Slowdown Multiplied By Wars: Global economic growth in the 2020s will be the lowest in half a century

A headwind: the global slowdown and its causes

The global economy looks stable, but a return to ‘pre-pandemic’ growth rates in the coming years is unlikely. On the contrary, if any change occurs, it is more likely to be for the worse. This is the general sentiment of reports released in January by the International Monetary Fund, the World Economic Forum in Davos, the World Bank and the UN Department of Economic and Social Affairs, which outline key trends in global economic development for this and the forthcoming years.

Specific estimates of future global GDP growth rates vary across these reports, as do assessments of what exactly constituted pre-pandemic growth. For instance, the IMF estimates that the world economy grew at an average rate of 3.65% per year from 2010 to 2019 and forecasts 3.3% growth in the coming years (3% on average for 2020–2029). The UN estimates past growth at 3.2% annually and expects 2.8–2.9% in the future. The World Bank calculates 3.19%growth in the 2010s and forecasts a 2.7% annual increase in the 2020s. In all cases, the growth rate for the 2020s is projected to be 0.3–0.65% lower than in the 2010s. As a result, forecasts suggest that this decade will see the slowest global growth in half a century.

At the same time, current economic conditions remain relatively stable, as noted by nearly all the reports. In 2024, central banks have largely succeeded in their disinflation efforts, managing the negative shocks of the early 2020s. According to the IMF’s baseline forecast, global inflation will continue to decline – from 5.8% in 2024 to 4.2% in 2025 and 3.5% in 2026. However, experts warn that policy decisions – sanctions, protectionism, and trade wars – could disrupt this trend. The risk of inflation resurgence may prompt Western central banks to start raising interest rates again by 2025. Former Swiss National Bank governor and BlackRock vice chairman Philipp Hildebrand believes that the world has entered a period of ‘persistently sticky’ inflation driven by structural factors.

The primary reason why all reports forecast slower economic growth this decade is the expected slowdown of developing economies, which were the main drivers of high growth in the previous two decades (Figure 1). The growth rates of developed countries have fluctuated less significantly, ranging between 1.7% and 2.05%, whereas developing economies are projected to slow from 5.8% to 3.8%. Moreover, as we can see in Figure 2, investment as a share of GDP increased in emerging markets during the 2000s and 2010s while declining in developed economies. However, in the 2020s, this trend has reversed: the redistribution of investments in favour of emerging markets has stopped, and their share remains stable, with only a modest 0.5% increase in the IMF forecast. The growth rate of world trade is also decelerating: total world trade in goods and services grew by 6.6% in the 1990s, 5.2% in the next decade, 4.6% in the 2010s and a modest 2.9% is projected in the 2020s. This marks the end of the 'golden twenty years' from 2000 to 2019, when rapid globalisation fueled 3.7% annual global GDP growth, with emerging markets expanding at 5.4%. That era is now history.

Figure 1. global economy growth rates, developed and developing countries over five decades, % of GDP

Figure 2. Share of investments in GDP: dynamics over five decades, % 

This issue is specifically addressed in the World Bank’s mid-January report, 'Developing and Emerging Economies in the 21st Century.' The title of its third chapter, 'From Tailwind to Headwind,' encapsulates the main idea. According to the report, the integration of emerging markets into the global economy has been slowing since the 2008–2009 financial crisis. Today, foreign direct investment (FDI) inflows, measured as a share of GDP, are half the level they were in the early 2000s. This is a concerning trend: with lower global GDP growth, the bulk of new wealth accrues to developed economies, while for most developing nations, slower growth is insufficient to meet their development challenges. Yet, this trend is gaining momentum and becoming more politically entrenched.

Fragmentation: drivers and consequences

Fragmentation and uncertainty are the dominant themes in economic forecasts and expert commentaries. The Davos Forum report, traditionally published by the Centre for the New Economy and Society, places a strong emphasis on fragmentation. This trend began in the 2010s, particularly with the US-China trade war, and was further accelerated by the pandemic (which forced countries to rethink supply chains) and Russia’s invasion of Ukraine, which triggered sanctions. The Davos report is based on a survey of several dozen leading economists from private companies and the public sector. 95% of them expect increased trade fragmentation over the next three years, 75% expect restrictions in labour migration, 65% in technology, 60% in services, and about half anticipate fragmentation in finance. Businesses are adapting internally to this new fragmented reality.

Fragmentation is a two-way process associated with developing countries, on the one hand, reassessing their economic and political influence and, on the other hand, with developed countries reassessing the risks of increasing this influence. Despite the fact that the share of developed economies in global GDP has fallen from 75% in the early 2000s to 45% in the 2020s, and the share of developing nations has grown, political convergence between these worlds remains slow. Emerging economies increasingly see themselves as the 'global majority' and adopt revisionist stances toward the existing world order. In response, developed nations prioritise geopolitical risk management in investment decisions (→ Re:Russia: Reversal of Globalisation). This shift leads to a desire to securitise supply chains and the extraction of critical resources, while the flow of investment into emerging markets is slowing, resulting in a deceleration of growth.

One possible scenario, however, is not a decline in investment in developing markets but rather a geographical shift (→ Re:Russia: Unsinkable Globalisation). The biggest winners at this stage are countries with low geopolitical ambitions. India has widely been viewed by economists as a potential new engine of global growth. Bloomberg Economics forecasts that by the end of this decade its economic growth rate may reach 8.5%. However, the IMF is more sceptical in this respect, predicting 6.5% growth for India, which will not offset China’s slowdown. Countries that are already deeply integrated into the global trading system, such as Malaysia, Mexico and Vietnam, stand to benefit most from the reshaping of international trade flows. Meanwhile, low-income countries that were already on the periphery of globalisation are falling even further behind, note Pinelopi Goldberg, professor of economics at Yale University, and IMF expert Michele Ruta. The World Bank report echoes the same idea.

Technological fragmentation is intensifying due to restrictions driven by national security concerns, data protection, and intellectual property rights. According to IMF estimates around 20% of industrial regulatory measures adopted by developed nations in 2023 were motivated by geopolitical and security considerations. At the same time, it is not only about restricting China's access to Western technologies, the Financial Times notes. For example, the US recently placed Dutch semiconductor equipment manufacturer ASML under export controls. Even within Europe, countries are beginning to limit cooperation: Spain blocked the sale of its dual-track railway technology to a Hungarian company due to security concerns – fearing that the know-how could leak to Russia, with whom Hungary maintains friendly ties, the report notes.

Uncertainty: the Trump factor and the return of protectionism

If 'fragmentation' is the key theme of the Davos report, the IMF and UN economic division reports focus on 'uncertainty' – a concept closely linked to fragmentation. Geopolitical risks and political instability are the primary drivers of this uncertainty. Both in Europe and the US, politicians with revisionist views and protectionist tendencies are either seeking power or already in office.

Global trade could suffer far more than expected, warn economists, if trade wars escalate in 2025 – even beyond the already pessimistic baseline scenario. During his campaign, Donald Trump proposed raising tariffs to 10% or even 20% on all imports and up to 60% on Chinese goods. He later radicalised his stance further. If this plan is implemented and US trading partners retaliate, the IMF Vice-Director Gita Gopinath warns that global GDP could shrink by up to 7%. However, predicting the actual course of events is impossible – Trump is known for his equal determination in making threats, promises, and later abandoning them.

Regardless, tariffs have long-term economic consequences, which experts are trying to quantify. The Tax Foundation report estimates that Trump’s first-term tariffs cost the US economy between 0.2% and 0.7% of GDP. If he imposes a 10% tariff on all imports, the potential loss could reach 0.5% of US GDP. There are also more extreme projections. Moody’s, cited in the Tax Foundation analysis, forecasts that if US trading partners impose retaliatory tariffs, the cumulative deviation from potential GDP growth over four years could exceed 10%.

However, a model developed by the Peterson Institute predicts greater losses for US trading partners than for the American economy. Mexico would be hit the hardest. Under a scenario where the US imposes 25% tariffs on imports from Mexico and Canada and 10% tariffs on imports from China, the US GDP would decline only slightly – by mere hundredths of a percentage point in the first year, 0.3 percentage points (p.p.) in 2026, and then stabilise at 0.15 p.p. below the baseline.China’s GDP would suffer even less, with a decline of 0.16 p.p. in the first year, 0.21 p.p. in the second year, and stabilisation at 0.15 p.p. thereafter. Meanwhile, Canada's GDP could lose up to 1 p.p. of growth at its peak, while Mexico’s losses could reach 2 p.p. Over a four-year Trump presidency, tariffs on Mexican and Canadian imports would result in $200 billion in lost US GDP compared to a no-tariff scenario. The impact of US-China tariff escalation is estimated by the Peterson Institute at $55 billion in lost US GDP and $128 billion in lost Chinese GDP, which analysts describe as relatively modest figures.

The Kiel Institute for the World Economy presents an even more pessimistic outlook for North America. Their model predicts that in the first year following 25% tariffs, Mexico’s GDP would shrink by 4%, and Canada’s by nearly 3%, while US GDP would lose only a fraction of a percentage point. According to Economist Intelligence's baseline forecast, Trump is expected to raise tariffs on Chinese imports to 30%, which would reduce China’s GDP by about 0.6 p.p. from 2025 to 2027. If he follows through with his 60% tariff threat, China’s GDP loss over the same period would reach 2.5 p.p.. Under this radical scenario, China’s economic growth would slow to 4% in 2025 and 3.5% in 2026.

Thus, the economic consequences of tariffs would be mutual – impacting both the US and China – but likely not catastrophic. This suggests that Trump’s economic leverage against America’s geopolitical rival may not be as strong as he or many others believe. In such a case, Trump's actions may fail to achieve their intended goals but could still cause significant disruption to US trade partners and global commerce. The trend of political restrictions on economic ties would continue to gain traction, fueling a global surge in protectionism. However, even this protectionist scenario would not lead to a decisive turn of the world towards consistent deglobalisation, but rather to a significant transformation of existing global economic structures.