an easing of monetary policy, with 100bps rate cuts likely from central banks in Australia and New Zealand, as well as rate cuts across most of north and southeast Asia. Japan is likely to be the main exception, as the Bank of Japan (BOJ) is signaling the need to keep raising rates to fight inflation.

As seen in other regions which exited from pandemic restrictions earlier, MEI expects AP travel trends to remain robust. The key factor to watch will be the extent to which labor markets stay strong. There is more room for recovery of outbound tourism from NE Asia, as Japan's exchange rate regains some of its multi-year losses and as the Chinese Mainland's outbound passenger recovery continues. According to IATA data from the UN Tourism Tracker, most other markets have already seen a full recovery of outbound tourism. Compared to the volumes of 2019 the total passenger demand recovery in AP was still 12% below 2019 levels as of mid-2024.

The main risks to keep an eye on in the region include the potential for higher oil prices to drive an unwelcome rise in headline inflation, as well as trade-related issues in a region highly exposed to global trade.

GDP and consumption | Indexed to 2019 = 100

seasonally adjusted, real, local currency

Select economies

•  Australia
•  Bangladesh
•  Chinese Mainland
•  Hong Kong SAR
•  India
•  Indonesia
•  Japan
•  Malaysia
•  New Zealand
•  Philippines
•  Singapore
•  South Korea
•  Sri Lanka
•  Taiwan
•  Thailand

Seeing around the corner

Following a successful 2024, the global economy sets course for another year of expansion, shaped by shifting fiscal and monetary policies. As the business cycle matures, the structural forces that have shifted the landscape will become more apparent, helping to define the new landing place for economies across the globe.

There is uncertainty surrounding the impact of policy changes in the U.S., which includes a substantial agenda covering immigration restrictions, tariffs, taxes, deficit expansion and deregulation. While some of these policies may support growth, others could constrain it and contribute to inflation.

Many proposals remain too underdeveloped to incorporate into a forecast, but our perspective will continue to evolve as the policy direction becomes clearer and as our data captures emerging trends.

To learn more about economic insights from the Mastercard Economics Institute, contact your Mastercard representative or request a demo.

Request a demo

Notes & Disclaimer

About the Mastercard Economics Institute

The Mastercard Economics Institute provides insights into global and local economic trends using advanced analytics and Mastercard's proprietary data assets. Established in 2020, MEI supports businesses, governments, and policymakers with economic monitoring services and timely analysis on economic themes including consumer spending, retail and travel trends, and other local and global barometers of economic performance. MEI offers valuable perspectives to inform decision-making and promote sustainable growth worldwide through our thought leadership series, and through Mastercard's specialized product offerings.

Disclaimer

© Mastercard International Incorporated. All rights reserved.

This Mastercard Economics Institute presentation (This "Presentation") and content or portions thereof may not be accessed, downloaded, copied, modified, distributed, used or published in any form or media, except as authorized by Mastercard. This presentation and content are intended solely as a research tool for informational purposes and not as investment advice or recommendations for any particular action or investment and should not be relied upon, in whole or in part, as the basis for decision-making or investment purposes. This presentation and content are not guaranteed as to accuracy and are provided on an "as is" basis to authorized users, who review and use this information at their own risk. This presentation and content, including estimated economic forecasts, simulations or scenarios from the Mastercard Economics Institute, do not in any way reflect expectations for (or actual) Mastercard operational or financial performance.

Footnotes

---

1. As reported from the UN tourism data statistics ↩

2. San Miguel De Allende is abbreviated as SMDA in "Travel twins" section ↩