As economies around the world navigate the aftermath of pandemic-era policies, governments face crucial decisions about spending, taxation, and support measures. The near-term growth outlook for 2025 and beyond is being shaped by a complex blend of policy actions, expiring programs, and emerging fiscal challenges. In this article, we explore how fiscal stimulus—or its withdrawal—is influencing GDP trajectories, with a focus on the United States, the euro area, and China. We also examine the interplay with monetary policy and outline practical recommendations for a sustainable recovery.

Understanding fiscal policy’s influence

Fiscal policy encompasses government actions on spending, taxation, and transfers that directly sway aggregate demand. When authorities increase infrastructure outlays or extend benefits, they inject cash into the economy, boosting consumption and investment. Conversely, spending cuts or tax hikes can create a headwind. According to the Hutchins Center Fiscal Impact Measure, in Q1 2025, combined federal, state, and local fiscal policy decreased U.S. GDP growth by 0.5 percentage point due to reduced federal purchases and workforce downsizing.

Net transfers such as household benefits provided a modest lift, adding under 0.1 percentage point. However, as pandemic-era supports have expired or been scaled back, the measure is forecast to remain negative through Q1 2027, indicating persistent fiscal drag. Policymakers must weigh the benefits of deficit reduction against the risk of subdued growth.

Near-term global growth outlook

Global growth forecasts point to a moderation from pandemic peaks. Morgan Stanley projects world GDP expansion of 2.9% in 2025, down from 3.3% in 2024, and 2.8% in 2026. In the United States, the OECD and major forecasters expect real GDP growth of 1.5–1.6% in 2025, decelerating further in 2026. Higher tariffs and trade tensions are exerting potential headwinds from tariffs, while expiring tax provisions and political gridlock limit fresh stimulus.

Europe’s outlook is slightly brighter due to ongoing NGEU funds and targeted support in Germany, but weak industrial activity and global uncertainty cap growth near or below 2%. China, grappling with a property sector adjustment and cautious consumers, aims for sub-5% growth, supported by gradual fiscal easing since late 2024.

Regional snapshots: United States, euro area, China

This data underscores how regional choices—from U.S. workforce reductions to German infrastructure boosts—are steering local and global growth.

Monetary and fiscal interplay: balancing act

Central banks and treasuries must coordinate policy to avoid sending mixed signals. In the United States, the Federal Reserve plans gradual rate cuts beginning Q3 2025, assuming inflation expectations remain anchored. Yet, uncertain fiscal and monetary outlook means that premature easing could reignite price pressures, especially if trade barriers push import costs higher.

In Europe, the ECB is set to conclude its rate cutting cycle by mid-2025, dropping its deposit rate to around 1.75%. This dovish stance can amplify the impact of fiscal support, but only if governments maintain disciplined spending that targets long-term productivity gains.

Lessons from past stimulus and current challenges

The global response to COVID-19 demonstrated the potency of large-scale fiscal intervention. Australia’s 2020 fiscal packages totaled over 15% of GDP, delivering rapid demand support. Most of these extraordinary measures have now expired, highlighting how expiring crisis-era support measures are shifting growth dynamics from boom to plateau.

Today’s fiscal adjustments, while more modest, illustrate how both introduction and removal of policies feed directly into forecasts. In the U.S., the tapering of business credits and reduced federal purchases have turned policy from tailwind into drag.

Risks and policy recommendations

Looking ahead, several risks could tip the balance:

• Escalating trade conflicts that further disrupt supply chains and raise consumer prices.
• High deficits leading to rising bond yields, forcing spending cuts or higher taxes.
• Policy uncertainty undermining business investment and hiring decisions.

To navigate these challenges, governments should consider a balanced agenda that prioritizes sustainable growth:

• Modernize infrastructure and social programs to boost productivity and equity.
• Align fiscal incentives with green investments for long-run resilience.
• Target support to vulnerable households to maintain consumption without fueling inflation.
• Ensure transparent, rules-based fiscal frameworks to anchor expectations.

Conclusion: charting a course for resilience

As the effects of pandemic-era spending fade, near-term growth forecasts increasingly reflect the tug of fiscal contraction rather than expansion. Policymakers must strike a careful balance—leveraging fiscal stimulus where it offers high returns, while safeguarding against rising deficits and inflationary pressures.

By combining prudent monetary easing with strategic fiscal investments—in infrastructure, environmental transition, and social safety nets—economies can secure a more robust trajectory for 2025 and beyond. The choices made today will determine whether the fiscal drag gives way to renewed momentum or deepens global slowdowns.