Global Economy Shows Resilience Amid Trade Tensions
The global economy has demonstrated notable resilience despite heightened trade tensions and ongoing policy uncertainty. Over the past year, several factors helped sustain economic activity, including stockpiling of traded goods, strong investor risk appetite, and a surge in spending on artificial intelligence (AI). In addition, global supply chains have increasingly adapted to rising trade barriers.
The faster-than-expected pace of growth concluded a five-year global recovery following the 2020 recession—an economic rebound unmatched in more than six decades. However, this overall recovery masks a significant divergence between advanced and developing economies. Nearly 90 percent of advanced economies have now surpassed their pre-pandemic per capita income levels. In contrast, more than one-quarter of emerging market and developing economies (EMDEs)—particularly low-income countries and those affected by fragility and conflict—still have per capita income levels below those recorded in 2019.
Looking ahead, global growth is projected to moderate to 2.6 percent this year as several supportive factors begin to fade. Trade growth is expected to weaken as companies scale back inventory accumulation and as the effects of tariffs intensify. Although EMDEs proved more resilient to last year’s trade headwinds than previously anticipated, growth prospects remain uneven across regions.
Risks to the Global Outlook
In the near term, risks to the global economic outlook are tilted to the downside. Growth could weaken if trade tensions escalate further, barriers increase, or financial market sentiment deteriorates due to asset price declines, fiscal concerns, or unexpected inflation developments. On the other hand, there are potential upside factors. AI-related investment could expand into a wider range of industries, and firms’ ability to adapt to evolving trade conditions may continue to support economic activity.
Policy Priorities for Sustainable Growth
Strengthening the global economic outlook will require coordinated international efforts. Policymakers are encouraged to improve the global trade environment, ease financing constraints, and mitigate climate-related risks. For EMDEs in particular, advancing domestic reforms will be crucial. Key priorities include diversifying trade, strengthening macroeconomic frameworks, and removing structural bottlenecks that limit productivity and investment.
Without stronger economic dynamism, many EMDEs may struggle to create sufficient employment opportunities for their rapidly expanding working-age populations. Policies that promote investment in physical infrastructure, digital connectivity, and human capital—along with improvements to the business environment—will be critical. Mobilizing private capital will also play a vital role in meeting the substantial investment needs required for long-term growth.
Rebuilding Fiscal Space: The Role of Fiscal Rules
One of the report’s analytical chapters highlights the importance of fiscal rules in strengthening public finances. With global shocks becoming more frequent and government debt in EMDEs reaching a 55-year high, fiscal rules can serve as a key policy tool for promoting fiscal discipline.
More than half of EMDEs currently operate with at least one fiscal rule, a significant increase from about 15 percent in 2000. Evidence suggests that such rules contribute to improvements in budget balances over the medium and long term. In many EMDEs, improvements in the cyclically adjusted primary balance (CAPB) peak about five years after fiscal rules are introduced, reaching cumulative gains of approximately 1.4 percentage points of trend GDP.
Fiscal rules also increase the likelihood of fiscal consolidation episodes—multi-year periods during which governments improve their fiscal positions. During such periods, the CAPB in a typical EMDE improves by around 1.6 percentage points of trend GDP annually. The effectiveness of fiscal rules tends to be greater when supported by strong institutions and favorable economic conditions.
Frontier Market Economies: Opportunities and Challenges
Another chapter focuses on frontier market economies, a subset of EMDEs characterized by limited but growing access to international financial markets. These economies hold significant potential: they are home to about one-fifth of the world’s population, yet account for only 5 percent of global output. Frontier markets are also expected to drive much of the world’s population growth through 2050.
Despite this promise, economic performance has been mixed. Since 2000, growth in per capita output and investment in the median frontier market has slowed significantly compared to the early 2000s. Poverty reduction progress has also decelerated. While financial openness has increased and frontier markets’ share of global capital flows has risen, their integration into global financial markets remains incomplete.
Many frontier markets are also vulnerable to financial volatility. Capital inflow surges often support short-term growth but can be followed by abrupt reversals. Around 40 percent of frontier markets have defaulted on sovereign debt since 2000, and in the five years beginning in 2020, these economies accounted for more defaults than all other economies combined.
Unlocking Frontier Markets’ Potential
To fully capitalize on their potential, frontier markets will need a comprehensive policy approach. Successful frontier markets tend to share several characteristics: stronger investment growth, improved institutions, and better management of government debt.
Policy priorities include strengthening financial oversight, developing local financial markets, expanding and diversifying exports, and building credible macroeconomic frameworks. Investments in foundational infrastructure and productivity-enhancing sectors will be critical to enabling these economies to harness their demographic potential, natural resources, and increasing access to global capital.
About the Report
The latest edition of the Global Economic Prospects report provides an in-depth assessment of global and regional economic developments, along with analytical chapters examining fiscal rules and the evolving role of frontier market economies in the global financial system.