Tariffs, trade tensions and weak investment blamed for broad economic slowdown
The World Bank has sharply downgraded its global growth forecast for 2025, warning that the 2020s are on course to become the slowest decade for economic expansion since the 1960s unless policymakers take decisive corrective action.
In its latest Global Economic Prospects report, released Tuesday, the Bank cut its 2025 global GDP forecast to 2.3%, down from 2.7% projected in January. That would mark the weakest non-recession year since the 2008 global financial crisis.
“This would be the slowest rate of global growth since 2008, aside from outright global recessions,” the report said, noting that trade tensions—particularly those involving the United States—have eroded key foundations of global economic cooperation and investment.
Growth forecasts for major economies were also revised downward:
- United States: cut by 0.9 percentage points to 1.4%
- Euro area: reduced by 0.3 points to 0.7%
- China: unchanged at 4.5%, but expected to slow to 4.0% by 2026
The World Bank now expects average global growth for the 2020s to settle at 2.5%—the lowest for any decade since the 1960s. Chief economist Indermit Gill described the outlook as an “inflection point” for the world economy. “Outside of Asia, the developing world is becoming a development-free zone,” Gill warned.
Trump tariffs drive policy uncertainty
The latest downgrade comes amid escalating trade friction sparked by US President Donald Trump, who in April imposed a blanket 10% tariff on all imports and raised duties on key commodities such as steel and aluminium. While some of these measures have been paused until July, the World Bank said their economic effect is already being felt.
The average US tariff rate has climbed from below 3% to the mid-teens, its highest level in nearly a century. Retaliatory measures from trading partners, including China and the European Union, have compounded the uncertainty, prompting the World Bank to lower its growth projections for nearly 70% of the world’s economies.
In a press conference, World Bank Deputy Chief Economist Ayhan Kose likened policy uncertainty to “fog on a runway” that slows investment and undermines confidence.
Developing economies hit hardest
While advanced economies face a slowdown, the World Bank said developing countries would suffer deeper, longer-term setbacks. Outside China, developing economies are expected to be 6% smaller in 2027 than pre-pandemic forecasts, with some unlikely to recover their lost ground for two decades.
Factors behind the decline include:
- A collapse in global trade growth, from 5.9% in the 2000s to a projected 1.8% in 2025
- Sluggish investment and rising debt burdens
- Weakened commodity demand, affecting exporters in regions such as Sub-Saharan Africa and Latin America
The Bank estimates that more than half of low-income countries are already in or at high risk of debt distress.
Averting deeper damage
Despite the bleak outlook, the Bank outlined a path to recovery, urging coordinated global action across three fronts:
- Rebuild trade relations: Halving global tariffs relative to late-May levels could boost global growth by 0.2 percentage points in 2025–2026, the report says. Developing economies, which tend to have higher average tariffs, are encouraged to liberalise trade across all partners—not just the US—and pursue “deep trade agreements” that extend beyond tariffs to regulatory alignment.
- Restore fiscal discipline: Developing economies face record fiscal deficits—averaging nearly 6% of GDP—and rising interest costs. The Bank called for stronger tax collection, reduced subsidies, and more efficient public spending to expand fiscal room.
- Accelerate job creation: With the working-age population set to surge in regions like South Asia, Sub-Saharan Africa, and the Middle East, the Bank stressed the importance of labour market reform, education, and private sector growth.
“If the right policy actions are taken,” said Gill, “this problem can be made to go away with limited long-term damage.”
Outlook still at risk
While not forecasting an imminent global recession—the probability remains below 10%—the World Bank warned that risks remain “tilted decidedly to the downside”. A further escalation of trade restrictions, persistent inflation, or additional shocks could push the global economy closer to crisis territory.
The downgrade follows similar moves by other institutions:
- OECD: global growth for 2025 revised from 3.1% to 2.9%
- IMF (April): trimmed 2025 world growth forecast from 3.3% to 2.8%
With global trade “fragmenting,” debt rising, and trust in multilateral institutions fraying, the World Bank said the current moment offers one last opportunity to reverse course. Otherwise, the great convergence that once lifted a billion people out of poverty may continue to unravel—one tariff at a time.
