The world's economic landscape is in a state of flux, and the outlook for the global economy remains uncertain. A dim future looms as we navigate through a complex web of policies and challenges.
As we enter October 2025, the World Economic Outlook report sheds light on the current state of affairs. While there's a slight improvement in the near-term forecast, global growth continues to be subdued. The newly implemented policies are gradually taking shape, but the overall picture is far from stable.
The global economy is adapting to a new reality shaped by policy measures. Some extreme tariff hikes have been mitigated through subsequent deals, but the environment remains volatile. Temporary factors that boosted activity earlier this year, such as front-loading, are now fading away.
Here's where it gets controversial: The latest World Economic Outlook (WEO) projects a slight upward revision in global growth compared to the April 2025 WEO. However, it still marks a downward trend when compared to pre-policy-shift forecasts. Global growth is expected to slow down, with projections of 3.3% in 2024, 3.2% in 2025, and 3.1% in 2026. Advanced economies are predicted to grow around 1.5%, while emerging markets and developing economies are just above 4%.
Inflation is projected to decline globally, but with variations across countries. The United States is expected to have inflation above the target, with risks leaning towards the upside. In contrast, other regions will experience subdued inflation.
Risks and challenges abound: The downside risks are significant. Prolonged uncertainty, increased protectionism, and labor supply shocks could further hinder growth. Fiscal vulnerabilities, potential financial market corrections, and the erosion of economic institutions pose threats to stability.
Policymakers face a daunting task: They are urged to rebuild confidence through credible, transparent, and sustainable policies. Trade diplomacy and macroeconomic adjustments must go hand in hand. Fiscal buffers need strengthening, and central bank independence should be preserved. Efforts on structural reforms must be intensified. As highlighted in Chapter 2, past actions to improve policy frameworks have proven beneficial. Chapter 3 also emphasizes the potential role of industrial policy, but it cautions against overlooking opportunity costs and trade-offs.
Chapter 1: Global Prospects and Policies
Global growth is projected to slow down, and the prospects remain dim. The world is adjusting to a landscape characterized by increased protectionism and fragmentation. Global headline inflation is expected to decline further but remain above target in certain countries. Risks to the outlook are predominantly on the downside. Prolonged uncertainty and the escalation of protectionist measures could further hinder growth. Larger-than-expected shocks to labor supply, especially in aging populations and skill-shortage economies, could reduce growth.
Fiscal vulnerabilities and financial market fragilities may interact with rising borrowing costs and increased rollover risks for sovereigns. An abrupt repricing of tech stocks could threaten macrofinancial stability. Pressure on the independence of key economic institutions could undermine sound economic decision-making.
Chapter 2: Emerging Market Resilience
Emerging markets have demonstrated remarkable resilience to risk-off shocks in recent years. While favorable external conditions have played a role, improvements in policy frameworks have been critical. Enhanced monetary and fiscal policy implementation and credibility have reduced the need for foreign exchange interventions. Central banks are less susceptible to fiscal interference and have more control over domestic borrowing conditions.
Looking ahead, countries with robust policy frameworks will face easier policy trade-offs and be better equipped to navigate risk-off episodes. In contrast, economies with weaker frameworks risk de-anchoring inflation expectations and larger output losses if monetary tightening is delayed, especially with persistent price pressures.
Chapter 3: Industrial Policy
Industrial policy is increasingly being used by countries to reshape their economies by supporting strategic sectors and firms. Motivations include boosting productivity, reducing import reliance, especially in energy, and enhancing resilience. Industrial policies can catalyze domestic industries, but their effectiveness depends on sector-specific characteristics, which can be challenging to determine beforehand.
Industrial policies present trade-offs. Onshoring production in a strategic sector might lead to prolonged higher consumer prices. The fiscal cost of industrial policy can be substantial, especially with elevated debt and constrained public finances. Even with positive sector-level outcomes, industrial policy can generate negative cross-sector spillovers and reduce overall productivity by inefficiently diverting resources away from untargeted sectors.
Effective industrial policy requires careful targeting, strong institutions, complementary structural reforms, and sound macroeconomic policy.
The World Economic Outlook report provides a comprehensive analysis of the global economy's current state and future prospects. It offers valuable insights for policymakers, economists, and anyone interested in understanding the complex dynamics shaping our economic world.
