World Bank lowers global growth forecast on tariff war

The global economy is set to suffer the consequences of heightened trade tension and policy uncertainty, with the World Bank estimating the pace of growth to fall to the slowest level since 2008 outside of global recessions.

The Washington-based multilateral lender projects world economy to expand 2.3 per cent this year, about half a percentage point lower than the estimates at the start of the year, it said in its latest Global Economic Prospects report.

The turmoil caused by Washington’s bid to levy historic tariffs on its global trade has resulted in “growth forecasts being cut in nearly 70 per cent of all economies – across all regions and income groups”, the lender said on Tuesday.

Global growth is projected to slow to 2.3 per cent this year, about half a percentage point lower than the rate that had been expected at the start of the year. A global recession is not expected. Nevertheless, if forecasts for the next two years materialise, average global growth in the first seven years of the 2020s will be the slowest of any decade since the 1960s.

“Outside of Asia, the developing world is becoming a development-free zone,” World Bank Group’s chief economist Indermit Gill said.

Trending down for three decades

Growth in developing economies has been ratcheting down for three decades – from 6 per cent annually in the 2000s to less than 4 per cent in the 2020s.

“That tracks the trajectory of growth in global trade, which has fallen from an average of 5 per cent in the 2000s to … less than 3 per cent in the 2020s. Investment growth has also slowed, but debt has climbed to record levels,” Mr Gill added.

The World Bank forecast for the global output is even more conservative than that of the International Monetary Fund's, which in April, slashed its growth projections on tariffs hitting 100-year highs. The IMF also warned that trade tension between the world’s two largest economies and Europe would further slow growth.

The fund lowered its 2025 global growth forecast by 0.5 percentage point to 2.8 per cent.

Although Washington has paused the historic high tariffs for a 90-day period and is negotiating with China and its other trading partners including the EU, the uncertainty has already hit global economic and trade activity.

Global economic headwind is expected to hurt about 60 per cent of all developing economies this year, that are set to rise by 3.8 per cent in 2025, more than a percentage point lower than the average of the 2010s.

Low-income countries are expected to grow by 5.3 per cent this year – a downgrade of 0.4 percentage point from the forecast at the beginning of 2025, the World Bank said.

Against rising trade barriers, developing economies should “seek to liberalise more broadly by pursuing strategic trade and investment partnerships with other economies and diversifying trade – including through regional agreements”, the World Bank said.

Regional outlook

In the Middle East and North Africa region, the lender expects aggregate gross domestic product to expand 2.7 per cent this year and further strengthen to an average of 3.9 per cent in 2026 and 2027.

In East Asia and Pacific, growth is expected to slow to 4.5 per cent this year and further weaken to 4 per cent on average in the next two years.

The World Bank expects Europe and Central Asia region economy to slow to 2.4 per cent this year, edging up slightly 2.6 per cent in 2026 and 2027.

South Asian economy is set to moderate to 5.8 per cent this year, while sub-Saharan African economic output is expected to edge up slightly to 3.7 per cent in 2025, according to world Bank data.