Executive Summary Global growth is expected to hold steady at 2.7 and weaker growth in major economies. On the percent in 2025-26. However, the global economy upside, faster progress on disinflation and appears to be settling at a low growth rate that will stronger demand in key economies could result in be insufficient to foster sustained economic develop- greater-than-expected global activity. ment—with the possibility of further headwinds from heightened policy uncertainty and adverse The subdued growth outlook and multiple trade policy shifts, geopolitical tensions, persistent headwinds underscore the need for decisive policy inflation, and climate-related natural disasters. action. Global policy efforts are required to Against this backdrop, emerging market and safeguard trade, address debt vulnerabilities, and developing economies (EMDEs)—which fuel 60 combat climate change. National policy makers percent of global growth—are set to enter the second need to resolutely pursue price stability, as well as quarter of the twenty-first century with per capita boost tax revenues and rationalize expenditures in incomes on a trajectory that implies substantially order to achieve fiscal sustainability and finance slower catch-up toward advanced-economy living needed investments. Moreover, to raise longer- standards than they previously experienced. Without term growth and put development goals on track, course corrections, most low-income countries are interventions that mitigate the impact of unlikely to graduate to middle-income status by the conflicts, lift human capital, bolster labor force middle of the century. Policy action at both global inclusion, and confront food insecurity will be and national levels is needed to foster a more critical. favorable external environment, enhance macroeco- Regional Prospects. Against a backdrop of nomic stability, reduce structural constraints, address heightened trade restrictive measures and the effects of climate change, and thus accelerate subdued global growth, EMDE regions face long-term growth and development. varying growth prospects this year. Growth is Global Outlook. Global growth is stabilizing as projected to moderate in East Asia and Pacific, inflation returns closer to targets and monetary amid weak domestic demand in China, as well as easing supports activity in both advanced in Europe and Central Asia due to decelerations economies and emerging market and developing in some large economies following strong growth economies (EMDEs). This should give rise to a last year. In contrast, a pickup is anticipated in broad-based, moderate global expansion over Latin America and the Caribbean, the Middle 2025-26, at 2.7 percent per year, as trade and East and North Africa, South Asia, and Sub- investment firm. However, growth prospects Saharan Africa, partly underpinned by robust appear insufficient to offset the damage done to domestic demand. In 2026, growth is expected to the global economy by several years of successive strengthen in most regions. negative shocks, with particularly detrimental The year 2025 will mark the end of the first outcomes in the most vulnerable countries. quarter of the twenty-first century—a good time From a longer-term perspective, catch-up toward to review the performance of emerging and advanced economy income levels has steadily developing economies since 2000 and assess their weakened across EMDEs over the first quarter of prospects. This edition of the Global Economic the twenty-first century. Heightened policy Prospects report features two analytical chapters uncertainty and adverse trade policy shifts that offer a quarter-century report card. One represent key downside risks to the outlook. chapter provides insights into the prospects and Other risks include escalating conflicts and challenges of middle-income emerging and geopolitical tensions, higher inflation, more developing economies; the other covers the extreme weather events related to climate change, performance of the poorest countries. xvii From Tailwinds to Headwinds: Emerging and growth underpinned by domestic reforms and a Developing Economies in the Twenty-First benign global environment allowed many Century. The first quarter of the twenty-first low-income countries (LICs) to attain middle- century has been transformative for EMDEs. income status in the first decade of the twenty- These economies now account for about 45 first century. Since then, the rate at which LICs percent of global GDP, up from 25 percent in are graduating to middle-income status has 2000, a trend driven by robust collective growth slowed markedly. The prospects for today’s LICs in the three largest EMDEs—China, India, and appear much more challenging. In recent years, Brazil (the EM3). Collectively, EMDEs have per capita growth has been anemic amid contributed about 60 percent of annual global heightened levels of conflict and fragility and growth since 2000, on average, double the share adverse global developments. Across a wide array during the 1990s. Their ascendance was powered of development metrics, today’s LICs are behind by swift global trade and financial integration, where LICs that since turned middle-income especially during the first decade of the century. stood in 2000. They are also more susceptible to Interdependence among these economies has also domestic shocks, including those related to increased markedly. Today, nearly half of goods climate change. exports from EMDEs go to other EMDEs, compared to one-quarter in 2000. As cross- Many LICs that graduated in the past underwent border linkages have strengthened, business cycles growth accelerations—extended periods of robust among EMDEs and between EMDEs and economic expansion, during which output advanced economies have become more synchro- became far more trade- and investment-intensive. nized, and a distinct EMDE business cycle has These accelerations were generally preceded by emerged. Cross-border business cycle spillovers reforms that tended to increase market orienta- from the EM3 to other EMDEs are sizable, at tion and channeled resources into rapid invest- about half of the magnitude of spillovers from the ment growth. To kick-start stronger growth, largest advanced economies (the United States, today’s LICs can harness large resource endow- the euro area, and Japan). ments to, among other things, supply the green transition, and find advantage in youthful and Yet EMDEs confront a host of headwinds at the growing populations, untapped tourism poten- turn of the second quarter of the century. tial, and regional trade integration. However, Progress implementing structural reforms in harnessing these factors and improving productiv- many of these economies has stalled. Globally, ity hinges on engineering increased investment in protectionist measures and geopolitical fragmen- human and physical capital, closing gender gaps, tation have risen sharply. High debt burdens, addressing fiscal risks, and improving governance. demographic shifts, and the rising costs of climate For LICs in fragile and conflict-affected situa- change weigh on economic prospects. A success- tions, attaining greater peace and stability is ful policy approach to accelerate growth and paramount. LICs will also need international development should focus on boosting invest- support to mobilize additional resources and ment and productivity, navigating a difficult foster institutions that can drive durable reforms. external environment, and enhancing macroeco- Throughout, policy makers should be guided by nomic stability. deep knowledge of country circumstances—there Falling Graduation Prospects: Low-Income is no one-size-fits-all recipe for growth and Countries in the Twenty-First Century. Rapid graduation to middle-income status in LICs. xviii