Global Growth Outlook: Challenges and Predictions for Emerging Markets

Global economic growth is projected to weaken to 2.3 percent in 2025, marking a significant downgrade from previous forecasts. Following this decline, a modest recovery is anticipated, with growth expected to pick up to 2.5 percent in the subsequent years of 2026 and 2027. This outlook is painted against a backdrop of a challenging external environment, particularly affecting emerging market and developing economies (EMDEs), where growth is expected to fall well below pre-pandemic averages.

Emerging Markets at a Crossroads

In the coming years, growth within EMDEs is forecast to remain insufficient for meaningful job creation and to bridge the substantial per capita income gaps between these economies and advanced nations. The current trajectory is concerning, as risks are tilted firmly to the downside, highlighted by renewed trade tensions and prolonged uncertainty that could inhibit global growth.

Trade Tensions and Economic Uncertainty

The global economic landscape has considerably deteriorated, with global growth expected to hit its slowest pace since 2008, discounting periods of outright recessions. The decline to 2.3 percent this year is largely attributed to struggles within advanced economies, where business and consumer confidence is deeply affected by an increase in trade policy uncertainty and escalating financial volatility. As global trade and investment growth weakens compared to previous projections, the need for decisive policy efforts becomes critical.

Policy Recommendations for Improvement

To ameliorate the bleak global growth prospects, policymakers must focus on restoring a predictable, transparent, and rules-based trade environment. There is an urgent requirement to tackle issues surrounding debt distress, support vulnerable EMDEs, and commit to combating climate change—all essential actions that will aid in stabilizing economic expectations.

Monetary and Fiscal Challenges Ahead

Emerging economies face a complex interplay between ensuring monetary policy addresses inflationary pressures while simultaneously cushioning against external growth headwinds. The rise in fiscal deficits post-pandemic necessitates a renewed focus on prioritizing government budgets and improving revenue mobilization efforts. Tackling these challenges will be vital for EMDEs to enhance growth prospects and create jobs for their increasingly large working-age populations.

Long-Term Growth: Structural Changes Necessary

For sustainable growth that translates to job creation in EMDEs, it is crucial to establish a more favorable climate for private investment. This includes the optimization of labor markets, improving workforce skills, and reducing conflicts in fragile EMDEs. An effective strategy would be to assess the barriers to investment, support labor market dynamism, and implement programs that focus on upskilling workers, paving the way for expansion and new job creation.

Quantifying Risks: Downside and Upside Scenarios

The economic outlook remains precarious, with risks quantified through two principal scenarios. In a downside scenario, should the average weighted tariff in the U.S. rise by an additional 10 percentage points, the effects could ripple through global growth, lowering projections for 2025 and 2026. Conversely, an upside scenario where tariffs decrease could provide a boost to global growth, revealing a stark contrast in outcomes based on trade policies.

Addressing Global Policy Challenges

The global community must engage in constructive dialogue and cooperative strategies to reinstate a stable trade policy environment while addressing the urgent needs of vulnerable EMDEs. This includes confronting growing food insecurity and risks of violent conflict in many fragile economies. Additionally, addressing climate change challenges is essential in mitigating the consequences of heightened global temperatures and their impact on economic stability.

The Path Forward: Strengthening Institutional Frameworks

As we look to the future, many EMDE central banks will need to carefully calibrate their monetary policy amidst inflationary pressures and external growth challenges. The restoration of fiscal space is equally important, necessitating the mobilization of domestic revenues and the reallocation of public spending to equip these economies for the ongoing struggles they face.

Structural challenges such as barriers to investment and job creation must be prioritized to facilitate sustainable economic growth in EMDEs. Stronger investment growth and robust job creation are essential to overcoming the myriad challenges these nations currently face. Institutional reforms that foster a conducive investment climate, ease barriers to business expansion, and reduce conflict-related risks are all critical steps towards achieving this goal.