The Global Economic Prospects report was published by the World Bank on January 13, 2025. The report claims that in 2025, the world economy showed resilience in the face of trade disputes and uncertain policy. Increased investment in artificial intelligence, a strong risk appetite, and hoarding of products were the causes of this resilience.
Despite the recent five years of robust global growth, emerging markets and developing economies (EMDEs) are still struggling to catch up to pre‑pandemic levels. The main points of the report are listed below.
Global Outlook
Global growth rate is expected to decrease to 2.6 percent in 2026 due to a slowdown in demand for traded goods and softer domestic demand in key economies. However, the growth is projected to increase to 2.7 percent in 2027, as monetary easing supports domestic demand and trade recovers with declining uncertainty.
As compared to the previous estimation, in June 2025, the global growth rate has increased by 0.4 percentage points for 2025 and by 0.2 percentage points for 2026. The upward revision is due to stronger growth in major economies and a reduced impact of trade policy changes and uncertainty.
The report states that this decade (i.e. 2020s) remains the weakest decade for growth for the global economy since the 1960s, despite showing resilience. Global inflation is expected to moderate as the inflation pressures are easing.
Advanced Economies
The United States is estimated to grow by 2.2 percent in 2026, an upward revision due to robust investment in AI technologies and a resilient labour market. In contrast, the Euro Area and Japan are expected to witness slower growth at approximately 0.9 percent and 0.8 percent, respectively.
A stark divergence persists between advanced and developing nations; while nearly all advanced economies have exceeded their pre-pandemic income levels, many developing nations continue to struggle below 2019 benchmarks.
Emerging Market and Developing Economies (EMDEs)
With one in four of the emerging markets and developing economies poorer than in 2019, growth prospects remain weaker. These nations face significant challenges, including subdued investment, weak productivity, and climate shocks. Additionally, commodity exporters face pressure from softening oil prices, which hover around $60 per barrel.
Inflation and Commodities
As commodity prices soften, global inflation is expected to ease to around 2.6 percent in 2026. Oil prices, in particular, are expected to decline from an average of $69 per barrel in 2025 to approximately $60 per barrel in 2026.
Risks
The global economic outlook is subject to several downside risks, including escalating trade tensions and new tariffs, alongside potential financial volatility and capital flight in emerging markets and developing economies (EMDEs). Furthermore, persistent climate shocks threaten food security and long-term growth, while policy uncertainty in advanced economies continues to create significant global spillovers.
Fiscal Rules
The report defines fiscal rules are formal, quantitative limits on government borrowing and spending designed to promote fiscal discipline. More than half of emerging markets and developing economies now use at least one rule. The report highlights deficit rules, debt rules, and expenditure rules as key types of fiscal rules. Deficit rules limit annual borrowing, debt rules cap total debt as a percentage of GDP, and expenditure rules restrict total spending or its growth rate.
Policy Recommendations
There are several policy recommendations stated in the report to foster sustainable growth. These recommendations include implementing structural reforms to boost productivity and investment, and encouraging trade cooperation to reduce barriers. It also calls for building climate resilience through sustainable infrastructure, developing strong debt management frameworks for EMDEs and implementing inclusive growth policies aimed at reducing poverty.
Indian Economy in the report
India’s GDP growth forecast for FY26 was revised upward to 7.2 percent, reflecting strong domestic demand, private consumption, and resilient services exports. Growth is estimated to moderate slightly in FY27 within a range of 6.5-6.6 percent due to a high base effect and external pressures.
In late 2025, India’s services exports were not significantly affected by US tariffs, and merchandise exports increased due to diversification of export markets. Real household incomes in rural areas are rising, and earlier tax reforms have improved fiscal resilience. Despite tariff winds, India is expected to maintain its position as the fastest-growing major economy in the world.
Conclusion
The report makes it evident that despite the global economy showing resilience, it remains fragile. The growth outlook is moderate, and risks are skewed downward. India stands out despite the prevailing divergences between developed and developing economies. Coordinated policy measures are urgently needed to prevent a ‘lost decade’ for development.
