Global Economic Prospects

Barring a miracle, the 2020s are on track to become a lost decade for far too many developing economies, the World Bank Group’s Chief Economist, Indermit Gill, writes in his Foreword. Virtually half of all developing economies have failed since 2019 to advance on the most rudimentary promise of development: narrowing the income gap with the world’s most prosperous economies. But prospects for the 2030s are bright: the economic forces now gathering—AI, energy transformation, and deeper regional integration—are powerful enough to unlock transformative progress in the next decade. Seizing that potential, however, will require immense preparation, and it must begin now.

The Middle East conflict has triggered sharp energy price increases, renewed inflation, and expectations of tighter monetary policy. Global growth is projected to slow to 2.5 percent in 2026, before firming in 2027–28 as energy supplies recover and trade strengthens. Risks remain skewed to the downside: escalating hostilities, commodity disruptions, and policy uncertainty could amplify the slowdown. On the upside, broader AI adoption could lift activity. Policy action is critical — globally to safeguard energy and food security, bolster the trading system, and advance the energy transition; and domestically to balance inflation control with growth support and strengthen fiscal sustainability. Addressing the jobs challenge in EMDEs requires investing in physical, human, and digital capital, fostering a business-friendly environment, and mobilizing private investment.

Growth is projected to decelerate across all emerging market and developing economy regions in 2026 due to the Middle East conflict. The Middle East, North Africa, Afghanistan, and Pakistan region is the worst affected, while South Asia remains the fastest growing. Regional impacts differ based on energy exposure, strategic reserves, and policy buffers. Recoveries are projected across all regions for 2027–28, driven by the decline in energy prices and the rebound in global activity. Fiscal pressures will affect the ability to reduce poverty and food insecurity, and create jobs. Risks to the outlook are tilted to the downside, including a protracted disruption in commodity markets, financial stress, persistent trade policy uncertainty, and weather-related shocks.

Growth in low-income countries (LICs) is expected to reach 5.4 percent in 2026, 0.3 percentage point lower than previous forecasts, reflecting the impact of the conflict in the Middle East. Growth is projected to edge up to an average of 5.5 percent a year in 2027-28. Real per capita GDP growth is expected to average about 2.7 percent in 2026-28, though gains are likely to be uneven and insufficient to significantly reduce poverty. The recent Ebola outbreak presents a new downside risk to LICs. Other downside risks include an escalation of geopolitical tensions, weaker global demand, tighter financial conditions, renewed inflationary pressures, and weather-related shocks.

Artificial intelligence (AI) has emerged as a potential catalyst for economic growth. Its most important contribution would come from faster productivity growth in the medium term. Yet estimates of the productivity impact of AI vary widely. Illustrative scenarios based on a range of such estimates taken from the literature suggest that these differences could lead to markedly different growth paths. Under optimistic assumptions, economic growth in the 2030s could exceed the average recorded in the 2000s. Under less optimistic assumptions, the gains would be considerably smaller. The growth benefits of AI are also likely to vary across countries. Emerging market and developing economies that cannot provide the right ecosystem and policy environment to adopt AI widely risk falling further behind.

Mobilizing private capital will be an essential pillar of efforts to boost growth and job creation, yet private investment growth has declined since the 2000s, particularly in emerging market and developing economies. Firms face persistent constraints, including large infrastructure gaps, high risk and uncertainty, and limited access to finance—challenges that have been compounded by recent overlapping shocks. Box 1.2 provides a brief overview of recent trends, details these constraints, and outlines policy priorities. Experience shows that reversing the decline in private investment requires sustained and coordinated policy action. Strengthening infrastructure, improving the business environment, expanding access to finance, and reinforcing institutional quality are central to unlocking investment and supporting job creation. Comprehensive reform packages, tailored to country circumstances, tend to deliver the strongest results.

Rising government debt poses a growing challenge for emerging market and developing economies (EMDEs), driving up interest rates, debt-service payments, and the risk of distress. The relationship between debt and borrowing costs is nonlinear: increases in debt-to-GDP ratios generate progressively larger rises in interest rates the higher debt already is. Since 2010, rising EMDE debt is associated with increases in sovereign spreads and domestic-currency yields of about 110 and 30 basis points, respectively, with advanced-economy debt adding further pressure. Countries with default histories, low credit ratings, or weak governance face even sharper increases. Strengthening fiscal positions—through revenue mobilization, efficient spending, and improved debt management—is essential to contain borrowing costs and preserve space for investment and job creation.

Recent commodity market disruptions have brought renewed attention to the persistent fiscal challenges faced by commodity-exporting emerging market and developing economies (EMDEs). Fiscal positions in these economies tend to be weaker than those in other EMDEs, reflecting lower and more volatile revenues, commodity price swings, and limited buffer accumulation in good times. Fiscal responses to commodity price shocks suggest that revenue windfalls are gradually spent rather than saved. Although sovereign wealth funds and fiscal rules have helped smooth spending over longer-lasting commodity cycles, they offer limited protection when spending pressures intensify after commodity shocks. The policy agenda calls for credible fiscal rules, well-governed sovereign wealth funds, independent fiscal councils, strengthened debt management, revenue diversification, and robust institutions.

Hidden government debt—liabilities that governments have already incurred but have not been fully disclosed—can undermine fiscal sustainability and is associated with significantly higher costs of borrowing. This box explores how emerging market and developing economy (EMDE) borrowing costs respond when hidden debts are revealed and assesses the associated policy implications. Hidden debt revelations are associated with large and significant increases in sovereign spreads. These hidden debt episodes also underscore the critical need to fill existing gaps in EMDE debt transparency practices.