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 trade tensions and uncertainty stemming from rising tariffs, particularly those imposed by the U.S. under President Trump. The report forecasts weaker growth for nearly 70% of economies, including the U.S., China, and Europe, with global trade growth expected to slow to 1.8% in 2025. While a global recession is deemed unlikely, the report warns that further tariff escalations could severely disrupt trade and financial markets, and that developing economies will disproportionately suffer, potentially taking decades to recover to pre-pandemic GDP levels.

Analysis

The World Bank has materially revised its global economic outlook, cutting the 2025 growth forecast by four-tenths of a percentage point to 2.3%, primarily attributing this to escalating trade tensions and heightened uncertainty driven by U.S. tariff policies. This downward revision affects nearly 70% of global economies, including significant downgrades for the U.S. (to 1.4% for 2025, a 0.9 percentage point cut from January), the Eurozone (to 0.7%), and Japan (to 0.7%), reflecting a substantial deterioration since January, particularly in advanced economies, now projected to grow by just 1.2%. Global trade growth is anticipated to decelerate sharply to 1.8% in 2025, a stark contrast to 3.4% in 2024 and historical averages. The report, based on tariffs effective late May including a 10% U.S. tariff on most imports, indicates that current global growth is the weakest outside a recession since 2008, with a projected average of only 2.5% GDP growth by 2027, the slowest for any decade since the 1960s. While the World Bank assigns a less than 10% probability to a global recession, it warns that a further 10 percentage point increase in U.S. tariffs and proportional retaliation could reduce the 2025 outlook by an additional 0.5 percentage points, potentially causing global trade to seize up and triggering financial market turmoil. Global inflation is expected to persist above pre-COVID levels at 2.9% in 2025. Emerging markets are also impacted, with their 2025 growth forecast lowered to 3.8%; notably, Mexico's forecast was slashed by 1.3 percentage points to 0.2%, while China's outlook remains unchanged at 4.5% due to available policy space. The White House has contested the World Bank's U.S. forecast, citing recent strong domestic economic data. Despite the prevailing uncertainty, described as 'fog on a runway' slowing investment, the World Bank notes some potential for modest trade rebound in 2026 and a boost from AI developments.

Key Decisions for Investors

• Investors should consider a defensive posture towards global growth-sensitive assets, given the World Bank's significant downgrade and the pervasive uncertainty stemming from trade tensions, particularly U.S. tariff policies.
• Monitor U.S. trade policy developments and international responses vigilantly, as further tariff escalations represent a key downside risk, potentially triggering market volatility, while any de-escalation could offer a relief rally.
• Diversify geographic exposure, potentially moderating allocations to advanced economies facing sharp downgrades and being selective in emerging markets, favoring those with stronger domestic fundamentals like China over trade-dependent economies such as Mexico.
• Factor in sustained global inflation, projected at 2.9% for 2025, into asset allocation decisions, particularly for fixed income strategies and sectors sensitive to rising input costs.
• Critically assess incoming U.S. economic data against the World Bank's pessimistic forecast and the White House's optimistic counterclaims to gauge the true trajectory of the U.S. economy.