World Bank: inflation decline drives 5.6% growth prospect
The World Bank Group yesterday projected two-year 5.6 per cent growth in low-income countries driven by stronger domestic demand, exports recovery, and easing inflation.
In its latest Global Economic Prospects report, the global lender said despite 2026–27 growth prospects, the income gap between developing and advanced economies will continue to narrow.
“Per capita income growth in developing economies is projected to be three per cent in 2026, about a percentage point below its 2000-2019 average. At this pace, per capita income in developing economies is expected to be only 12 per cent of the level in advanced economies,” it said.
Global inflation is projected to edge down to 2.6 percent in 2026, reflecting softer labour markets and lower energy prices. Growth is expected to pick up in 2027 as trade flows adjust and policy uncertainty diminishes.
In 2026, growth in developing economies is expected to slow to 4 percent from 4.2 percent in 2025 before edging up to 4.1 percent in 2027 as trade tensions ease, commodity prices stabilize, financial conditions improve, and investment flows strengthen the World Bank Group’s Chief Economist and Senior Vice President for Development Economics, Indermit Gill disclosed that with each passing year, the global economy has become less capable of generating growth and seemingly more resilient to policy uncertainty.
“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,” he said.
In addition, developing economies need to bolster their fiscal sustainability, which has been eroded in recent years by overlapping shocks, growing development needs, and rising debt-servicing costs. A special-focus chapter of the report provides a comprehensive analysis of the use of fiscal rules by developing economies, which set clear limits on government borrowing and spending to help manage public finances.
These rules are generally linked to stronger growth, higher private investment, more stable financial sectors, and a greater capacity to cope with external shocks.
World Bank Group’s Deputy Chief Economist and Director of the Prospects Group, M. Ayhan Kose, said that 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.
“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,” he said.
More than half of developing economies now have at least one fiscal rule in place. These can include limits on fiscal deficits, public debt, government expenditures, or revenue collection.
The report explained that developing economies that adopt fiscal rules typically see their budget balance improve by 1.4 percentage points of GDP after five years, once interest payments and the ups and downs of the business cycle are accounted for.
“Use of fiscal rules also increases by 9 percentage points the likelihood of a multi-year improvement in budget balances. However, the medium- and long-term benefits of fiscal rules depend heavily on the strength of institutions, the economic context in which the rules are introduced, and how the rules are designed, the report finds.
According to the report, the global economy is proving more resilient than anticipated despite persistent trade tensions and policy uncertainty. Global growth is projected to remain broadly steady over the next two years, easing to 2.6 percent in 2026 before rising to 2.7 percent in 2027, an upward revision from the June forecast,” it said.
Also, the resilience reflects better-than-expected growth, especially in the United States, which accounts for about two-thirds of the upward revision to the forecast in 2026.
“Even so, if these forecasts hold, the 2020s are on track to be the weakest decade for global growth since the 1960s. The sluggish pace is widening the gap in living standards across the world, the report finds: at the end of 2025, nearly all advanced economies enjoyed per capita incomes exceeding their 2019 levels, but about one in four developing economies had lower per capita incomes,” it said.
In 2025, growth was supported by a surge in trade ahead of policy changes and swift readjustments in global supply chains. These boosts are expected to fade in 2026 as trade and domestic demand soften. However, the easing global financial conditions and fiscal expansion in several large economies should help cushion the slowdown, according to the report.
