The World Bank has issued a stark warning, indicating that global growth could fall even lower than anticipated.
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This grim outlook is primarily driven by escalating trade barriers, with the report emphasising that the average effective tariff imposed by the United States is at its highest level in nearly a century, even with a temporary pause in reciprocal tariffs.
The report warns of severe consequences: ‘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’.
The World Bank’s call for fostering “dialogue and cooperation” to address global imbalances appears to be a vague and likely ignored plea given the current geopolitical climate.
These tariff measures have exacerbated an already lower trend in global growth, disrupting a potential recovery in global trade and investment, which are crucial drivers of long-term development.
The downgrade to global growth this year is “principally driven by the advanced economies.” In the US, growth is expected to “decelerate sharply in 2025 to 1.4 percent,” with investment spending “particularly hard hit.”
Growth in 2026 is predicted to rise marginally to 1.6 percent, while resilience in US labour markets continues to diminish.
The situation in the Euro Area may be even worse, with surging uncertainty and financial volatility poised to “prolong the bloc’s economic weakness,” hindering recovery in investment and trade.
Growth in the region is set to slow to just 0.5 percent this year and average 0.9 percent for 2026–27.
Japan’s growth is expected to rise to 0.7 percent this year from 0.2 percent in 2024, but this is a downward revision of 0.5 percent from earlier projections due to slowing external demand amid increased trade barriers and weaker real wage growth.
China’s growth is also projected to decelerate from 5 percent in 2024 to 4.5 percent this year, falling to 4 percent in 2026 and 3.9 percent in 2027.
The “emerging market and developing economies (EMDE)” face a similarly bleak prospect, with growth expected to “slow significantly” in 2025 to 3.8 percent, with only a “modest” pickup in 2026–27.
This projected growth rate is “well below pre-pandemic averages and the pace that is needed to create sufficient jobs to meet working-age population growth.”
The report also highlights that many EMDEs’ capacity to respond to negative shocks has diminished due to sharp pandemic related increases in debt, elevated poverty rates, and waning official development assistance.
The escalating debt burden in EMDEs, exacerbated by rising interest rates since 2022, is a growing concern.
Fiscal deficits in the 2020s have averaged 6 percent of GDP in developing economies, the highest levels this century, with interest payments alone accounting for about a third of the deficits.
International economist Joseph Stiglitz recently noted that, according to United Nations data, some 54 countries spend more than 10 percent of their tax revenues on interest payments alone, with average interest payments as a share of tax revenue having almost doubled since 2011.
Stiglitz highlighted that “More than 3.3bn people live in countries that now spend more on debt service than on health and 2.1bn in countries that spend more on debt than on education,” indicating that these countries are being “sucked dry by international finance capital.”
The World Bank report also warned that volatility in financial markets could lead to a “material reappraisal of risk appetite [that] could lead to sharp asset price corrections in advanced economies, which would reverberate through global markets and might become disorderly if synchronous deleveraging by market participants leads to liquidity strains.”
This directly connects to the Trump tariff war; despite the usual safe-haven effect of the dollar during turbulence, its value has fallen since massive reciprocal tariff hikes were announced.
The growing lack of confidence in the US dollar as the global currency was also reflected in the rise of the gold price to record highs.
While forecasting a fall in the price of metals and other raw materials due to the world economic slowdown, the World Bank predicts that the price of gold will continue to rise, clearly indicating fears of increased dollar instability.
In his foreword to the report, the bank’s chief economist Indermit Gill summarised the dire conclusions: “Only six months ago, a ‘soft landing’ appeared to be in sight: The global economy was stabilising after an extraordinary string of calamities both natural and man made over the past few years. That moment has passed. The world economy today is once again running into turbulence. Without a swift course correction, the harm to living standards could be deep.”
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However, amid rising conflicts on both economic and political fronts, a “swift course correction” seems unlikely.
