World Economic Situation and Prospects 2026

Syllabus: GS3/ Economy

Context

• The United Nations’ World Economic Situation and Prospects (WESP) 2026 has projected India’s GDP growth to 6.6 percent in 2026 from 7.4 percent in 2025, largely due to tariffs imposed by the US on India’s exports.
  • The report was produced by the United Nations Department of Economic and Social Affairs (UN DESA).

Key highlights of the report

• Global Growth Outlook: 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 United States and parts of Asia, growth remains weak in Europe, and high debt and climate shocks continue to constrain many developing economies.
• Trade and Investment Trends: 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 and Cost-of-Living: Global headline inflation is projected to fall to 3.1% in 2026 from 3.4% in 2025. However, high prices continue to erode real incomes, particularly for low-income households.
• Financial Conditions and Risks: Lower interest rates and improved market sentiment have helped revive capital flows, but high asset valuations and elevated borrowing costs continue to pose risks.
  • Many developing economies remain constrained by heavy debt burdens and limited access to affordable finance.

Reasons for slowdown in world economy

• Inflation: While headline inflation has cooled from its peak, core inflation remains sticky, particularly in services.
• Rising trade protectionism: Higher tariffs, trade barriers and policy uncertainty have disrupted global supply chains and dampened trade growth.
• Structural challenges: Ageing populations, low productivity growth and slow technological diffusion are weighing on long-term growth.
• Weak multilateral cooperation: Fragmentation of global governance and trade rules has reduced policy coordination and growth momentum.

Key recommendations

• Coordination across macroeconomic policies: Monetary policy alone cannot manage persistent price pressures.
  • Better alignment between monetary, fiscal and industrial policies is essential to stabilise inflation, support investment and protect vulnerable groups.
• Use fiscal policy strategically and credibly: Credible medium-term fiscal plans and prudent debt management are essential to rebuild fiscal space.
• Multilateral cooperation and development finance: Implementing commitments under the Sevilla Commitment, including debt reform and expanded concessional and climate finance, is vital to closing investment gaps and reducing systemic risks.
• Open rules-based trading system: Strengthening transparency, predictability and cooperation in global trade remains central to sustaining growth and limiting fragmentation in an increasingly uncertain global economy.

Source: UN