Global economy resilient, but tariff pressures cloud outlook

Tariffs

Penang, 12 Jan (Kanaga Raja) — Global economic output is projected to expand by 2.7 per cent in 2026, marking a marginal slowdown from the 2.8 per cent expected in 2025, according to the United Nations.

The outlook remains subdued compared with the pre-pandemic average growth rate of 3.2 per cent, underscoring the persistent drag on the world economy, it said.

In its flagship World Economic Situation and Prospects 2026 report, the UN said global growth in 2025 proved more resilient than expected despite steep US tariff hikes, buoyed by strong consumer spending and moderating inflation.

Yet, it said, deeper structural weaknesses remain. Weak investment and constrained fiscal space are dampening economic momentum, heightening concerns that the world economy may be drifting toward a prolonged period of slower growth compared with the pre-pandemic era.

The report said a partial easing of trade tensions helped limit disruptions to international commerce. However, the impact of higher tariffs, coupled with elevated macroeconomic uncertainties, is expected to become more evident in 2026.

Financial conditions have eased amid monetary loosening and improved sentiment, but risks remain high given stretched valuations – especially in sectors linked to rapid advances in artificial intelligence, it added.

Meanwhile, high debt levels and borrowing costs are constraining policy space, especially for many developing economies.

“A combination of economic, geopolitical and technological tensions is reshaping the global landscape, generating new economic uncertainty and social vulnerabilities,” said UN Secretary-General Antonio Guterres.

“Many developing economies continue to struggle and, as a result, progress towards the Sustainable Development Goals remains distant for much of the world,” he added.

GLOBAL OUTLOOK

The global economic outlook remains clouded by elevated macroeconomic uncertainty, shifting trade policies, and fiscal challenge, said the report, adding that geopolitical tensions and financial risks add to these pressures, keeping the global economy fragile.

“In 2025, a sharp increase in United States tariffs created new trade frictions, though the absence of broader escalation helped limit disruptions to international commerce.”

Despite the tariff shock, global activity proved resilient, supported by the front-loading of shipments, inventory accumulation, and solid consumer demand underpinned by monetary easing and broadly stable labour markets, said the report.

Continued policy support is expected to cushion the effects of higher tariffs, but growth in trade and overall activity are likely to moderate in the near term, it suggested.

“Global economic growth is estimated at 2.8 per cent for 2025 and is forecast to decline slightly to 2.7 per cent in 2026 before edging up to 2.9 per cent in 2027. The pace of expansion is expected to remain well below the 2010-2019 average of 3.2 per cent.”

The report said that subdued investment, high debt levels, and limited fiscal space constrain productive capacity and hold back potential growth in many countries.

“These structural headwinds raise the prospect that the world economy could settle into a persistently slower growth path than in the pre-pandemic era.”

Advances in artificial intelligence (AI) could lift productivity growth, but the scale and timing of potential gains remain highly uncertain, and the benefits may be unevenly distributed, deepening existing structural inequalities.

It said across regions, a moderate yet uneven expansion is anticipated for 2026. Economic growth in Europe, Japan, and the United States of America is projected to hold broadly steady but proceed at a modest pace, with monetary and fiscal support continuing to underpin demand.

Several large developing economies, including China, India, and Indonesia, are expected to continue recording solid growth, driven by resilient domestic demand or targeted policy support.

For the least developed countries (LDCs), the pace of expansion is forecast to strengthen yet remain well below the 7 per cent growth target of the Sustainable Development Goals (SDGs).

The report said recent global developments suggest a fragile outlook shaped by elevated policy uncertainty and softening industrial and trade activity.

“Although trade policy uncertainty has eased somewhat – reflecting partial tariff rollbacks in the United States and a wave of new trade agreements – it remains elevated by historical standards. Global policy uncertainty has declined only moderately after reaching record levels in September 2025, underscoring persistent geopolitical tensions and policy volatility.”

Prolonged uncertainty and lingering trade frictions have started to weigh on industrial production and global merchandise trade. Business confidence in major economies has softened, and consumer confidence remains subdued, said the report.

Inflation has continued to moderate across most countries, supported by easing energy and food prices. However, in several large economies, headline inflation remains above target, sustained by persistent pressures in services.

The report said that disinflation is expected to continue through 2026-2027, though supply risks from growing economic fragmentation, trade frictions, and climate-related shocks may reignite price pressures and prompt a more cautious approach to monetary easing.

“Monetary conditions eased further in 2025, and a softer United States dollar helped lower external financing costs and reduce exchange rate pressures, supporting broadly resilient global financial markets.”

Despite elevated macroeconomic and policy uncertainty, capital flows to major developing economies remained robust, strengthening external balances.

Yet sovereign financing conditions remain sensitive to shifts in global risk sentiment, given the high public debt, persistent fiscal deficits, and still elevated long-term borrowing costs in many economies, said the report.

In low-income developing countries, limited access to affordable finance and heavy debt burdens continue to constrain public investment and fiscal support for development, it added.

It said financial stability could also be tested by sharp corrections in asset prices – particularly in technology and AI-related sectors, where valuations have surged amid expectations of large productivity gains and higher future profits.

The UN cautioned that a disorderly adjustment could erode household wealth, dampen consumption, and trigger broader market spillovers.

Progress towards the SDGs remains insufficient and uneven. By 2025, only about 35 per cent of targets were on track or reflected moderate progress, it said.

The report said while global growth has shown resilience in the face of multiple shocks, income convergence between developing and developed economies slowed markedly between 2022 and 2025 in comparison with the previous two decades.

It further said growth in per capita income has decelerated in developing economies, especially in the LDCs and conflict-affected countries, even as it has picked up slightly in developed economies.

“The number of people living in extreme poverty (below $3 per day), after returning to pre-pandemic levels in 2024, declined slightly from 839 million in 2024 to 831 million in 2025.”

However, the pace of poverty reduction has slowed significantly over the past decade, and extreme poverty has become increasingly concentrated in sub-Saharan Africa and in countries affected by conflict and fragility, said the report.

REGIONAL OUTLOOK

Economic prospects across countries remain uneven, shaped by the combined effects of macroeconomic policy adjustments, exposure to trade tensions, and lingering geopolitical uncertainties, the report stressed.

“While many economies are benefiting from resilient domestic demand and easing inflation pressures, high debt burdens, tight fiscal space, and subdued investment continue to weigh on medium-term growth.”

The report said economic growth in the United States is estimated to have slowed from 2.8 per cent in 2024 to 1.9 per cent in 2025 as resilient consumer spending and AI-related investment were partly offset by widening negative net exports and a contraction in investment in residential and business structures.

Growth is projected to edge up to 2.0 per cent in 2026 and 2.2 per cent in 2027, supported by expansionary fiscal and monetary policies that cushion the impact of a softening labour market and moderating wage growth.

It said price pressures are expected to ease gradually as the lagged effects of tariff-related increases dissipate and housing rent growth decelerates, though inflation is likely to remain above the Federal Reserve target of 2 per cent in 2026.

“Downside risks include policy uncertainty, an uncertain fiscal outlook marked by persistent budget deficits and elevated public debt, and the possibility of sharp corrections in equity markets.”

Meanwhile, the report said the economy of China is projected to grow by 4.6 per cent in 2026 and 4.5 per cent in 2027 following an estimated 4.9 per cent expansion in 2025.

While escalating trade tensions with the United States raised concerns about external pressures in early 2025, a temporary easing – marked by targeted tariff reductions and a one-year trade truce (effective 10 November 2025) – has helped stabilize market confidence.

Muted inflation reflects still-subdued domestic demand, while ongoing policy measures – including consumption incentives, infrastructure investment, and industrial upgrading – are expected to support economic activity, said the report.

However, it said key risks remain, including the possibility of renewed trade frictions, subdued external demand, and persistent weakness in the property sector.

“In the medium term, the transition towards innovation-driven development – as outlined in the 15th Five-Year Plan for Economic and Social Development of the People’s Republic of China, released in October 2025 for the period 2026-2030 – may moderate headline growth but would likely enhance longer-term sustainability.”

Growth in the European Union is projected at 1.3 per cent for 2026 and 1.6 per cent for 2027, compared with an estimated 1.5 per cent in 2025, as external headwinds and structural challenges persist, said the report.

It said higher United States tariffs and ongoing geopolitical uncertainty are expected to weigh on exports, while resilient consumer spending – supported by stable labour markets and rising real wages – remains the main driver of growth. Inflation is expected to stay near central bank targets, allowing monetary policy to remain broadly accommodative and sustain credit expansion and domestic demand.

However, the report said long-standing structural issues – including competitiveness concerns, elevated electricity prices, slow technological diffusion, and population ageing – continue to constrain productivity, holding back the region’s growth potential.

In the United Kingdom of Great Britain and Northern Ireland, growth is projected to be 1.1 per cent in 2026 and 1.3 per cent in 2027, down from an estimated 1.4 per cent in 2025, with tighter fiscal policy and trade frictions expected to weigh on economic activity while sticky inflation keeps monetary policy restrictive.

Among the economies of developed Asia, growth in Japan is projected at 0.9 per cent in 2026 and 1.0 per cent in 2027, down slightly from the estimated growth of 1.2 per cent in 2025

The report said private consumption is expected to continue its gradual recovery, while exports, especially of automotive products, are likely to remain constrained by higher United States tariffs and ongoing trade policy uncertainty.

The Bank of Japan faces a delicate balancing act between containing inflation and supporting wage growth and domestic demand, it added.

In the Commonwealth of Independent States and Georgia, growth is projected at 2.1 per cent for 2026 – down from 4.6 per cent in 2024 and an estimated 2.2 per cent in 2025, said the report.

It said the pace of expansion is expected to accelerate to 2.5 per cent in 2027, but the outlook remains clouded by elevated uncertainties. Economic performance across the region diverged markedly in 2025, with a slowdown in the Russian Federation contrasting with robust growth in Central Asian economies – a pattern likely to persist in the near term.

“The protracted war in Ukraine continues to shape macroeconomic conditions, affecting inflation, employment, trade, and economic policies. For smaller economies, the fading benefits of serving as trans-shipment hubs for trade with the Russian Federation have been offset by strong domestic demand, underpinned by infrastructure investment.”

The UN said in Africa, GDP growth is forecast to gradually strengthen from an estimated 3.9 per cent in 2025 to 4.0 per cent in 2026 and 4.1 per cent in 2027, supported by improved macroeconomic stability, rising investment, and stronger consumer demand.

It said while the region’s diversification of export partners helps mitigate exposure to global trade disruptions, structural vulnerabilities persist – particularly in apparel-exporting economies.

Divergent commodity price trends continue to contribute to uneven performance across sub-regions. Inflation has eased from post-pandemic highs but remains elevated, prompting a cautious approach to monetary easing.

High debt-servicing costs continue to constrain fiscal space, while declining official development assistance (ODA) and heightened trade and financial uncertainty weigh on the continent’s medium-term outlook, the UN suggested.

In East Asia, economic growth is projected to moderate from an estimated 4.9 per cent in 2025 to 4.4 per cent in both 2026 and 2027. The strong export performance that boosted growth in 2025 – driven by the front-loading of shipments to the United States ahead of tariff increases – is expected to fade.

Nevertheless, the report said that domestic demand is expected to remain resilient, underpinned by continued disinflation, monetary easing, and fiscal expansion.

“Risks to the outlook remain tilted to the downside, reflecting protracted global policy uncertainty, the impact of higher United States tariffs, and slower growth among major trading partners.”

It said the economic outlook in South Asia remains relatively strong. Growth is projected to moderate from an estimated 5.9 per cent in 2025 to 5.6 per cent in 2026 before strengthening to 5.9 per cent in 2027.

Trade policy uncertainty continues to weigh on economic prospects, while high public debt in several countries limits fiscal space and heightens vulnerability to shocks.

In India, growth is estimated at 7.4 per cent for 2025 and is forecast at 6.6 per cent in 2026 and 6.7 per cent in 2027, supported by resilient private consumption and strong public investment, which should largely offset the drag from higher United States tariffs on exports.

Recent tax reforms and monetary easing are expected to provide additional support to near-term growth, the UN said.

Growth momentum in Western Asia is expected to strengthen, with GDP projected to expand by 4.1 per cent in 2026 and 4.0 per cent in 2027, up from an estimated growth rate of 3.4 per cent in 2025, it added.

“In oil-exporting economies, the unwinding of OPEC Plus production cuts will boost oil output and lift revenues, while ongoing diversification efforts – including in manufacturing and digital technologies – will support non-oil growth.”

The report said in Turkiye, growth is expected to remain moderate, with robust private demand (supported by monetary easing) tempered by tight fiscal policy and large external financing needs.

The regional outlook remains highly vulnerable to geopolitical risks, as persistent conflicts and security tensions continue to undermine confidence and disrupt trade and investment flows.

Meanwhile, the short-term outlook for Latin America and the Caribbean remains moderate. Regional growth is estimated at 2.4 per cent for 2025 and is projected to decline slightly to 2.3 per cent in 2026 before edging up to 2.5 per cent in 2027 – reflecting sustained growth above the 2010-2019 average of 1.6 per cent.

The report said that growth is supported by stronger private consumption and a gradual recovery in investment. Financial conditions have also improved amid relatively stable prices for key commodities, solid capital inflows, and narrowing sovereign spreads.

However, the UN cautioned that new tariff measures and shifts in immigration policies in the United States, alongside elevated shipping costs, are generating uneven impacts across the region, reshaping trade flows, altering supply chain dynamics, and influencing remittance patterns.

The report said that economic growth in the least developed countries (LDCs) is forecast to rise to 4.6 per cent in 2026 and 5.0 per cent in 2027, up from an estimated 3.9 per cent in 2025 but still below both the pre-pandemic (2010-2019) average of 5.3 per cent and the SDG target of at least 7 per cent annual growth.

Headline growth reflects improved or steady performance in several of the largest LDCs, including Bangladesh, Ethiopia, and the United Republic of Tanzania, thanks to stable agricultural output, favourable price trends for certain commodities (including gold), and robust domestic demand amid ongoing reforms under International Monetary Fund (IMF) programmes.

However, the report said many smaller LDCs continue to face significant economic headwinds, constrained by ongoing security challenges, limited fiscal space, and high debt burdens.

Elevated trade tensions and tariff increases imposed by the United States – a market accounting for nearly 10 per cent of LDC exports – are expected to weigh on export performance, it suggested.

Several LDCs, including Lao People’s Democratic Republic and Myanmar, are subject to particularly steep tariff increases, reaching around 40 per cent.

Light manufacturing exports – especially textiles and apparel, key sources of employment for women – are hit the hardest, it noted.

“The expiration of the African Growth and Opportunity Act (AGOA) in September 2025 weakens preferential access for African LDCs to the United States market, placing additional pressure on export prospects.”

A sharp decline in ODA compounds these challenges, reducing an important source of concessional financing for investment, social protection, and climate-resilience programmes, said the report.

Economic growth for landlocked developing countries (LLDCs) is projected at 4.9 per cent in both 2026 and 2027, down from an estimated 5.3 per cent in 2025. Divergent commodity-market trends are generating uneven prospects across resource-dependent economies, it added.

For instance, Turkmenistan is projected to benefit from expanding oil production, while weakening diamond prices are weighing on growth in Botswana. Steady remittance inflows continue to support domestic demand in countries such as Nepal and Tajikistan.

However, the UN said persistent logistics bottlenecks and ongoing geopolitical tensions remain major structural constraints for many LLDCs.

The economies of small island developing States (SIDS) are forecast to grow at an aggregate rate of 2.8 per cent in both 2026 and 2027, down from an estimated 3.5 per cent in 2025. International tourism continues to expand, albeit more slowly than during the post-pandemic rebound, supporting economic activity in many countries.

However, structural vulnerabilities – including high exposure to climate shocks, limited economic diversification, and elevated debt burdens – remain pronounced. According to the World Bank, as at September 2025, 11 of 37 SIDS were classified as being in or at high risk of debt distress, the report said. – Third World Network