The World Bank has revised its global economic growth forecast for 2025, projecting a slowdown to 2.3%, down from the 2.7% anticipated earlier this year. This adjustment marks the slowest pace of expansion since 2008, excluding periods of global recession. The downgrade is attributed to escalating trade tensions, increased policy uncertainty, and a significant decline in foreign direct investment (FDI), all of which are exerting pressure on economic activity worldwide.
Trade Barriers and Policy Uncertainty
The World Bank’s latest Global Economic Prospects report highlights that heightened trade barriers and an unpredictable policy environment are primary contributors to the anticipated slowdown. The report notes that growth forecasts have been reduced for nearly 70% of economies globally, affecting all regions and income groups. In particular, the United States is now expected to grow at a rate of 1.4% in 2025, half of what was predicted a year earlier.
Chief Economist Indermit Gill emphasized the urgency of addressing these challenges, stating, “The world economy today is once more running into turbulence. Without a swift course correction, the harm to living standards could be deep.”
Decline in Foreign Direct Investment
Compounding the economic slowdown is a significant drop in FDI, particularly into developing countries. In 2023, FDI flows into these economies fell to $435 billion, the lowest level since 2005. Advanced economies also experienced a decline, receiving just $336 billion, the lowest since 1996. This downturn in investment is attributed to rising trade and investment barriers, geopolitical tensions, and economic risks, which are undermining development prospects.
Deputy Chief Economist Ayhan Kose warned that the sharp drop in FDI should “sound alarm bells,” as it threatens infrastructure development, poverty alleviation, and climate change efforts. He called for bold domestic reforms, improved business climates, and global cooperation to reverse this trend.
Regional Impacts
The slowdown is expected to impact various regions differently. In East Asia and the Pacific, growth is projected to decelerate to 4.5% in 2025, down from 5% in 2024, due to higher trade barriers and heightened policy uncertainty. Europe and Central Asia are also anticipated to experience slower growth, with projections indicating a decline to 2.4% in 2025. Latin America and the Caribbean are expected to see the lowest growth among emerging market and developing economy regions, hindered by high trade barriers and longstanding structural weaknesses.
Long-Term Outlook
Looking ahead, the World Bank warns that the global economy is on track for its weakest decade since the 1960s. If current projections hold, the 2020s will average just 2.5% annual growth. The report underscores the need for countries to lower trade barriers, suggesting that halving tariffs could boost global growth by 0.2 percentage points in 2025 and 2026.
Conclusion
The World Bank’s revised forecast serves as a stark reminder of the interconnectedness of global economies and the far-reaching implications of trade policies and investment flows. Addressing these challenges will require concerted efforts from policymakers worldwide to foster a more stable and cooperative economic environment.
