The global economy is headed for rougher waters, according to a new report released today by the United Nations Conference on Trade and Development (UNCTAD). Global growth is now projected to slow to just 2.3% in 2025, falling beneath the often-cited 2.5% threshold that many economists associate with a technical global recession. This forecast paints a worrying picture of escalating challenges facing businesses, investors, and policymakers worldwide.

According to UNCTAD, the already sluggish pre-pandemic global economy is now weighed down further by rising uncertainty, tightening financial conditions, and intensifying geopolitical tensions. While the world economy has been showing resilience since the pandemic recovery began, the momentum is rapidly fading, raising fresh concerns about a prolonged period of stagnation.

Escalating Uncertainty Clouds the Outlook

One of the biggest culprits behind the projected slowdown is surging uncertainty in global trade and economic policies. Trade tensions are once again rising sharply, reversing years of efforts toward stability. A wave of new tariffs and protectionist measures introduced by major economies is undermining the predictability that businesses rely on for investment and expansion decisions.

“This rising unpredictability is causing manufacturers and investors to rethink strategies, delay capital investments, and bolster risk management frameworks,” UNCTAD’s report noted. “A business environment marked by second-guessing and hesitation is not conducive to sustained growth.”

In particular, the Trade Policy Uncertainty Index—a measure of how unpredictable global trade policies have become—has climbed to levels never seen before, surpassing even the tumultuous periods during the 2008 global financial crisis and the 2020 COVID-19 pandemic.

Financial markets have not been spared either. The Economic Policy Uncertainty Index, which tracks how uncertain economic policies are perceived to be, soared to its highest point this century in early 2025. This turbulence has manifested in sharp corrections across major stock markets, with the so-called “fear index”—the VIX, which measures market volatility—recording its third-highest level on record, behind only the peaks observed during the COVID-19 pandemic and the 2008 crash.

Global Trade Momentum Wanes

Trade, long a vital engine of global growth, is also faltering. After a brief surge at the end of 2024, global merchandise trade is now losing steam. The Shanghai Containerized Freight Index—a benchmark for the cost of shipping goods—plummeted by 40% between January and March 2025, wiping out gains made during the post-pandemic rebound and returning to levels last seen before COVID-19 struck.

The drop in trade volumes is seen not only in Asia but across major trading corridors. Ports in Europe and North America have reported declining throughput, and shipping companies are scaling back their forecasts for the rest of the year. This contraction is symptomatic of broader global economic malaise, with corporations slashing their investment budgets and households cutting back on discretionary spending.

Tighter Financial Conditions Squeeze Growth Prospects

The financial squeeze is adding another layer of complexity. The term premium—the additional yield that investors demand to hold longer-term government bonds—has risen sharply. As a result, borrowing costs for governments, households, and businesses are climbing, making it harder to finance infrastructure, homes, or new ventures.

“This environment of high interest rates and risk aversion will hit developing economies particularly hard,” UNCTAD warned. Many low- and middle-income nations, already burdened by soaring external debts, face a perfect storm of declining access to affordable finance, weakening currencies, and slowing domestic growth.

The International Monetary Fund (IMF) recently estimated that more than half of low-income countries—35 out of 68 nations—are now either in debt distress or at high risk of falling into it. For these countries, the global financial environment is a no-win scenario: even as revenues fall and debt repayments rise, investors are growing more risk-averse, pulling money out of emerging markets and parking it in “safe haven” assets like U.S. Treasuries.

This shift is crowding out financial flows critical to the Global South, exacerbating inequality and threatening hard-won development gains.

Risks for Developing Economies

Developing economies are at the epicenter of the global slowdown’s impact. Many face intertwined crises: rising food and energy prices, volatile exchange rates, and depleted fiscal buffers after years of pandemic-related spending. Even countries that had begun to recover are now being tested by these new shocks.

Countries across Sub-Saharan Africa, for instance, are dealing with not only slowing exports and rising debt service costs but also the intensifying impacts of climate change—floods, droughts, and storms that further strain already fragile economies.

Latin America, while benefiting from stronger commodity prices in some sectors, faces a tightening squeeze as external financing becomes more expensive and investor appetite cools. Meanwhile, parts of Asia, particularly South and Southeast Asia, continue to display resilience but are not immune to the broader global slowdown.

UNCTAD stressed that developing countries must urgently diversify their economies, strengthen domestic capital markets, and enhance regional trade links to buffer against the fallout from advanced economies’ monetary tightening cycles.

Bright Spots Amid the Gloom: South-South Trade

Despite the challenging environment, not all news is grim. Trade among developing countries, often called South-South trade, has remained relatively resilient. South-South trade now accounts for about one-third of global trade, according to UNCTAD, and continues to expand at a faster rate than trade among advanced economies.

Much of this growth is driven by the dynamism of Asian economies. East and South-East Asia have been particularly robust, with strong intraregional trade underpinning economic activity. In 2024, the region was responsible for over 40% of global GDP growth, highlighting the increasing importance of emerging markets in the global economy.

China, despite facing its own economic headwinds, remains a central hub for regional supply chains, while countries like Vietnam, Indonesia, and India are also playing a growing role in reshaping global trade patterns. Regional cooperation initiatives, such as the Regional Comprehensive Economic Partnership (RCEP), are facilitating trade flows and deepening economic ties across Asia.

UNCTAD’s Call for Action

In light of these worrying trends, UNCTAD is urging governments to act decisively. The organization’s latest report emphasizes the need for:

• Stronger Regional Integration: Strengthening economic links between neighboring countries can help build resilience and create new markets for goods and services.
• Renewed Multilateral Cooperation: Global challenges require global solutions. UNCTAD calls for a revitalization of international cooperation mechanisms to address trade tensions, resolve debt crises, and tackle climate change.
• Rebalancing Fiscal Priorities: UNCTAD advocates for a shift in government spending priorities towards sustainable infrastructure, social protection systems, and climate action. These investments not only create jobs but also enhance economic resilience over the long term.
• Addressing Climate Risks: With climate change acting as a “threat multiplier,” UNCTAD calls for climate adaptation and mitigation efforts to be integrated into economic planning at all levels.
• Financial Support for Developing Countries: International financial institutions must step up efforts to provide concessional financing, debt relief, and liquidity support to the most vulnerable economies.

Looking Ahead

The risks to global growth are now clearer than ever. Without a concerted global effort to restore stability and confidence, 2025 could be remembered not just as a year of slow growth, but as a critical turning point where fragmentation and uncertainty reshaped the world economy for the worse.

However, with coordinated policy actions, increased investments in sustainable sectors, and a recommitment to open, fair, and resilient trade systems, it is possible to avoid the bleakest outcomes. The path forward may be narrow, but it is not yet closed.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

28th April, 2025