The global economy faces a challenging landscape, with the World Bank forecasting the slowest growth rate since 2008 for many economies worldwide. The latest report, titled Global Economic Prospects, sheds light on how heightened trade tensions and ongoing policy uncertainty are significant contributors to this downturn.
These predictions reveal that growth forecasts have been downgraded for nearly 70% of the world’s economies across various regions and income levels, emphasizing the widespread impact of these issues. This situation paints a sobering picture as we approach the end of the year, with global growth anticipated to decelerate to just 2.3% by 2025. This is nearly half a percentage point lower than projections made at the start of the year, though a global recession is not expected.
However, if the current forecasts of slow growth indeed materialize, the 2020s could experience the weakest average growth rates of any decade since the 1960s. Indermit Gill, the Chief Economist at the World Bank Group, aptly remarked that outside of Asia, the developing world seems to be on a path toward stagnation. The average growth rate in developing economies has been on a significant downtrend — from 6% annually during the 2000s, to approximately 5% in the 2010s, and now projected to drop below 4% in the 2020s.
One of the main issues underlying this slow growth is the downward trend in global trade growth. The average growth rate for global trade has also steadily declined, falling from a 5% average in the 2000s to around 3% in the current decade. Further complicating matters, investment growth has weakened while overall debt levels have surged to unprecedented heights.
According to the report, nearly 60% of developing economies are expected to experience slower growth this year. Low-income countries, in particular, face a downgrade in expected growth to 5.3% for the year, reflecting a decline from earlier projections. Tariffs and tight labor markets further contribute to upward pressure on inflation rates, which are forecasted to average 2.9% in 2025, remaining above pre-pandemic levels.
This slowing growth has severe implications for developing economies, as it hampers efforts to generate jobs, combat extreme poverty, and reduce income disparities compared to advanced economies. Per capita income growth in these regions is expected to reach just 2.9% by 2025, significantly lower than the average growth seen between 2000 and 2019.
If the development trajectories for economies outside of China remain aligned with the forecasted GDP growth of 4% for 2027, it could take them roughly two decades to return to their pre-pandemic economic performance levels. This reality is stark and concerning, as prolonged slow growth locks countries into a cycle of stagnation, making recovery increasingly complex.
Nevertheless, the World Bank cautions that if major economies take steps to mitigate trade tensions, global growth might rebound more quickly than anticipated. The report indicates that resolving current trade disputes and reducing tariffs could bolster average global growth by around 0.2 percentage points.
Emerging markets and developing economies have historically benefited from global trade integration but now find themselves precariously positioned at the forefront of ongoing trade conflicts. M. Ayhan Kose, World Bank’s Deputy Chief Economist, urged these economies to double down on integrating trade with new partners, pursue pro-growth reforms, and strengthen fiscal resilience to weather the economic storm.
In light of rising trade barriers, the report emphasizes the need for developing economies to pursue broader liberalization strategies. These strategies may include forming strategic trade and investment partnerships, and diversifying trade channels through regional agreements. Given that governmental resources are limited amid increasing developmental needs, it is critical for policymakers to prioritize mobilizing domestic revenues and fiscal spending aimed at the most vulnerable communities.
To accelerate economic revival, nations need to cultivate a more favorable business environment, promote productive employment opportunities, and equip workers with the skills required in the modern workforce. Creating effective labor markets that efficiently align workers with available jobs is of utmost importance.
Global collaboration will play an essential role in supporting the most vulnerable developing economies, particularly through multilateral interventions and concessional financing. Emergency relief and support for nations grappling with active conflicts are also necessary to facilitate significant economic recovery.
In conclusion, while the new World Bank report highlights a disheartening outlook for global economic growth, there remains room for optimism through strategic reforms and collective action. The path forward necessitates open dialogue and cooperation among nations to mitigate trade tensions, find innovative solutions, and rebuild a more prosperous economic future for all.
For a deeper insight into the state of the global economy, the full report can be accessed here.
