World Bank Cuts 2025 Global Growth Forecast, Citing Trade Tensions and Uncertainty

The World Bank has revised its global economic growth forecast for 2025 downward by 0.4 percentage point to 2.3 per cent, warning that rising tariffs and an increasingly unpredictable trade environment are creating a “significant headwind” for almost all economies. The adjustment, detailed in the Bank’s latest Global Economic Prospects report released Tuesday, reflects the deteriorating outlook for nearly 70 per cent of the world’s economies, including major players like the United States, China, and the European Union, as well as all six emerging market regions.

The updated forecasts come as the global economy reels from the lingering impact of volatile trade policies initiated during Donald Trump’s presidency. The former U.S. president’s use of aggressive tariff strategies—frequently imposed and then retracted—has driven the effective U.S. tariff rate from under 3 per cent to the mid-teens, marking its highest level in nearly 100 years. These moves have prompted retaliatory tariffs from China and numerous other countries, disrupting global trade flows and increasing uncertainty.

Despite ongoing reassurances from U.S. officials, who maintain that the economic costs will be outweighed by an eventual surge in investment and promised tax cuts, the World Bank’s assessment joins a growing list of economic bodies lowering their growth forecasts due to the unpredictable nature of U.S. trade policy. While the report does not predict an outright recession, it does state that 2025 is on track to record the weakest global growth outside of a recession since the 2008 financial crisis. Looking ahead to the end of the decade, the Bank projects that by 2027, global GDP growth will average just 2.5 per cent—marking the slowest decade of expansion since the 1960s.

The Bank now expects global trade to expand by only 1.8 per cent in 2025, down from a projected 3.4 per cent in 2024 and a stark contrast to the 5.9 per cent growth rate seen throughout the 2000s. This latest forecast reflects tariff levels in effect as of late May, including a 10 per cent U.S. tariff on imports from most nations. Notably, it does not factor in tariff increases announced by Trump in April, which were later delayed until July 9 to allow further negotiations to unfold.

Global inflation is projected to remain elevated at 2.9 per cent in 2025, staying above pre-pandemic levels, as higher tariffs and tight labor markets continue to put upward pressure on prices. “Risks to the global outlook remain tilted decidedly to the downside,” the Bank stated, noting that their models suggest a further 10-percentage point hike in average U.S. tariffs—alongside proportional retaliatory tariffs from other nations—could further reduce 2025 growth by an additional 0.5 percentage point.

According to the report, such a scenario could trigger a severe deterioration in trade conditions, with global trade activity potentially grinding to a halt in the latter half of 2025. This would likely be accompanied by “a widespread collapse in confidence, surging uncertainty and turmoil in financial markets,” the Bank warned. Nonetheless, it assessed the risk of a global recession as remaining below 10 per cent.

In a bid to ease escalating tensions, senior officials from the United States and China are holding discussions in London this week. The focus of these meetings extends beyond tariff disputes to include restrictions on rare earth minerals—an issue that threatens to shock global supply chains and further dampen growth.

“Uncertainty remains a powerful drag, like fog on a runway. It slows investment and clouds the outlook,” World Bank Deputy Chief Economist Ayhan Kose told Reuters. Despite the gloomy forecast, Kose indicated there may be reasons for cautious optimism, citing ongoing dialogue and supply chain adaptations as encouraging signs. He suggested that trade could stage a modest recovery in 2026, with growth improving to 2.4 per cent. The rise of artificial intelligence and digital transformation could also provide a growth boost in coming years.

“We think that eventually the uncertainty will decline,” Kose said. “Once the type of fog we have lifts, the trade engine may start running again, but at a slower pace.” He added that while downside risks remain, trade is still flowing and that countries such as China and India continue to show solid growth. New trade partnerships under discussion across various regions might yield long-term benefits, he noted.

The report emphasized that much of the deterioration in the global outlook since January is attributable to advanced economies. Their collective growth is now forecast at just 1.2 per cent, down from 1.7 per cent in 2024. The U.S. economy, in particular, faces a steep downgrade, with its 2025 growth projection slashed by 0.9 percentage point to 1.4 per cent. The 2026 estimate was also reduced by 0.4 percentage point to 1.6 per cent. According to the Bank, a combination of rising trade barriers, “record-high uncertainty,” and increasing financial market volatility is expected to dampen private consumption, trade, and investment in the U.S.

Forecasts for other advanced economies also took a hit. Growth in the euro area is now seen at just 0.7 per cent, a 0.3 percentage point reduction, while Japan’s outlook was cut by 0.5 percentage point, also to 0.7 per cent.

Emerging markets and developing economies are expected to fare somewhat better, with growth forecast at 3.8 per cent in 2025—though still a downgrade from the 4.1 per cent estimate published in January. The report highlighted that poorer countries are likely to bear the brunt of the economic slowdown. By 2027, per capita GDP in developing countries—excluding China—is expected to remain 6 per cent below pre-pandemic levels. Alarmingly, the Bank warned that it could take these economies up to two decades to fully recover the economic ground lost during the 2020s.

Mexico, which relies heavily on trade with the U.S., saw one of the steepest revisions, with its 2025 growth forecast slashed by 1.3 percentage points to just 0.2 per cent.

Interestingly, China was the outlier among major economies, as the World Bank left its 2025 growth projection unchanged at 4.5 per cent. The Bank noted that China’s government still retains enough monetary and fiscal flexibility to provide meaningful support to its economy, and it remains positioned to stimulate growth if necessary.

By fLEXI tEAM