Global growth outlook downgraded amid rising headwinds: QNB

02/06/2025 04:43 AST

At the beginning of the year, the global outlook pointed to stable economic growth, against a backdrop of cautious optimism. Tailwinds included continued policy easing from major central banks, resilient growth in the US, and a cyclical recovery in the Euro Area and China, with positive spillovers to the global economy.

Growth in both Advanced Economies (AE) and Developing Economies (DE) was initially expected to remain steady, at rates that would match those of last year, adding to a world economic expansion rate of 3.3%, QNB said in its economic commentary.

But the climate of optimism and positive market sentiment began to shift markedly in February, as the new US administration embarked on an aggressive agenda of policy change, with sweeping implications for the global macroeconomic landscape.

In fact, following US-driven trade uncertainties after "Liberation Day," expectations for growth were significantly downgraded. The 2.8% rate currently expected for this year is well below the initial expectations, and the 3.5% long-term average for 2000-2024.

The World Economic Outlook (WEO) is a valuable tool to discuss the global economic prospects.

The WEO is the flagship publication crafted by the International Monetary Fund (IMF) twice a year, and is a standard benchmark for industry and markets.

It provides a unified analysis of global economic conditions, trends and risks. The recent publication of the WEO offers a timely opportunity to revisit and reassess the global outlook, in light of significant recent market volatility and escalating trade tensions.

First, the main factor behind the global outlook revision is associated with escalating trade rifts and the uncertainty this represents for both investors and consumers. Rising geopolitical tensions and policy disarray are expected to dampen trade volumes and cross border production, particularly in countries reliant on export-led growth strategies.

Leading economic indicators in trade-intensive Asian countries, a barometer for global commercial activity, have already deteriorated sharply.

More broadly, the volume of world trade in goods is seen expanding only about 1% this year, a quarter of the annual average of the last two decades.

Given the role of trade as an engine of economic activity, its lacklustre performance this year will act as a drag on global growth. Second, the impact of the shock is also expected to be broad-based across geographies and country groups.

In Advanced Economies (AE), the downgrades were led by the US, where growth is now expected to decelerate to 1.8% this year, a full percentage point below the performance of last year.

The epicentre of the policy uncertainty, the US is expected to be significantly impacted even when the overall share of trade on GDP is relatively small. However, given its sweeping tariffs and the counter-measures from other countries, a significant share of the country's overall imports and exports are directly affected.

The downgrades were also prevalent on other developed nations, including the Euro Area, Japan, and the UK. As a result, the group of AE, which represents 40% of the world economy, is now expected to decelerate to 1.4% this year.

Growth in Developing Economies (DE) is also seen losing pace, with the growth rate falling to 3.7%.

Within this group, the current outlook points to a slowdown in Emerging and Developing Asia and Europe, as well as Latin America and Subsaharan Africa, while only the Middle East and Central Asia would see an improvement relative to last year.

Thus, worsening broad-based growth projections across both the AE and DE groups have contributed to a more subdued global outlook.

Third, financial conditions have remained tighter than previously expected, increasing the costs of debt for firms and consumers. Sovereign yields in AE began to rise with the monetary policy tightening cycles by major central banks in 2022.

In spite of the beginning of rate cuts by the US Federal Reserve and the European Central Bank, longer-term yields have remained high, on the back of increased government bond issuances, renewed inflation concerns, and policy-induced disruptions in US Treasury markets.

As a result, long-term government bond yields adjusted for inflation, which determine the real costs of debt, remain close to their highest levels in more than a decade across the major AE.

Adding to the tightening of financial conditions, the spreads between high yield corporate bonds and long-dated government debt have increased.

Higher real long-term yields and wider corporate yield spreads create additional headwinds for economic growth, as borrowing costs negatively impact investment and consumption.

All in all, the global outlook has deteriorated sharply since the beginning of the year, on the back of worsening prospects for international trade, a broad-based weakening performance expected across the AE and the DE, and tighter financial conditions weighing on consumption and investment.

The Peninsula