Global economy to remain stable in 2025-2026 with 2.7 percent growth: World Bank

A new report indicates that even if the global economy stabilizes in the next two years, developing economies are expected to make slow progress in catching up with the income levels of developed economies. The report shows that developing economies, which drive 60% of global economic growth, will have their weakest long-term growth prospects in the first 25 years of this century since 2000.

According to the World Bank's latest "Global Economic Prospects" report, the global economy is projected to grow by 2.7% in both 2025 and 2026, the same pace as in 2024, as inflation and interest rates gradually decline. Growth in developing economies is also expected to remain around 4% over the next two years. However, this is weaker than pre-pandemic performance and insufficient to promote poverty reduction and achieve the progress needed for broader development goals.

The World Bank's analysis is the first systematic assessment of the performance of developing economies in the first 25 years of this century. The analysis found that in the first decade, the growth rate of developing economies was the fastest since the 1970s. However, progress slowed after the 2008-09 global financial crisis. Global economic integration has stalled: foreign direct investment (FDI) inflows to developing economies as a share of GDP are about half the level of the early 21st century. New global trade restrictions in 2024 are five times the average level of 2010-19. As a result, overall economic growth fell from 5.9% in the 2000s to 5.1% in the 2010s and 3.5% in the 2020s. Since 2014, the average per capita income growth rate of developing economies, excluding China and India, has been half a percentage point lower than that of wealthy economies, and the gap between rich and poor is widening.

Indermit Gill, Chief Economist and Senior Vice President for Development Economics at the World Bank Group, said, “The next 25 years will be more difficult for developing economies than the past 25 years. Many of the forces that once helped them rise have dissipated. In their place are severe headwinds: high debt burdens, weak investment and productivity growth, and rising costs of climate change. In the coming years, developing economies need a new strategy that emphasizes domestic reforms to accelerate private investment, deepen trade relations, and promote more efficient use of capital, talent, and energy.”

The importance of developing economies to the global economy is higher than at the beginning of this century. They account for about 45% of global GDP, up from 25% in 2000. Their interdependence is also increasing: more than 40% of merchandise exports flow to other developing economies, double the level in 2000. Developing economies have also become important sources of global capital flows, remittances, and development assistance to other developing economies: from 2019 to 2023, they accounted for 40% of global remittances, up from 30% in the first decade of this century.

Therefore, these economies now have a greater impact on the growth and development outcomes of other developing economies. For example, a 1 percentage point increase in the GDP growth rate of the three largest developing economies, China, India, and Brazil, tends to result in a cumulative increase of nearly 2% in the GDP of other developing economies after three years. However, these effects are only about half of the growth impact of the three largest economies, the United States, the Eurozone, and Japan. In short, the well-being of developing economies remains closely linked to the growth of the three major developed economies.

M. Ayhan Kose, Deputy Chief Economist and Director of the Prospects Group at the World Bank, said, “In a world affected by policy uncertainty and trade tensions, developing economies need bold and far-reaching policies to seize untapped opportunities for cross-border cooperation. A good start is to establish strategic trade and investment partnerships with other fast-expanding developing country markets. Modernizing transport infrastructure and standardizing customs processes are key steps to cutting unnecessary expenses and promoting greater trade efficiency. Finally, sound domestic macroeconomic policies will enhance their ability to cope with the uncertainty of the global outlook.”

The report notes that developing economies may face serious headwinds in the next two years. High global policy uncertainty could undermine investor confidence and limit financing flows. Increased trade tensions could reduce global growth. Persistent inflation could delay expected interest rate cuts. However, the global economy could also perform better than expected, especially if its largest engines, the United States and China, can gain momentum. In China, additional stimulus measures could boost demand. In the United States, strong household spending could lead to higher-than-expected growth, which would have a favorable impact on developing economies.

The report argues that despite the headwinds, developing economies have many options to improve their growth prospects. With the right policies, these economies can even turn some challenges into significant opportunities. Addressing infrastructure needs, accelerating the climate transition, and improving human capital can improve growth prospects while also helping to achieve climate and development goals. At the same time, all countries should work together, with the support of multilateral institutions, to strengthen global trade governance.

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