ECONOMIC OUTLOOK
STORM CLOUDS OVER GROWTH
Prashanthi Cooray reports on findings in the World Bank’s global forecast
Sri Lanka’s economic trajectory faces renewed headwinds as the World Bank’s latest Global Economic Prospects report points to a broad global slowdown. According to the report, the world economy is forecast to grow by only 2.3 percent this year – its slowest pace in 17 years outside of periods of recession.
This deceleration stems from escalating trade tensions, policy uncertainty and financial market volatility. Almost 70 percent of economies have seen their 2025 growth forecasts downgraded since January.
For many emerging markets and developing nations, the prevailing global landscape is making it harder to spur job creation and reduce poverty. Weak trade growth and sluggish investment are weighing heavily on their chances of a brighter future.
Across the South Asia region, the pace of economic expansion is weakening. Regional growth is estimated at 5.8 percent in 2025 – a 0.4 percentage point downgrade compared to January’s projections.
The World Bank attributes this to growing restrictions on trade, which are impacting exports, eroding business confidence and discouraging private sector investment.
In India, growth is projected to reduce to 6.3 percent in financial year 2025/26. Pakistan is expected to experience a modest improvement due to declining inflation and lower borrowing costs. Meanwhile, Bangladesh’s growth is forecast to increase to 4.9 percent, depending on political stability and reform implementation.
Sri Lanka’s economy grew by five percent last year, supported by an uptick in industrial output and increased construction activity. However, according to the South Asia regional report, this momentum is projected to ease in 2025 with GDP growth forecast at 3.5 percent.
This reflects the lingering effects of the country’s economic crisis, structural barriers to growth and continued global uncertainty.
World trade has slowed, falling from an average of 5.1 percent in the 2000s to only 2.6 percent in the 2020s. Investment growth has also remained weak while debt continues to mount. According to the report, per capita income growth in developing economies is expected to reach only 2.9 percent in 2025 – well below the 2000-2019 average of four percent.
In his foreword to the report, the World Bank Group’s Chief Economist and Senior Vice President for Development Economics Indermit Gill describes the global economy as being “once more in turbulence.” He warns that without decisive action, the impact on living standards could be severe.
“The global economy today is at an inflection point,” Gill notes, adding that the forces that lifted many out of poverty are now reversing.
The World Bank emphasises three policy priorities: rebuilding global trade relations, restoring fiscal order and accelerating job creation. While the report does not offer country specific recommendations, it argues that regional and international cooperation will be essential to restoring growth.
Developing economies, it states, can benefit from lowering trade barriers, improving tax systems, and upgrading education and labour markets.
With the outlook still fragile, risks such as escalating international trade disputes, rising inflation and tighter financial conditions could trigger capital outflows and currency pressures in the region.
The South Asia update also highlights the risk of natural disasters, particularly in climate vulnerable countries such as Sri Lanka, which could intensify existing macroeconomic weaknesses.
While Sri Lanka has made strides towards a recovery, the path forward won’t be easy. Policymakers face tough choices – tackling debt, inflation and climate risks, while restoring fair trade and equipping youth with skills essential to generate jobs and sustain long-term economic resilience.
For families that are already managing tight budgets, even small setbacks may be felt deeply. And so steady leadership and thoughtful reforms will be key to keep the economy afloat and ensure that a recovery reaches those who need it most.
