The global economy is projected to experience a significant slowdown in 2025, with growth forecasted at just 2.7%, a rate that aligns with the weakest performance seen since 2019, according to the World Bank. While this growth is not catastrophic, it is expected to have limited benefits for the improvement of living standards worldwide, as it would not be sufficient to boost prosperity in either developed or developing nations. This outlook highlights the complex challenges faced by governments and businesses alike, as they navigate a series of economic uncertainties, including rising trade tensions, the persistence of high interest rates, and increasing policy unpredictability.

Ayhan Kose, the World Bank’s deputy chief economist, explained that although a growth rate of 2.7% would be manageable, it represents a sharp contrast to the more robust growth observed in the years leading up to the COVID-19 pandemic, which averaged over 3% annually. The World Bank’s warning emphasizes the ongoing struggle for economic recovery, especially as global growth is expected to decelerate further in the coming years. One of the major contributors to this bleak forecast is the escalating trade tensions, particularly between the US and its major trading partners. The threat of fresh tariffs, particularly from the United States, is a central concern.

Former President Donald Trump had previously championed the imposition of tariffs as a key strategy for stimulating the US economy by protecting domestic jobs, increasing tax revenue, and reducing trade deficits. His administration had already introduced tariffs on China, and now, with the rise of new trade conflicts, the threat of tariffs on imports from nations like China, Canada, and Mexico is again looming. As the world’s largest importer, the US plays a pivotal role in the global trade ecosystem. According to World Bank data, China, Mexico, and Canada account for a substantial share—roughly 40%—of the $3.2 trillion worth of goods imported by the US annually. A 10% increase in US tariffs on imports from all countries would reduce global economic growth by an estimated 0.2%, even if countries did not retaliate. However, retaliatory measures could further exacerbate the downturn, potentially hitting the global economy even harder.

The consequences of such tariff policies are not limited to the countries imposing them; trade restrictions often have ripple effects that disproportionately affect global markets. The World Bank’s Kose cautioned that the introduction of trade barriers leads to negative consequences, which are often felt most acutely by the country that enforces the restrictions. As global supply chains become more interconnected, any disruption in trade relationships could reverberate across industries and regions, affecting everything from manufacturing to consumer spending.

Beyond trade, other factors are also contributing to the pessimistic outlook. Central banks across the globe have kept interest rates higher for longer in an effort to combat inflation, a policy that has dampened business confidence and investment. This, in turn, has hindered growth prospects, as businesses are reluctant to make long-term investments amidst such uncertainty. Kose warned that the long-term effects of these interest rate policies, combined with ongoing geopolitical risks, could lead to a prolonged period of stagnation, where growth fails to reach levels that can meaningfully improve the quality of life for the average citizen.

Despite these challenges, governments are actively seeking ways to stimulate economic growth. In the UK, the government is looking to the artificial intelligence (AI) industry as a potential driver of future prosperity. In the US, the focus has shifted towards tax cuts and deregulation as strategies for boosting economic performance. Meanwhile, in India, the government is prioritizing the expansion of manufacturing capabilities, while China has adopted measures to spur consumer spending and increase domestic consumption.

However, Kose emphasized that there are no quick fixes or “magic solutions” to the current economic malaise. He warned that nations would need to carefully consider and implement a range of policy options, as simply relying on one sector or strategy will not be enough to achieve sustainable economic growth. The ongoing shift in global economic power dynamics, coupled with the strain on international trade systems, suggests that countries will need to rethink their economic strategies in order to build a resilient and adaptable future economy.

While the global economy is not facing a crisis of the same magnitude as the 2008 financial collapse or the COVID-19 pandemic, it is entering a period of heightened uncertainty. The risks posed by trade tensions, high interest rates, and unpredictable policies require coordinated efforts from governments, businesses, and international organizations to mitigate potential damage and ensure that growth can be restored in a more inclusive and sustainable manner. The road ahead remains fraught with challenges, but with careful management and strategic planning, the world economy may be able to overcome these obstacles and return to a more prosperous trajectory in the long term.

(Adapted from BBC.com)

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