Despite high waves and gusting winds, most emerging markets (EMs) have stayed the course. EMs were better prepared to adapt to these conditions than they have been in the past.
Growth has generally held up well in most places and outpaced developed markets. Surging exports fueled stronger growth among Asian economies, thanks to the global tech upcycle.
Capital flows remained resilient, despite tight global monetary conditions. EMs have had better success in containing inflation than their larger cousins, thanks to improved monetary policy frameworks and stable commodity costs.
There is room for more optimism. U.S. Federal Reserve rate cuts will allow EM central banks to take similar steps. Falling inflation and lower government debt burdens will translate into improved sovereign risk profiles. Subdued global demand and greater U.S. energy production will keep commodity costs in check, a tailwind to growth in commodity-importing EMs. Narrowing interest rate differentials will support their currencies.
Emerging markets are vulnerable to heightened trade frictions.
Strong current account positions, disciplined fiscal policy and higher savings will offer some fundamental protection against external pressures. However, few will come out unscathed from a further escalation in the U.S-China trade conflict and America’s broader trade agenda.
The possibility of the U.S. imposing higher tariffs looms large over EMs, as they would impair global commerce. Countries like Mexico and Taiwan will suffer from increased protectionism. A broad-based retreat from rules-based trading systems will leave many in a vulnerable position. On the other hand, EMs like India remain geopolitically and geographically well placed to benefit from realignment away from China.
Emerging markets will likely continue to play a bigger role as a driver of world economic growth in 2025. But their resilience will be put to a serious test again in the face of a challenging global climate.
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