Global economy stabilizes, but developing economies face weakest growth in decades

January 18, 2025 — Developing economies, which drive 60% of global growth, are projected to experience the weakest long-term growth outlook since 2000, according to the World Bank's latest Global Economic Prospects report. While the global economy is expected to stabilize over the next two years, developing economies will struggle to catch up to the income levels of advanced economies, the World Bank says.

The report forecasts global economic growth to remain steady at 2.7% in 2025 and 2026, mirroring 2024's pace as inflation and interest rates gradually decline. Growth in developing economies is also projected to hold steady at around 4% over the next two years. However, this is weaker than pre-pandemic levels and insufficient to alleviate poverty and achieve broader development goals.

The World Bank's analysis, the first systematic assessment of developing economies' performance in the 21st century, reveals a concerning trend. While the first decade of the century saw rapid growth in developing economies, progress has significantly slowed since the 2008-09 Global Financial Crisis. Global economic integration has faltered, with foreign direct investment inflows into developing economies declining significantly. Moreover, new global trade restrictions have increased substantially, further hindering economic growth.

"The next 25 years will be a tougher slog for developing economies than the last 25," said Indermit Gill, the World Bank Group's Chief Economist. "Most of the forces that once aided their rise have dissipated. In their place have come daunting headwinds: high debt burdens, weak investment and productivity growth, and the rising costs of climate change. In the coming years, developing economies will need a new playbook that emphasizes domestic reforms to quicken private investment, deepen trade relations, and promote more efficient use of capital, talent, and energy."

The report highlights the growing interdependence among developing economies. Their trade with other developing economies has doubled since 2000, and they now play a crucial role in global capital flows and remittances. However, the welfare of developing economies remains strongly tied to the growth of major advanced economies like the United States, the euro area, and Japan.

"In a world shaped by policy uncertainty and trade tensions, developing economies will need bold and far-reaching policies to seize untapped opportunities for cross-border cooperation," said M. Ayhan Kose, the World Bank's Deputy Chief Economist. "A good start would be to pursue strategic trade and investment partnerships with the rapidly expanding markets of other developing nations. Modernizing transportation infrastructure and standardizing customs processes are critical steps to cut unnecessary expenses and foster greater trade efficiency. Finally, sound macroeconomic policies at home will fortify their capacity to navigate the uncertainties of the global outlook."

The report acknowledges potential headwinds, such as high global policy uncertainty, rising trade tensions, and persistent inflation. However, it also emphasizes the potential for stronger-than-expected growth, particularly if the United States and China can boost their economies.

The World Bank argues that developing economies possess the means to improve their growth prospects. By addressing infrastructure needs, accelerating the climate transition, and improving human capital, these economies can transform challenges into significant opportunities. Furthermore, strengthened global trade governance, with the support of multilateral institutions, is crucial for all countries.

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