From slowdown to recovery

By Nikolaj Schmidt, Global Chief Economist T. Rowe Price

The global economy is likely to experience a growth slowdown in early 2025 if weakening data from China begins to ripple through the rest of the world. The good news is that central banks, particularly the European Central Bank (ECB), are well-positioned to respond swiftly with rate cuts. A manufacturing-led recovery in the second half of the year appears highly plausible, though pinpointing the exact timing remains challenging.

Monetary policy has been restrictive since 2022. However, this has been offset by the lingering effects of generous fiscal support, resulting in two key outcomes:

1. Interest rate hikes have not been as devastating as they might have been in the past.
2. Central banks have been able to raise rates higher than initially expected at the start of the tightening cycle.

Conditions are now shifting. As fiscal impulses fade, the impact of these hikes is beginning to be felt, likely continuing into early 2025.

China’s Slowdown to Impact Global Markets

Despite recent stimulus injections from China, the macroeconomic outlook for the country remains uncertain. A slowdown in China will have global repercussions, but the effects won’t be evenly distributed. Europe, with its heavier reliance on manufactured goods exports, will likely feel the impact of weaker Chinese growth more acutely than the United States.

Recovery to Accelerate Transition to Manufacturing-Led Growth

High interest rates mean the ECB has ample room to ease monetary policy quickly, which is what we expect. Once rates are substantially lowered in Europe, the impact on growth will likely be felt rapidly. European households, which have accumulated significant excess savings since the coronavirus pandemic, are expected to increase spending.

Europe’s economic outlook could also improve further if tensions in the Russia-Ukraine conflict ease.

When recovery takes hold, it is likely to accelerate the ongoing shift toward manufacturing-led growth, which has lagged behind the services sector for several years.

In our view, three key factors will drive this transition:

1. The release of pent-up demand for interest-rate-sensitive goods.
2. Increased infrastructure spending, driven by the global push for renewable energy and the rise of generative artificial intelligence.
3. A growing trend of companies relocating production to "friendlier" countries to address supply chain vulnerabilities.

A Surge in Fixed Asset Investment to Boost Global Markets

These drivers share a common thread: each will require substantial capital injections. Industrials, energy, and materials sectors—providing solutions to these shifts—are expected to attract massive investment flows into physical assets over the coming years.

While these are multi-year trends, their impact on the global economy will likely become visible in 2025, particularly in the second half of the year. By then, we expect monetary easing to have spurred a global economic recovery, though it will likely remain uneven across regions, with activity shifting from the services sector to manufacturing.

Key Takeaway

A recovery in the second half of 2025 is likely to accelerate the transition toward manufacturing-led growth.