Global economic resilience masks an uneven growth outlook

First, the good news: in the face of one shock after another, the global economy has proved to be surprisingly shock-proof since the COVID-19 pandemic.

Despite steep tariff increases and historically high policy uncertainty during the last 12 months, global GDP growth in 2025 is set to come in at 2.7 percent—the pace that was predicted in January 2025. That rate should hold roughly steady through 2027. Inflation is abating. Interest rates are coming down. Investors are again showing signs of exuberance. At least by one measure, the global recovery from the coronavirus-era recession will go down as the strongest in six decades: global GDP per person in 2025 was 10 percent higher than it was on the eve of the pandemic. Subsequent shocks—wars, inflation, and tariffs—did less damage than most economists feared.

Yet a grimmer picture emerges if we take stock of the world economy after the first 25 years of this century. Global growth has unmistakably downshifted to a slower gear since the pandemic. It is now at a pace insufficient to reduce extreme poverty and create jobs where they’re needed most. If the forecasts in the latest edition of the World Bank Group’s Global Economic Prospects materialize, the average growth rate of this decade will be the lowest since the 1960s. 

That depressing statistic hides an even more disconcerting detail. While nearly all advanced economies will be richer in per capita income than they were before the pandemic, one out of four developing countries—and more than a third of all low-income economies—will be poorer than they were five years ago. 

In short, growth in the 2020s has hardly been the rising tide that lifts all boats—certainly not the kind of growth that freed more than a billion people from extreme poverty in the 1990s and 2000s. It has been, instead, a source of divergence in the living standards of low- and high-income economies. More than half of the 10 percent rise in global GDP per person since 2019 has been attributable to the performance of the wealthiest economies. By the end of this year, developing economies will have an average GDP per person of around $6,500—barely 12% of the average of advanced economies. The gap for low-income countries is even more striking: their GDP per person is less than $700, about 1 percent of the level in high-income economies.

These trends cannot be explained by misfortune alone. In far too many developing countries, trends reflect avoidable policy mistakes. As this report makes clear, these economies were better prepared to cope with the 2009 global financial crisis than they were with the COVID-19 recession—in fact, they were better prepared than most high-income economies. That’s because developing economies went on a reform spree in the 1990s and 2000s: they cut public debt, adopted more flexible exchange rates, adopted inflation-targeting systems, and built up their rainy-day funds. 

When the 2009 recession arrived, developing economies were able to ramp up government spending to support their economies instead of cutting back—something they had never done before. The reform momentum in developing economies, however, did not last: by the time the COVID-19 crisis came, debt in developing economies had skyrocketed to all-time highs. Budget deficits were more than four times the average before 2009. The result was unsurprising: developing economies had little to spare. The fiscal stimulus they were able to deliver to their economies, accordingly, was much smaller than the dose administered by high-income economies. No surprise, then, that their recovery has been feebler. 

The main lesson of the last 25 years is that developing economies with the right policies control their own destiny. This is especially so for middle-income economies. When they tailor policies to their society’s needs, they bring immense benefits to their own citizens—as well as to the 2 billion people living in low- and high-income economies around the globe. Developing economies must now do so again. In the next decade, a job-creation challenge of historic proportions will confront many of them. It will need to be tackled when global economic conditions are hardly conducive—when trade relationships are rapidly being reconfigured, when the debt of developing economies is at a half-century high, and when foreign-aid budgets of high-income economies are shrinking.

An important step will be to re-establish policy discipline, starting with a return to fiscal orthodoxy. In normal economic times, a government ought to set and live by rules on how much it can spend and borrow. Fiscal rules can help ensure that government spending is kept on a tight leash when the private economy is doing well, so that public funds are available when times are tough. The evidence is clear: such rules, which have become increasingly common over the last 25 years, are effective in improving fiscal balances in developing economies.

Timing is crucial for determining whether fiscal rules are effective. Governments tend to adopt fiscal rules under duress, when economic conditions are weak, rather than in good times. Bad timing can lead to bad rule design. Weak governance and insufficient enforcement capacity—more prevalent in developing economies than in high-income countries—also hinders the effectiveness of fiscal rules. These deficiencies, however, are correctable. Governments can choose to adopt fiscal rules when the economy is healthy; they can choose to strengthen governance capacity. 

It is proper to find comfort in the fact that the global economy has defied expectations—that it did not crack under the extraordinary strains of the 2020s. Yet it would be dangerous to assume that the danger has passed. The resilience displayed in 2025 did not stem from economic strength. It was mainly the result of hard-to-repeat maneuvers: beleaguered firms scrambling to import before higher tariffs took effect, and debt-laden governments keeping the fiscal spigots open. But it will take more than business agility and fiscal laxity to steer the global economy back on track. There is no substitute for good economic policy. 

The solutions are clear: governments must operate within their means while adopting policies that encourage investors to push the limits of enterprise outward. It has worked before, and it will work again.

Source: blogs.worldbank.org