Trade wars to weigh on two-thirds of developing countries, World Bank warns

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The US-driven global trade war will depress growth in almost two-thirds of developing economies this year, according to World Bank forecasts, as the lender warned the globalisation that drove an “economic miracle” in many countries had swung into reverse.

Emerging and developing countries will see 3.8 per cent growth this year — down from 4.2 per cent in 2024, according to the World Bank’s latest economic outlook, pushing the pace of expansion more than a percentage point below the average rate in the 2010s.

Per capita income growth will be 2.9 per cent in developing countries this year, also more than a percentage point below the average between 2000 and 2019. Overall global growth will be the slowest since 2008, excluding recessions, according to the forecasts.

The report underscores the damage wrought by the Trump-led assault on global trade for countries that have ranked among the biggest beneficiaries of greater global integration in recent decades. Global trade growth in goods and services is set to slow sharply in 2025 to 1.8 per cent compared with 3.4 per cent previously, the bank predicted.

Per capita GDP in developing countries nearly quadrupled in the past half-century, lifting more than 1bn people out of extreme poverty. But that transformation is now in danger, as developing countries find themselves “on the frontline of a global trade conflict”, the bank said.

“Outside of Asia, the developing world is becoming a development-free zone,” warned Indermit Gill, the World Bank’s chief economist.

“Growth in developing economies has ratcheted down for three decades — from 6 per cent annually in the 2000s to 5 per cent in the 2010s to less than 4 per cent in the 2020s,” he added.

Compounding the pressures is a halving of foreign direct investment inflows into emerging and developing countries compared with the peak in 2008. The bank warned that “downside risks” to the outlook predominate, among them a further escalation of trade barriers, persistent policy uncertainty and rising geopolitical tensions.

The bank now thinks that the per capita GDP of high-income countries will be roughly where it was expected to be before the Covid-19 pandemic, whereas developing countries will be 6 per cent worse off. Leaving aside China, “it could take these economies about two decades to recoup the economic losses of the 2020s”, it said.

“Global co-operation is needed to restore a more stable and transparent global trade environment and scale up support for vulnerable countries grappling with conflict, debt burdens and climate change,” the bank said.

Last month the central bank of Mexico, an emerging market heavily geared to US economic conditions, slashed forecasts for growth this year to almost zero.

The South African Reserve Bank also recently cautioned that expected growth of 1.2 per cent this year for Africa’s most industrial nation was at risk as the “combination of higher trade barriers, plus elevated uncertainty, is likely to weaken the world economy”.

Gita Gopinath, the first managing director of the IMF, told the FT last month that emerging economies faced an even tougher policy challenge than during the Covid-19 crisis five years ago, given the unpredictable impact of tariffs on their economies and the risk of adverse capital flows.

Despite the warnings, investors are reaping a rally in larger emerging markets this year in response to the weakening of the US dollar and bets that the worst of Trump’s tariffs will be repealed.

The Brazilian real is up 11 per cent so far this year against the dollar, more than the Swiss franc or euro, while the Mexican peso and Taiwan dollar are both up almost 10 per cent.

Local currency bonds and stocks of emerging markets have also rallied by about 10 per cent overall so far in 2025, behind only European stocks as the best performing assets worldwide.

While many investors bet at the start of the year that emerging Asian economies in particular would be hit hard by US tariffs on their exports, their currencies have instead surged.

Savers and insurers in these countries invested massively in US stocks and bonds in recent years but are now turning against dollar assets.

“These dynamics explain the appreciation of trade-sensitive Asian currencies despite the looming growth hit,” JPMorgan analysts said on Tuesday.

Despite the darkening global outlook many developing economies have also built up “strong fundamentals” after years of repairs to their finances since the oil price downturn of 2015 and other shocks, Alaa Bushehri, head of emerging market debt at BNP Paribas Asset Management, said.

“We are looking at about a decade or so of improving traction across fundamentals in different emerging markets . . . on the basis of delivery of inflation targets, growth targets and other metrics” including better management of debt, Bushehri added.