World Bank sees global economy holding up despite trade headwinds

The global economy is proving more resilient than expected despite persistent trade tensions and policy uncertainty, according to the World Bank’s latest Global Economic Prospects report. Global growth is projected to remain broadly steady over the next two years, easing to 2.6% in 2026 before rising to 2.7% in 2027, an upward revision from the Bank’s June forecast.

The improved outlook reflects stronger-than-anticipated growth, led by the US, which accounts for about two-thirds of the upward revision to the 2026 forecast.

Even so, the report warns that if current projections hold, the 2020s are on track to be the weakest decade for global growth since the 1960s. The slowdown is widening disparities in living standards, with nearly all advanced economies ending 2025 with per capita incomes above 2019 levels, while about one in four developing economies remains poorer than before the pandemic.

Growth in 2025 was supported by a surge in trade ahead of anticipated policy changes and rapid adjustments in global supply chains. Those temporary boosts are expected to fade in 2026 as trade momentum and domestic demand soften.

The World Bank said easing global financial conditions and fiscal expansion in several large economies should help cushion the slowdown. Global inflation is projected to edge down to 2.6% in 2026, reflecting weaker labor markets and lower energy prices, before growth picks up in 2027 as trade flows adjust and policy uncertainty recedes.

“With each passing year, the global economy has become less capable of generating growth and seemingly more resilient to policy uncertainty,” said Indermit Gill, the World Bank Group’s chief economist and senior vice president for development economics. “But economic dynamism and resilience cannot diverge for long without fracturing public finance and credit markets.”

Gill said the global economy is set to grow more slowly than it did in the 1990s while carrying record levels of public and private debt. To avoid stagnation and rising joblessness, governments in both emerging and advanced economies must liberalize private investment and trade, rein in public consumption, and invest in technology and education.

Growth in developing economies is expected to slow to 4% in 2026 from 4.2% in 2025, before edging up to 4.1% in 2027 as trade tensions ease, commodity prices stabilize, financial conditions improve, and investment flows recover. Growth in low-income countries is projected to average 5.6% over 2026 and 2027, supported by firmer domestic demand, recovering exports, and moderating inflation.

Despite the rebound, the pace of growth is unlikely to narrow income gaps with advanced economies. Per capita income growth in developing economies is projected at 3% in 2026, about a percentage point below its average between 2000 and 2019. At that rate, per capita incomes in developing economies would reach only about 12% of those in advanced economies.

The report warns that these trends could intensify job creation challenges in developing economies, where about 1.2 billion young people are expected to reach working age over the next decade. Addressing the challenge will require policies focused on strengthening physical, digital, and human capital, improving the business environment through greater policy credibility and regulatory certainty, and mobilizing private capital to support investment.

Developing economies also face mounting pressure to restore fiscal sustainability after years of overlapping shocks, rising development needs, and higher debt-servicing costs. A special-focus chapter of the report examines the use of fiscal rules, which set limits on government borrowing and spending to manage public finances.

“With public debt in emerging and developing economies at its highest level in more than half a century, restoring fiscal credibility has become an urgent priority,” said M. Ayhan Kose, the World Bank Group’s deputy chief economist and director of the Prospects Group.

More than half of developing economies now operate at least one fiscal rule, covering areas such as deficits, public debt, government spending, or revenue collection. The report finds that countries adopting fiscal rules typically see budget balances improve by about 1.4 percentage points of GDP within five years, after adjusting for interest payments and economic cycles. Fiscal rules also raise the likelihood of sustained improvements in budget balances, though their effectiveness depends on institutional strength, economic conditions, and enforcement.