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The World Bank in its Global Economic Prospects report published on June 10, said that the global economy would see the slowest economic growth in 2025 outside of a recession since 2008. The WB, however, said global output would increase by 2.3 per cent in 2025. This is a reduction of 0.5 percentage points on its forecast at the start of the year. It further added "the downgrade to global growth this year is principally driven by the advanced economies".
The World Bank report comes after the OECD also downgraded its global economic outlook on June 3. The OECD has lowered its global economic growth forecasts for 2025 from 3.1 per cent to 2.9 per cent, with a smaller downward revision for 2026. If such predictions prove accurate, it will make the 2020s the weakest economic decade since the 1960s, when the world was under Cold war tensions. By 2027, Global GDP growth is expected to average just 2.5 per cent in the 2020s, the slowest pace of any decade since the 1960s.
In fact, the World Bank lowered its growth forecasts for nearly 70 per cent of all economies including the US, Japan, China, the EU as well as six emerging market regions from the levels projected at the very beginning of the year before Donald Trump took office. Since then, Trump's introduction of universal 10 per cent tariff on all imports coming into the US along with higher tariffs on steel and aluminium, caused financial markets to plunge in April.
The WB report also added that growth could even be lower as the forecast was made based on the pause in the imposition of reciprocal tariffs by the Trump administration which would remain in force.
"Against the backdrop of heightened policy uncertainty and increased trade barriers, the global economic context has become more challenging", the report said. It further added that the potential for further "further rapid shifts" in trade restrictive moves by countries will create more "sentiment sapping policy uncertainty". The Bank warned that increases in US tariffs would further cut growth leading to rising inflation
In fact, a series of 'on again, off again' tariff hikes have increased the effective tariff rate from below 3 per cent to the mid-teens, the highest level since in almost a century and triggered retaliation by China. It is clearly evident from the report that trade tensions are one of the major causes of weakening economic growth.
The growth projection primarily focused on Trump's latest tariff policies which have negatively impacted global trade flows prompting rinsing business uncertainty. "Uncertainty remains a powerful drag, like fog on a runway. It slows investment and clouds the outlook" World Bank Deputy Chief Economist Ayhan Kose told at a press interview.
WB report said, "this sudden escalation in trade barriers results in global trade seizing up in the second half of this year and is accompanied by a widespread collapse in confidence, surging uncertainty, and turmoil in financial markets." However, it stopped short of predicting a global recession, saying the chances of that were less than 10 per cent. Growth would improve by 0.2 percentage points if tariffs were halved, the World Bank found.
Growth is expected to "decelerate sharply in 2025 to 1.4 per cent" in the US with investment spending "particularly hard hit". Growth in 2026 is predicted to rise marginally to 1.6 per cent. Growth in the Euro Zone is expected to be even worse, just 0.7 per cent this year with 0.9 per cent in the following year. China is expected to slow down to 4.5 per cent this year from 5 per cent in 2024 and further falling to 4 per cent in 2026.
The situation in the emerging market and developing economies is not much better; growth is expected to slow down to 3.8 per cent in 2025 with only a modest pick up in 2026-27. The capacity of countries in these countries to respond to negative external shocks has diminished due to increasing debt burden, elevated poverty rates and waning development assistance. However, the poorest countries among them will be the hardest hit.
According to the report, by 2027, per capita income of high-income countries will be roughly where it had been expected before the Covid-19 pandemic. But developing economies would be worse off, with per capita income levels 6 per cent lower. It could take these economies about two decades to recoup the economic losses of 2020s, except China.
The growth in the debt burden with the rise of interest rates since 2022 is increasing in significance. According to the IMF public debt is projected to reach 100 per cent of global GDP by the end of this decade. Governments, particularly those in emerging market and developing economies, face both mounting debt service costs and shrinking room to maneuver in government budgets. The result is fewer resources for social programmes or investment, reduced capacity to respond to shocks and higher borrowing costs.
Joseph Stiglitz in an article in the Financial Times noted that according to UN data, some 54 countries spend more than 10 per cent their tax revenue on interest payments alone (in Bangladesh interest payment will account for 22 per cent of total revenue budget or 15.5 per cent of total spending during the fiscal year 2025-26).With the average payment on interest as a share of tax revenue having almost doubled since 2011.
He further added, "More than 3.3 billion people live in countries that now spend more on debt service than on health and 2.1 billion people in countries that spend more on debt than on education".
The report forecast that global trade would grow by 1.8 per cent in 2025, down from 3.4 per cent in 2024 and roughly a third of its 5.9 per cent level in 2000s. The Bank warns commodity exporters are likely to see a reduction in demand due to slowing growth. It further said global inflation was expected to reach 2.9 per cent in 2025, remaining above pre-Covid levels, given tariff increases and tight labour markets.
Slowing growth will impede developing countries in their efforts to generate jobs which is only sure way to reduce poverty and their drive to achieve higher levels of economic achievements. The report argues that as most developing countries today tend to have far higher tariffs than high income economies, developing countries in the face of rising trade barriers should seek to liberalise more broadly by pursuing strategic trade and investment partnership with other economies and diversify trade.
The Bank's Chief economist indicated that without swift course correction, the harm to living standards could be deep. But amid rising economic and geo-political conflicts, mostly initiated or supported by the US, such a course correction is a highly unlikely proposition.