The global economy is projected to slow substantially in 2025, with growth dipping to 2.6% from 2.9% in 2024, as heightened financial market volatility and sustained geopolitical uncertainty exert a drag on international trade and critical investment, according to the United Nations Conference on Trade and Development (UNCTAD), which released its comprehensive Trade and Development Report 2025 on Tuesday. This deceleration highlights a critical nexus where fluctuating financial conditions now hold an influence over global commerce comparable to traditional shifts in real economic activity, potentially altering development trajectories across the world.
Financial Conditions Dictate Global Trade Flows
While optimism surrounds emerging technologies like artificial intelligence (AI) and their potential to unlock substantial productivity gains, UNCTAD projects that overall global output will remain subdued, forecasting a consistent 2.6% growth rate into 2026.
UNCTAD Secretary-General Rebeca Grynspan emphasized that modern international trade is fundamentally reliant on financial underpinnings—including sophisticated credit lines, rapid payment systems, dynamic currency markets, and capital movements—just as much as it depends on physical supply chains. The report highlights that changes in these financial elements are increasingly critical in determining the trajectory of trade flows worldwide.
It is important to note that UNCTAD’s projections are calculated using market exchange rate (MER) weights. This contrasts with the purchasing power parity (PPP) weights utilized by organizations like the Organisation for Economic Co-operation and Development (OECD), which tend to produce a higher estimate for global growth. The OECD, releasing its own assessment simultaneously, forecast global Gross Domestic Product (GDP) growth easing from 3.2% in 2025 to 2.9% in 2026.
Developing Nations Face Elevated Financial Strain
The study indicates that developing economies are expected to maintain stronger growth, projected at 4.3% in 2025, outpacing advanced economies. However, this progress is threatened by severe financial constraints. Tighter global financing conditions, increased vulnerability to unpredictable capital flow reversals, and escalating climate-related financial risks are collectively restricting fiscal space and curbing investment capacity across much of the developing world.
A significant disparity in borrowing costs compounds these issues. Many developing countries with nascent domestic financial markets are forced to rely on external borrowing at markedly higher interest rates, often ranging from 7% to 11%. This contrasts sharply with the relatively low 1% to 4% borrowing costs prevalent in major advanced economies.
Compounding this financial burden is the impact of climate change. Recurrent extreme weather events are adding substantial strain, with climate-vulnerable states estimated to pay an additional US$20 billion annually in interest due to repeated exposure to these shocks.
Recommendations for a More Stable Economic Future
To mitigate financial fragility and improve economic predictability, UNCTAD has strongly advocated for a comprehensive suite of reforms designed to better align trade, finance, and development objectives.
Key recommendations include:
- Reforming Trade Rules: Updating international commerce regulations to reflect modern economic realities.
- Narrowing Digital Divides: Addressing constraints and inequalities related to digital data access and infrastructure.
- Monetary System Reform: Overhauling the international monetary system to enhance stability and fairness.
- Deepening Capital Markets: Expanding and strengthening domestic capital markets in developing economies.
These suggested actions aim not only to stabilize capital flows but also to create a more resilient global economic framework capable of weathering both financial volatility and mounting climate risks, ultimately fostering sustainable development worldwide.