Yet one in four emerging markets still trailing pre-pandemic income levels
Despite ongoing trade frictions and policy unpredictability, the global economy is exhibiting greater resilience than many anticipated, the World Bank’s latest Global Economic Prospects report reveals. Projected global GDP growth is set to hold broadly steady over the next two years, moderating slightly to 2.6% in 2026 before edging up to 2.7% in 2027, revised upward from the mid-2025 forecast.
This unexpected strength largely stems from stronger-than-forecasted expansion in the United States, which accounts for roughly two-thirds of the 2026 growth upgrade. Nonetheless, if these projections materialize, the 2020s will mark the weakest decade for global economic growth since the 1960s. This sluggish trajectory is exacerbating disparities in living standards worldwide. By the close of 2025, nearly all advanced economies had surpassed their 2019 per capita income benchmarks, while approximately 25% of developing economies recorded declines in per capita income.
The growth in 2025 was buoyed by a surge in trade activity in anticipation of shifting policy frameworks, alongside rapid adjustments in global supply chains. These tailwinds are expected to dissipate in 2026 as trade momentum slows and domestic demand softens. Nevertheless, accommodative global financial conditions combined with fiscal stimulus in several major economies are anticipated to mitigate the deceleration. Inflation globally is forecasted to ease to 2.6% in 2026, reflecting softer labor markets and a retreat in energy prices. Growth is expected to rebound in 2027 as trade flows normalize and policy uncertainty diminishes.
“With each passing year, the global economy has become less capable of generating growth and seemingly more resilient to policy uncertainty,” observed Indermit Gill, World Bank Group’s Chief Economist and Senior Vice President for Development Economics. “But economic dynamism and resilience cannot diverge for long without fracturing public finance and credit markets. Over the coming years, the world economy is set to grow slower than it did in the troubled 1990s, while carrying record levels of public and private debt. To avert stagnation and joblessness, governments in emerging and advanced economies must aggressively liberalize private investment and trade, rein in public consumption, and invest in new technologies and education.”
Emerging markets are expected to see growth moderate to 4% in 2026 from 4.2% in 2025, before a slight uptick to 4.1% in 2027, driven by an easing of trade tensions, stabilization of commodity prices, improved financial conditions, and strengthened capital inflows. Low-income countries are forecasted to outperform, averaging 5.6% growth over 2026–27, supported by rising domestic demand, export recoveries, and moderating inflation pressures. Yet, this pace remains insufficient to close the income divide between developing and advanced economies. Per capita income growth in emerging markets is projected at 3% in 2026, roughly one percentage point below its 2000-2019 average, leaving per capita income at just 12% of advanced economies’ levels.
These trends intensify the formidable employment challenge facing developing countries, where 1.2 billion young workers will enter the labor market over the next decade. Addressing this requires a comprehensive policy framework built on three pillars: enhancing physical, digital, and human capital to boost productivity and employability; improving the investment climate through credible policies and regulatory certainty to enable business expansion; and mobilizing private capital at scale to finance growth. This approach can shift job creation toward higher-productivity, formal sector employment, fostering income growth and poverty reduction.
Fiscal sustainability also demands urgent attention. Developing economies have seen their fiscal positions erode amid successive shocks, rising development demands, and escalating debt servicing costs. The report’s special chapter analyses fiscal rules, mechanisms that set explicit government borrowing and spending limits to anchor public finances. These rules correlate with stronger growth, increased private investment, more stable financial sectors, and enhanced resilience to external shocks.
“With public debt in emerging and developing economies at its highest level in more than half a century, restoring fiscal credibility has become an urgent priority,” stated M. Ayhan Kose, World Bank Group’s Deputy Chief Economist and Director of the Prospects Group. “Well-designed fiscal rules can help governments stabilize debt, rebuild policy buffers, and respond more effectively to shocks. But rules alone are not enough: credibility, enforcement, and political commitment ultimately determine whether fiscal rules deliver stability and growth.”
Currently, over half of developing economies have implemented at least one fiscal rule, encompassing limits on deficits, debt levels, expenditures, or revenue collection. Countries adopting fiscal rules typically experience a 1.4 percentage point improvement in budget balances relative to GDP within five years, after adjusting for interest payments and economic cycles. These rules also increase by 9 percentage points the likelihood of sustained multi-year fiscal consolidation. Nonetheless, the long-term effectiveness of fiscal rules depends critically on institutional strength, economic context, and rule design, the report emphasizes.
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