WORLD Economic Forum – gathering of top leaders, business men and economists at Davos in their recommendations in January 2026 cautioned about the current health of Global Economy, headline inflation (which is projected to rise modestly in 2026 before resuming its decline in 2027), along with slowdown in growth, which is expected to be particularly pronounced in emerging markets and developing economies.
Downside risks dominated the outlook for 2026.Recently IMF warned that after withstanding higher trade barriers and elevated uncertainty last year, global activity now faces a major test from the outbreak of war in the Middle East. Assuming that the conflict remains limited in duration and scope, global growth is projected to slow to 3.1 percent in 2026 and 3.2 percent in 2027. Regional Growth Forecasts, according to World Bank projections indicate modest economic growth in different regions for 2026 .East Asia and Pacific is likely to grow by 4.4%, Europe and Central Asia by 2.4%, Latin America and the Caribbean by 2.3%, Middle East, North Africa, Afghanistan, and Pakistan by 3.6%, South Asia by 6.2% and Sub-Saharan Africa by 4.3%.
Risks to the outlook, while more balanced, are still tilted to the downside, including the possibility of escalating geopolitical tensions, further trade fragmentation, and higher-for-longer interest rates. Natural disasters related to climate change could also hinder activity. Subdued growth prospects across many emerging market and developing economies and continued risks underscore the need for decisive policy action at the global and national levels as per research report of Global Economic Prospects, flagship of World Bank. Due to continued inflationary pressures, central banks in both advanced economies and emerging market and developing economies (EMDEs) will likely remain cautious in easing monetary policy. As such, average benchmark policy interest rates over the next few years are expected to remain about double the 2000 average.
Despite an improvement in near-term growth prospects, the outlook remains subdued and tilted to the down side by historical standards in advanced economies and EMDEs alike. Global growth over the forecast horizon is expected to be nearly half a percentage point below its 2010-19 average pace. In 2024-25, growth underperformed its 2010s average in nearly 60 percent of economies, representing more than 80 percent of global population and world output. EMDE growth is forecast to moderate from 4.2 percent in 2023 to 3.2 percent in both 2026 and 2027. Prospects remain especially lackluster in many vulnerable economies—over half of economies facing fragile- and conflict-affected situations will still be poorer by the end of this year than on the eve of the pandemic. Escalating geopolitical tensions could lead to volatile commodity prices and further trade fragmentation risks resulting in additional disruptions to trade networks. Unilateral tariffs and trade policy uncertainty has also dented the global economy.
Persistent inflation could delay monetary easing, while a higher-for-longer interest rate environment would dampen global activity. Growth in some major economies may also slow due to domestic challenges, and climate change-related natural disasters could further hinder economic performance. On the positive side, global inflation could moderate more quickly than expected, enabling faster monetary policy easing, while stronger-than-anticipated growth in the United States could support the global outlook. Against this backdrop, decisive global and national policy efforts are needed. At the global level, priorities include safeguarding trade, supporting green and digital transitions, delivering debt relief and improving food security. At the national level, persistent inflation risks underscore the need for EMDE monetary policies to remain focused on price stability. High debt and elevated debt-servicing costs will require policymakers to sustainably boost investment while ensuring fiscal sustainability. To achieve development goals and strengthen long-term growth, structural reforms are needed to raise productivity, improve the efficiency of public investment, build human capital and close gender gaps in the labor market.
As regards regional prospects, growth is projected to soften in most EMDE regions in 2026. East Asia and the Pacific will slow mainly due to China, while Europe and Central Asia, Latin America and the Caribbean, and South Asia also decelerate due to weaker major economies. In contrast, the Middle East and North Africa and Sub-Saharan Africa are expected to see a modest pickup, though weaker than earlier forecasts. Public investment remains a key driver of EMDE growth by catalyzing private investment and boosting productivity, yet it has declined over the past decade. Where fiscal space and efficiency allow, a 1 percent of GDP increase in public investment can raise output by up to 1.6 percent over the medium term and crowd in private investment. To maximize gains, governments must improve governance, strengthen fiscal administration, enhance efficiency and create fiscal space through reforms, while global support through finance and technical assistance remains essential.
Fiscal challenges in small states include weathering shocks and rebuilding resilience. The COVID-19 pandemic and subsequent global disruptions have worsened fiscal and debt positions, intensifying existing vulnerabilities, particularly in managing frequent climate-related disasters. Two-fifths of EMDE small states are now at high risk of debt distress or already in it, roughly double the share in other EMDEs. Fiscal deficits have widened since the pandemic due to higher spending to support households and firms and weaker revenues. Comprehensive fiscal reforms are therefore essential. Revenue bases should be made more stable and less volatile, while spending efficiency must be improved. These efforts should be complemented by stronger fiscal frameworks, including better use of fiscal rules and sovereign wealth funds. The global community also has a key role in supporting small states by providing funding for climate resilience and adaptation, alongside technical assistance in fiscal policy and debt management to strengthen long-term sustainability and stability.
—The writer is Former Civil Servant and Consultant (ILO) & International Organisation for Migration and author of seven books.
