World Bank slashes global growth forecast as trade tensions bite

The World Bank has significantly lowered its 2025 global growth forecast to 2.3%, a 0.4 percentage point reduction, citing increased tariffs and heightened uncertainty, primarily attributed to U.S. trade policies. The report forecasts weakened growth for the U.S., China, and Europe, with global trade growth expected to slow to 1.8% in 2025, a sharp decline from previous years, while global inflation is projected to remain above pre-COVID levels at 2.9%; further escalation of trade barriers could severely disrupt global trade and financial markets, although the risk of a global recession remains below 10%.

Analysis

The World Bank has significantly downgraded its 2025 global growth forecast by 0.4 percentage points to 2.3%, primarily attributing this revision to the adverse impacts of higher tariffs and pervasive uncertainty stemming from U.S. trade policies. This downward adjustment affects nearly 70% of all economies, including the United States, whose 2025 growth forecast was slashed by 0.9 percentage points to 1.4%, as well as China and Europe. The report highlights that U.S. tariff rates have escalated from below 3% to the mid-teens, their highest level in almost a century, triggering retaliatory measures and constricting global commerce. Consequently, global trade growth is projected to decelerate to a mere 1.8% in 2025, a sharp decline from 3.4% in 2024 and roughly a third of its 5.9% level in the 2000s. Furthermore, global inflation is anticipated to remain above pre-COVID levels, reaching 2.9% in 2025, fueled by tariff increases and tight labor markets. While the World Bank stops short of forecasting a global recession, stating the risk is less than 10%, it warns that risks to the outlook are "decidedly to the downside." A further 10-percentage point increase in average U.S. tariffs, met with proportional retaliation, could shave another 0.5 percentage points off the 2025 global growth outlook, potentially leading to global trade seizing up and widespread financial turmoil. Emerging markets and developing economies are forecast to grow by 3.8% in 2025, a reduction from the 4.1% January forecast, with the report noting that poorer countries will suffer most, with per capita GDP in developing economies (excluding China) projected to be 6% below pre-pandemic levels by 2027. Despite these headwinds, China's 2025 growth forecast remains unchanged at 4.5%, and officials note that increased dialogue on trade and adaptive supply chains could offer some mitigation, though current uncertainty acts as a "powerful drag" on investment.

Key Decisions for Investors

• Investors should brace for heightened market volatility and a slower global growth environment, with particular caution advised for sectors highly exposed to international trade dynamics and tariff impacts.
• It is prudent to review and potentially adjust portfolio allocations, reducing overweight positions in economies and industries most vulnerable to escalating trade tensions and protectionist policies.
• Closely monitor developments in U.S. trade policy, U.S.-China relations, and global inflation trends, as these factors will be critical drivers of market sentiment and economic performance.
• While maintaining a diversified investment strategy, exercise particular diligence when considering exposures to emerging and developing economies, given the World Bank's projection of their heightened vulnerability and protracted recovery timelines, with the notable exception of China's more stable outlook.
• Factor in the persistence of elevated inflation and the dampening effect of "record-high uncertainty" on private consumption, trade, and investment when evaluating asset valuations and making capital allocation decisions.