Tariffs are pushing global economy into "turbulence," World Bank says

The World Bank projects global growth to slow to 2.3% this year, the slowest pace since 2008 outside of recessionary periods, citing tariff policies and economic uncertainty as key factors. This forecast is a 0.4 percentage point downgrade from January, driven by lowered expectations for the U.S. and other major economies, with U.S. growth now estimated at 1.4%. The institution anticipates only a tepid recovery in the next two years, with global trade growth also slowing significantly, suggesting potential long-term damage to trade flows and a reversal of factors that drove economic growth in recent decades.

Analysis

The World Bank's latest forecast paints a significantly gloomier picture for the global economy, projecting growth to slow to 2.3% this year, the weakest non-recessionary performance since 2008. This 0.4 percentage point downgrade from the January estimate is largely attributed to the detrimental impact of tariff policies and associated economic uncertainty, which have reportedly quashed prospects of a 'soft landing'. The U.S. economy's growth forecast has been particularly affected, revised down by nearly a full percentage point to 1.4%. The report underscores that current tariff levels, specifically those from late May including revised rates on Chinese goods, are a primary constraint, though a halving of these tariffs could potentially add 0.2 percentage points to global growth on average between 2025 and 2026. A critical concern highlighted is the anticipated deceleration in global trade growth to a mere 1.8% this year, substantially below the 3.4% recorded in 2024 and far from the pre-pandemic average of 4.6% seen in the 2010s. The World Bank suggests this slowdown, with trade growth only reaching 2.7% by 2027, could indicate 'permanent damage to trade flows'. This trade-related pessimism exacerbates existing economic challenges, including high debt levels, geopolitical instability, and the cessation of ultra-low interest rates, collectively signaling a reversal of the dominant economic expansionary forces of the past half-century.

Key Decisions for Investors

• Investors should prepare for a sustained period of subdued global economic growth, now projected at 2.3% for the current year, and increased market volatility stemming from trade policy uncertainties and structural economic shifts.
• Given the significant slowdown in global trade growth to 1.8% and its potential long-term impairment, re-assess allocations towards companies and sectors heavily reliant on international commerce, potentially favoring those with more resilient domestic demand or diversified supply chains.
• Actively monitor developments in global tariff policies, as the World Bank highlights these as a primary drag on growth, noting that a halving of current tariffs could add 0.2 percentage points to growth in 2025-2026, presenting potential inflection points.
• Recognize that the era of 'painless policy corrections' facilitated by record-low interest rates has concluded, necessitating a more cautious approach to leverage and a heightened focus on investments with strong fundamentals in an environment of higher borrowing costs and geopolitical strife.