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Info Service on UN Sustainable Development (May25/05) Penang, 25 Apr (Kanaga Raja) — Global growth is expected to slow to 2.3% in 2025, falling below the 2.5% threshold that is often associated with a global recessionary phase, according to UN Trade and Development (UNCTAD). In its Trade and Development Foresights 2025 report, UNCTAD said this marks a sharp deceleration compared to the average annual growth rates of the pre-pandemic period, which were already sluggish. Subdued demand, trade policy shocks, financial turbulence and systemic uncertainty are intensifying pressures, especially for developing countries, it added. Among the other key takeaways from the report are that the late-2024 and early-2025 up-tick in global trade was driven in part by front-loaded orders. This momentum is expected to fade, or even reverse, during the rest of 2025 as new tariffs come into effect. The report also said that fiscal priorities are shifting in major economies, with reduced official development assistance, lower social spending and higher defence budgets. These changes risk undermining progress toward the Sustainable Development Goals. Investor caution – amid tight financial conditions and growing uncertainty – further threatens long-term development financing, it said. Another key point highlighted in the report is that strengthening existing trade ties, including within the global South, offers a buffer against rising uncertainty. However, the report said many low-income countries face a convergence of risks: worsening external conditions, heavy debt burdens and weakening domestic growth. If the geoeconomic confrontation continues to disrupt the global economy, poorer nations can face a “perfect storm”, it said. With the trade tensions rising and growth slowing, UNCTAD also cautioned against the dangers of economic fragmentation and geoeconomic confrontation. Instead, it said strengthening regional and international policy coordination, and building on existing trade and economic links, will be key to resilience in a fragile global economy. SPECTRE OF LOW GROWTH According to the UNCTAD report, despite a slightly stronger-than-expected growth performance of 2.8 per cent in 2024, the global economy is set to slow down in 2025. UNCTAD estimates that the world gross product will expand by only 2.3 per cent in 2025, below the threshold of 2.5 per cent – a marker of a global recessionary phase. This is a significant deceleration compared to the average annual growth rates registered in the pre-pandemic period, which itself was a period of subdued growth globally, it said. The global outlook for 2025 is clouded by heightened policy uncertainty, the levels of which in early 2025 were the highest observed in this century, said the report. Notwithstanding the details of the new tariffs the United States announced on 2 April 2025, the prevailing levels of policy uncertainty affect economic activity negatively as companies encounter losses and put off investment and hiring decisions, it added. Similarly, it said that the implementation of successive rounds of restrictive trade measures and geoeconomic confrontation carry the risks of severe disruptions to border-crossing production lines and international trade flows, in turn pulling down economic activity globally. A minor upward revision to the growth estimate for 2024 – compared to what UNCTAD anticipated – resulted from a stronger than expected performance of the United States economy in the final quarter of 2024. This was partially offset by a weakening of growth in Europe and Latin America, said the report. The up-tick in activity towards the end of 2024 mainly reflects a front-loading of trade orders and consumption spending in anticipation of tariff measures and consequent increases in the prices of affected goods, it added. In other words, it said the dynamism observed in the closing months of 2024 and early weeks of 2025 will prove transitory. In April 2025, concerns over the global economic context and the impact of trade policy shifts have translated into major financial turbulence, said the report. Sharp corrections and significant losses in financial markets followed weeks of volatility that marked the opening months of 2025. With the so-called financial “fear index” at its third highest level – after the peaks of 2008 and 2020 – fears of recession in the United States are growing, while the international ramifications of tariff tensions add to investor anxiety regarding the prospects for economies worldwide, said the report. Developing countries are vulnerable to global financial volatility, with the economies of Asia – the region most integrated into the global value chains – particularly affected by financial turbulence, it pointed out. It said current risks stem from two areas. On the one hand, the recent financial boom has been concentrated in the technology stocks of the advanced economies, with companies from the developing countries finding it difficult to raise capital. “On the other hand, while current gyrations in the financial markets can accelerate financial inflows into some emerging market assets, in the context of systemic uncertainty, trade tensions and slowing demand, short-term speculation adds to financial stability risks.” Changing perceptions of risks have also affected the price of traditional safe-haven assets such as gold, the dollar and United States Treasuries, in turn amplifying systemic uncertainty further, the report observed. For the past six months, gold prices maintained strong upward momentum, defying traditional market trends and despite a stronger dollar and increasing real yields – an unusual phenomenon, it said. This trajectory reflects two trends. On the one hand, central banks around the world, which have accelerated the diversification of their reserves, have contributed to growing demand, said UNCTAD. On the other hand, gold serves as a safe-haven asset against higher inflation expectations and anxiety about the performance of other assets, and has been sought by investors in the wider context of uncertainty and loss of confidence, it added. Starting from mid-2024 – and after several delays – the central banks of the major advanced economies finally kicked off their monetary loosening cycles, the report noted. The European Central Bank was the first to begin cutting rates in June 2024 and has since reduced its key policy rates by a cumulative 150 basis points. Likewise, the Bank of England has reduced its rate by an accumulated 75 basis points, while the Federal Reserve has realized three cuts to its key policy rate from September to December 2024, totalling 100 basis points. However, the report said during this period – and contrary to historical norms – long-term government bond yields have increased. It said although yields have receded from the highs registered in January 2025, they remain above the levels registered at the outset of the respective central banks’ loosening cycles, including in the United States, where 10-year yields remain above their September 2024 level. Despite a sharp drop immediately after the tariff announcement of 2 April, bond yields returned quickly to their prior levels soon after. While one would not necessarily expect long-term bond yields to match movements in central banks’ policy rates – since such policy rates are very short-term – such a drastic divergence of paths is unusual, the report noted. In the last seven monetary loosening cycles of the Federal Reserve dating back to the 1980s, the yield on 10-year Treasury bonds invariably moved lower in the months after the initial cut in interest rates. The uptick in inflation expectations in recent months explains part of this divergence, it said. However, the most significant factor behind the higher risk compensation demanded by bond holders stems from heightened macroeconomic uncertainty, it added. This is reflected in the increase in what is known as the “term premium” – that is, the amount by which the yield on a long-term bond exceeds that on shorter-term bonds. This premium reflects the amount investors expect to be compensated for lending for longer periods. The report said the impact of heightened uncertainty on the trajectory of yields is not limited to the financing costs of the respective Governments. It said it equally affects other borrowers, both households and firms, as loan terms are typically influenced by government borrowing costs; it also puts upward pressure on global interest rates. This will further complicate the macroeconomic prospects for developing countries, particularly those with high external debt burdens, the report cautioned. CHALLENGING GLOBAL CONTEXT The decade of historically low – and in some advanced economies, negative – real interest rates has given way to a longer-term period of significantly tighter financial conditions, said the report. “Given the rapid build-up of debt, particularly in developing countries, the ongoing tight financing conditions forebode a worrying situation: not only is investment constrained due to higher financing costs, but resources are increasingly diverted away from critical spending needs to cover the onerous debt-servicing costs.” According to the recent IMF debt sustainability analysis, more than half of low-income countries – 35 out of a total of 68 – are currently in debt distress or at high risk of debt distress. UNCTAD said the prospect of tighter-for-longer monetary policy in the United States as well as unusually elevated government bond yields across the major advanced economies point to a further crowding out of financial flows to the developing world. This adds to the challenging economic landscape for the countries of the global South, it cautioned. “Beginning in the third quarter of 2024, developing countries faced mounting pressures. Concerns over trade tariffs and technology restrictions grew, triggering volatility in emerging market equities and growing investor caution.” It said historically, such conditions, exacerbated by elevated levels of uncertainty, have been characterized by a so-called “flight to safety” in which investors channel financial resources towards “safer” or more “stable” assets and markets – almost invariably perceived as those in advanced economies – to the detriment of financial flows to developing countries. UNCTAD said for their part, central banks in the developing world will face a more challenging environment for the normalization of their domestic monetary policy. This, in turn, will put upward pressure on local borrowing costs and further inhibit domestic demand. The report said in these difficult conditions, three key factors can help developing economies leverage existing trade relationships amid the ongoing shifts. First, while the United States remains the world’s largest export market, developing economies now account for a significant share of merchandise exports and imports of all the three largest economies; this can potentially offset some of the impact of the projected economic slowdown in the United States. Second, the rise of China has been driving a steady growth of South-South trade, which has been expanding at a faster pace than that of other trade flows. The potential of South-South economic integration offers opportunities for many developing countries, in trade and beyond, said the report. Third, intra-regional trade offers strong development opportunities, it added. The report said that while its progress has not been uniform across the global South, it has been a major force in strengthening open regionalism in parts of Asia, with the East and South-East Asian economies driving over 40 per cent of global economic growth in 2024. At the same time, current tariff escalation and the volatile external environment pose new challenges to the region. These add to financial stability risks in several Asian economies, as high debt servicing costs have weakened the debt repayment ability of not only Governments but also firms and households, it added. GLOBAL OUTLOOK According to the report, the outlook for the global economy is increasingly worrying. It said that the initial optimism at the beginning of 2025 regarding a dynamic expansion of the economy in the United States – largely driven by expectations of a short-term boost from corporate tax cuts, deregulation measures and monetary easing – is tempered by the abrupt shifts in trade and immigration policies, which are already generating significant negative supply shocks. In addition, the macroeconomic effects of tariffs raise the risks of a period of stagflation in the latter part of 2025, it said. The report said for its part, an uptick in inflationary pressures in the United States in recent months has resulted in a more cautious approach to the Federal Reserve’s loosening of monetary policy. The prior broad consensus of policy rate cuts in each quarter – resulting in an accumulated reduction of 100 basis points by year-end – is being revised. In turn, the effects of the “higher-for-longer” policy rates will be felt both domestically and internationally, it added. In the euro area, despite the ongoing normalization of monetary policy, domestic demand is unlikely to rebound. The manufacturing sector, which has been struggling in recent years under the pressures of global competition and elevated domestic energy prices, is particularly vulnerable to the imposition of tariffs and a deteriorating external environment, said UNCTAD. Yet, it said on the positive side, the announcement by the incoming Government in Germany – which accounts for almost a third of the euro-zone economy – of reforms to fiscal rules that had previously acted as a brake on public spending, particularly on infrastructure, holds out the possibility of an improvement in growth prospects in the years ahead. UNCTAD said in the case of China, growth is expected to be supported by the ramping up of fiscal and monetary stimulus measures as well as structural policies. “Similarly, a series of policy actions undertaken to stabilize the real estate sector appear to have had the desired effect, as the sector’s declining trend has eased since the end of 2024.” However, the increasingly difficult external context will undoubtedly weigh on growth, said the report. Across the rest of the global South, developing regions face an increasingly challenging environment, it added. It said the imposition of escalating rounds of tariffs will have a disproportionately large impact (both directly and indirectly) on developing countries, particularly those that are more integrated into global supply chains. “Similarly, elevated policy uncertainty and subsequent delays in investment and hiring decisions will have a dampening effect on both employment and household incomes,” the report concluded. +
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