What options do emerging market policymakers have? Part III
|To wrap up this three part series, we examine overall policy space in the emerging markets. By “overall policy space” we are referring to the capacity for central banks to ease monetary policy and governments to deploy fiscal stimulus, in combination, to offset a tariff induced global growth slowdown. In this final report, we determine that most developing economies are associated with less than adequate overall scope for policy maneuvers, and should U.S. tariff policy be more contentious than we expect, the global growth deceleration could be more severe and ultimately led by emerging market nations. Global growth is set to slow noticeably in 2025, and with emerging economies most vulnerable to softer external demand, developing economy growth prospects are likely to dwindle this year. In this series of reports, we raised the question: “what can policymakers do to offset soft global growth?” To get a sense of available policy options, we did a deep dive into whether central banks can ease monetary policy and if governments across the developing world can offer fiscal support. Part I of this series focused on monetary policy. We made the point that many central banks do not have adequate space to pursue easier monetary policy, and if sharply lower interest rates were delivered, financial stability, and in turn growth, could be at risk. In Part II, we highlighted how fiscal deficits have widened and debt burdens have climbed post-pandemic. Worsening public finance dynamics constrain, or in some cases eliminate, fiscal policy space available to governments across the developing world. If fiscal stimulus is extended regardless of worsening public finance positions, local financial markets could experience sharp selloff's. In this final report, we examine overall policy space. That is, the capacity for central banks to ease monetary policy and governments to deploy fiscal stimulus in combination with each other. As recent tariff rhetoric hints at more aggressive tariffs than we initially assumed, an approach including two-pronged stimulus efforts may be needed to support growth in emerging economies.Summary
Putting policy space in one place
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