World Bank Chief Economist Indermit Gill said trade uncertainty has exacerbated the problems of rising debt and slow growth facing emerging markets and developing countries, but lowering their own tariffs could provide a big boost.
Gill said global economists are rapidly downgrading growth forecasts for advanced economies after U.S. President Donald Trump announced a tsunami of tariffs, while growth forecasts for developing countries have been lowered, at least for now.
The International Monetary Fund and World Bank Spring Meetings in Washington this week have focused on concerns about the economic impact of a century of high U.S. tariffs and retaliatory tariffs announced by China, the European Union, Canada and other countries.
The International Monetary Fund (IMF) on Tuesday slashed its economic forecasts for the United States, China and most countries, warning that rising trade frictions will further drag on growth. The IMF predicts global economic growth of 2.8% in 2025, half a percentage point lower than its January forecast.
The World Bank will not release its twice-yearly forecasts until June, but Gill said the consensus among economists around the world is that forecasts for growth and trade have been significantly downgraded. The uncertainty index also surged after Trump’s tariffs on April 2, having already been well above a decade ago.
Gill told Reuters in an interview on Thursday that compared with earlier shocks such as the 2008-2009 global financial crisis and the coronavirus pandemic, the current shocks were caused by government policies, meaning they could also be reversed.
He said the current crisis would further depress emerging market growth, which has been steadily declining from around 6% two decades ago, with global trade now expected to grow by just 1.5%, well below the 8% growth rate in the early 2000s.
“So you have a sudden slowdown in a situation that is not particularly good,” he said, noting that portfolio investment and foreign direct investment (FDI) flows to emerging markets were also falling, as they were during earlier crises.
“In the boom years, foreign direct investment in emerging markets was 5% of GDP. Now it’s actually 1%, so portfolio inflows and FDI inflows are falling overall,” he said.
Negotiating trade deals
Gill said high debt levels mean half of about 150 developing and emerging markets are either unable to service their debts or are at risk of not being able to service them, a ratio that is double the rate in 2024 and could rise further if the global economy slows.
“If global growth slows, trade slows, more countries get into debt and interest rates remain high, many countries will get into debt distress, including some commodity exporters,” he said.
Net interest payments as a share of GDP – a measure of countries’ ability to service their debts – are now 12% for emerging markets, compared with 7% in 2014, a drop back to levels last seen in the 1990s. He said the ratio is even higher for poor countries, where debt service costs are now 20% of GDP, compared with just 10% a decade ago.
That means countries are spending less on education, health care and other programs that could boost development, he said.
Gill said interest rates will also remain high given rising inflation expectations, meaning countries’ debts could rise further if they need to roll over existing debt.
He said his advice to developing countries is to quickly and urgently negotiate a deal with the United States to reduce their own tariff rates, avoid high U.S. tariffs, and extend lower tariff rates to other countries.
It is reasonable to do so now, and U.S. pressure may ease domestic resistance. Gill said World Bank modeling shows that such measures can significantly boost economic growth.
