Finance can put trade at risk, leaving the global economy ‘on the brink’ – with developing countries hardest hit

Global growth will slow to 2.6% in 2025, down from 2.9% in 2024, as global trade and investment face growing pressure from financial volatility and geopolitical uncertainty, according to UN Trade and Development’s new “Trade and Development Report 2025: On the Brink – Trade, finance and the reshaping of the global economy”.

The report shows that shifts in financial markets move global trade almost as strongly as real economic activity, influencing development prospects worldwide.

UN Trade and Development (UNCTAD) Secretary-General Rebeca Grynspan said the findings show how financial conditions increasingly determine the direction of global trade: “Trade is not just a chain of suppliers. It is also a chain of credit lines, payment systems, currency markets and capital flows.”

Global trade rose by about 4% early in 2025, driven in part by firms accelerating imports ahead of tariff changes, but also by structural shifts: Services are expanding faster, supported by growth in the digital economy and artificial intelligence, and South–South trade is growing above average.

Beneath these factors, underlying trade growth is estimated at between 2.5% and 3% and is expected to ease further as financial conditions influence production and investment decisions more strongly.

Nearly 90% of global trade depends on trade finance. Dollar liquidity and cross-border payment systems are also crucial for international trading activities. This deep reliance on financial channels makes trade closely linked to global financial and monetary conditions. A shift in interest rates or investor sentiment in a major financial centre can affect trade volumes worldwide. For developing countries, where access to affordable credit is limited, these financial pressures can undermine otherwise viable trade transactions.

The report also highlights the increasing role of financial factors of commodity markets, particularly in essential food systems.

For several major food trading companies, more than 75% of income now stems from financial operations rather than the physical movement of goods.

Developing economies face mounting pressures

Developing economies are forecast to grow by 4.3%, significantly faster than advanced economies. But they face higher financing costs, greater exposure to sudden shifts in capital flows and rising climate-related financial risks. These factors limit the fiscal and investment space needed to sustain growth.

The global South accounts for more than 40% of world output, nearly half of global merchandise trade and more than half of global investment inflows.

Yet its role in global financial markets remains limited. Excluding China, developing countries represent only about 12% of global equity market value and around 6% of global bond issuance.

Because their domestic financial markets are small, many developing economies rely on external borrowing at significantly higher cost. Borrowing rates of 7% to 11% are common, compared with 1% to 4% in major advanced economies.

These elevated costs often reflect structural issues in the international financial architecture rather than economic fundamentals, reducing long-term investment and slowing growth.

Climate vulnerability adds to financial pressures. Countries repeatedly exposed to extreme weather now pay an estimated 20 billion dollars more each year in interest because lenders perceive them as riskier. Since 2006, these additional premiums have cost climate-vulnerable economies about 212 billion dollars – resources that could have supported social investment or climate adaptation.

Dollar dominance continues to anchor global finance

Despite gradual diversification of international reserves, the dollar remains central to global finance. Its share of international payments through SWIFT has risen from 39% to about 50% in five years.

The United States also accounts for half of global equity market value and about 40% of global bond issuance.

While this provides stability in uncertain periods, it also links developing economies to financial cycles over which they have limited influence.

Source UNCTAD