Financial system must adapt to better serve global economy: UNCTAD

ISTANBUL

The UN Trade and Development Organization (UNCTAD) predicted Wednesday that global economic growth could reach 2.6% this year due to increased financial volatility and geopolitical tensions, and stated that the financial system must adapt to better serve the needs of the economy.

"On the surface, global trade looks resilient. Goods are moving, supply chains are adapting, and trade grew about 4% in early 2025 – even amid tariff hikes and geopolitical tensions," UNCTAD said in its Trade and Development Report 2025.

While the service sector grew faster, supported by the growth of the digital economy and artificial intelligence economy, trade between developing countries increased above average, according to the report.

It said despite this growth, policy instability now poses a persistent challenge to trade, investment, and development, with financial shocks rapidly spilling over into the real economy and gaps emerging in the global economic structure. The dependence of over 90% of global trade on finance is reshaping opportunities but also deepening vulnerabilities.

These financial volatility and geopolitical uncertainties are increasingly putting pressure on global trade and investment.

As this situation impacts economic growth, global economic growth is projected to slow from 2.9% in 2024 to 2.6% this year, the report said.

According to UNCTAD, as globalization is reshaped by geopolitical uncertainties and policy shifts, the financial system will have to adapt to better serve the needs of the real economy.

"Trade is not just the concatenation of suppliers. It is also the concatenation of credit lines, payment systems, currency markets and capital flows," UNCTAD Secretary-General Rebeca Grynspan said.

Developing economies face the highest financial and climate risks.

Developing economies, which are more vulnerable to the financial system, are expected to grow 4.3% faster than developed economies.

However, developed countries face challenges such as higher financing costs, greater exposure to sudden changes in capital flows, and increased financial risks from climate change. These factors limit the fiscal and investment space needed to sustain growth.

The Global South, encompassing developing countries in Africa, Asia, and South America, accounts for more than 40% of world production, nearly half of goods trade, and more than half of global investment inflows. Despite this, their role in financial markets remains limited.

Excluding China, developing countries represent only 12% of global stock market capitalization and 6% of bond issuance.