Stronger policy coordination urged, as trade tensions cloud world economic outlook

TRADE tensions and fiscal strains loom as challenges in 2026, despite the global economy having demonstrated resilience in the year just gone, a document prepared for the United Nations reveals.

The World Economic Situation and Prospects 2026 report said growth was expected to slow to 2.7% in 2026, below 2025 levels and the pre-pandemic average.

This was related to “subdued investment and structural headwinds weigh on momentum despite easing inflation and monetary loosening”.

“Without stronger policy coordination, today’s pressures risk locking the world into a lower-growth path,” the report stated.

“Tight fiscal space, uneven disinflation and weakening multilateral cooperation are slowing progress towards the Sustainable Development Goals, particularly in developing and climate-vulnerable economies.”

The report noted:

• Global growth is slowing and remains uneven. World output is projected to slow to 2.7% in 2026 before edging up to 2.9% in 2027. While domestic demand and policy easing are supporting activity in the US and parts of Asia, growth remained weak in Europe.
• Trade and investment face mounting headwinds. Global trade performed better than expected in 2025, driven by early shipments ahead of higher tariffs and robust services exports. But growth is projected to slow in 2026.
• Inflation is easing, but the cost-of-living squeeze persists. Global headline inflation is projected to fall slightly in 2026 from 2025. However, high prices are expected to continue to erode real incomes.
• Financial conditions have eased, but risks remain elevated. Lower interest rates and improved market sentiment have helped revive capital flows, but high asset valuations – particularly in AI-related sectors – and still-elevated borrowing costs continue to pose risks.

“Many developing economies remain constrained by heavy debt burdens and limited access to affordable finance,” the report stated.

According to the report, monetary policy alone could not manage persistent price pressures, and there was a need for an “open, rules-based trading system.

“Better alignment between monetary, fiscal and industrial policies is essential to stabilise inflation, support investment and protect vulnerable groups,” the report stated.

“Strengthening transparency, predictability and cooperation in global trade remains central to sustaining growth and limiting fragmentation in an increasingly uncertain global economy."