What options do emerging market policymakers have? – Part one
|Global growth is set to slow in 2025 amid a backdrop of tariffs and broader U.S. policy uncertainty. In our view, emerging market economies are most vulnerable to softening global demand and are likely to see growth rates come under pressure this year. In a series of reports, we examine the policy options available for local policymakers to support economic activity. This first article focuses on monetary policy space (i.e., capacity for central banks to lower interest rates). At a high level, most central banks across the emerging markets do not have adequate monetary policy space to boost growth prospects, in our view. With that said, select central banks—most notably in Mexico and Colombia—may pursue monetary easing that we see as inconsistent with underlying economic and market fundamentals, raising risks to local currencies as well as broader financial stability. 2024 was a year defined by ongoing challenges, although the global economy was able to prove resilient. This year, we expect that resilience to be tested, and as we outlined in our 2025 International Economic Outlook, we believe the backdrop for global economic growth will be difficult this year. Lingering inflationary pressures and geopolitical uncertainties are factors that could drive slower activity; however, we believe global growth will be most challenged by more contentious tariff policy under the incoming Trump administration. President-elect Trump has consistently stated his preference for tariffs as means to rework trade relationships and obtain concessions from foreign nations. Given Trump's prior history implementing tariffs, we believe he will ultimately impose new levies on trade partner countries around the world. To that point, and as a reminder, the working assumption underpinning our global economic outlook is for the Trump administration to impose a 5% universal tariff on all U.S. imports and place a 30% tariff on all Chinese exports to the United States. Under these tariff assumptions, we forecast the global economy to grow just 2.5% this year, down from global growth closer to 3% in 2024. We also made the point that emerging market economies are particularly vulnerable in an environment of slower global growth, especially if the global growth deceleration is led by more inward-looking U.S. trade policy. Trade linkages with the U.S. are most significant in the emerging markets, with many developing economies reliant on U.S. consumer demand to power exports and broader economic activity. Emerging nations are also sensitive to financial market developments and capital flows. Uncertain U.S. trade policy can result in market participants seeking safe-haven destinations for capital rather than allocating toward risk-sensitive emerging markets. With many developing economies reliant on capital inflows, should portfolio or foreign direct investment inflows recede, the negative impact from tariffs could be compounded.Summary
Emerging markets are vulnerable to a global growth slowdown
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.