World Bank Group Report Investigates Global Economic Outlook

The global economy is showing signs of stabilization, with growth steadying for the first time in three years, inflation reaching its lowest point in three years, and improving financial conditions suggesting a potential “soft landing.” However, this optimistic outlook belies a more concerning reality: over four years since the onset of the COVID-19 pandemic, many countries, especially developing economies, are still struggling to find a path to prosperity.

A recent World Bank Group report highlights that the projected annual global growth rate of 2.7 percent through 2026 is significantly lower than the 3.1 percent average seen in the decade before the pandemic. This rate is insufficient to support significant progress on key development goals. By the end of this year, one in four developing economies is expected to be poorer than they were before the pandemic. Additionally, most economies are predicted to grow more slowly in 2024-2025 than they did in the decade preceding COVID-19.

With global interest rates forecasted to average 4 percent through 2026—double the rate of the previous two decades—this outlook is unlikely to improve without proactive measures. Governments need to focus on long-term growth by enhancing productivity, entrepreneurship, and innovation, facilitated by stronger international cooperation.

Before the pandemic, eliminating extreme poverty seemed within reach. However, in recent years, there has been a breakdown in international cooperation, with increasing trade restrictions and rising uncertainty over trade policies. This environment has led to persistent weaknesses in investment, particularly in developing economies, where investment growth from 2013 to 2023 was less than half of that in the 2000s.

This decline in investment growth is a key factor behind the expected average per capita income growth of just 3 percent in developing economies through 2026, compared to 3.8 percent in the decade before the pandemic. Many developing countries will struggle to close the income gap with developed nations, and nearly half will see this gap widen over the next five years—the highest proportion since the 1990s.

Despite these challenges, there are bright spots in the global economy. The United States has demonstrated remarkable resilience, maintaining robust growth even amid the most aggressive monetary tightening in four decades. This resilience suggests some potential upside for the global economy over the next two years.

In emerging markets, India and Indonesia are notable for their strong economic performance. India, driven by vibrant domestic demand, increasing investment, and a dynamic services sector, is projected to grow by an average of 6.7 percent per fiscal year through 2026. Similarly, Indonesia is expected to achieve an average growth rate of 5.1 percent over the next two years, supported by a growing middle class and sound economic policies.

These examples show that high growth rates are achievable even under challenging conditions. For other countries to replicate this success, they must implement policies that strengthen human capital, boost productivity, and increase female labor force participation. Efficient and well-targeted public investment is crucial in this regard.

In developing economies, public investment constitutes just a quarter of total investment, on average. Research indicates that increasing public investment by just 1 percent of GDP can boost total GDP by more than 1.5 percent over the medium term and increase private investment by up to 2 percent within five years. The benefits are greatest in countries with a history of effective public investment and sufficient fiscal space to enhance spending.

Small developing countries, particularly those with populations under 1.5 million, face unique challenges, including a high frequency of climate-related natural disasters and significant debt distress. However, these countries can still pursue stable and prosperous economic paths by mobilizing domestic revenue, creating fiscal frameworks to manage shocks, and improving public spending efficiency, especially in health, education, and infrastructure. International policy coordination and financial support can further aid these efforts.

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