By Paul Hannon
The global economy is set to grow more rapidly than previously expected in the face of President Trump's tariff hikes, thanks in part to a U.S. boom in AI investment, but is nonetheless on course for its weakest decade in half a century, the World Bank said Tuesday.
In a twice-yearly report on the economic outlook, the Washington D.C.-based development bank's economists reversed many of the cuts to forecasts they announced in June as the higher duties were being rolled out. In common with other forecasters, they have been surprised by the global economy's ability to adjust to the largest rise in tariffs in a century.
"In the face of one shock after another, the global economy has proved to be surprisingly shock-proof since the pandemic," said Indermit Gill, the World Bank's chief economist.
The bank's economists estimate that the U.S. economy grew by 2.1% last year, a much better performance than the 1.4% growth they expected to see in June, but still a slowdown from 2024. They lifted their forecast for growth this year to 2.2% from 1.6%.
"Sharply higher investment in AI-related equipment and structures helped support growth," the World Bank said.
The bank's economists also upgraded their assessment of the global economy, and now estimate it grew by 2.7% in 2025, a stronger outcome than the 2.3% expansion forecast in June, and only slightly weaker than 2024. Growth is expected to slow to 2.6% this year, a stronger outcome than the previous forecast of 2.4%.
Growth could turn out to be weaker than expected this year if there is a fresh round of tariff hikes, a sharp fall in equity prices or a jump in government bond yields fueled by investor concerns about rising debts. But the World Bank said growth could also be stronger if the boom in AI investment spreads.
Boosted by U.S. imports of AI-related equipment, front-loading ahead of the imposition of tariffs and the modest scale of retaliation, global trade flows are estimated to have grown more rapidly than foreseen, increasing at a 3.4% clip that was unchanged from 2024. However, trade flows are expected to slow sharply this year as higher tariffs take a greater toll.
While much of the improvement in global growth is the result of a stronger U.S. performance, other large economies have also proved more resilient than anticipated. The World Bank raised its estimate for Chinese economic growth in 2025 to 4.9% from 4.5%, and its forecast for this year to 4.4% from 4%.
The economists estimate that the eurozone economy grew by 1.4% last year, having forecast an expansion of 0.7% in June. India also grew much faster than expected last year, with the World Bank now estimating that its gross domestic product increased by 7.2%, having forecast an expansion of 6.3%.
But while the global economy has adjusted to a series of shocks that include the Covid-19 pandemic and the fallout from Russia's full-scale invasion of Ukraine more successfully than anticipated, those big shocks keep on coming.
The result is that the global economy is now on course for its weakest decade of growth since the 1960s, according to the World Bank, which expects global output to expand by 2.7% in 2027.
"With each passing year, the global economy has become less capable of generating growth and seemingly more resilient to policy uncertainty," said Gill.
The sluggish pace of global growth will make it more challenging for developing economies to close the income gap with their advanced counterparts, the World Bank said.
By the end of last year, per capita incomes in almost all advanced economies exceeded the levels recorded in 2019. However, the World Bank estimates that incomes in one out of four developing countries had yet to recover to their pre-pandemic levels.
And while many advanced economies are already seeing a decline in the number of workers due to aging, many developing economies still need to find ways to productively employ a swelling working-age population.
"These trends could intensify the job-creation challenge confronting developing economies, where 1.2 billion young people will reach working age over the next decade," the World Bank said.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
01-13-26 0944ET
