Diverging growth prospects and narrowing EM outperformance in 2026

Summary

The global economy is on pace to decelerate in 2026, but with near-term China and U.S. growth prospects set to diverge next year, the emerging economy (EM) growth outperformance relative to developed economies (DM) is set to narrow once again. In fact, the EM-DM growth gap has been on a downward trajectory for close to twenty years and may shrink to the narrowest since before China ascended to the World Trade Organization in the early 2000s. With China's economy facing structural challenges to growth the EM-DM growth gap may never recover to past peak levels, and with policy space across the broader emerging markets also limited, the EM-DM growth spread may continue to narrow for the foreseeable future.

In our 2026 Annual Economic Outlook, we mentioned how global growth in the upcoming year is unlikely to match the pace of global expansion experienced in 2025. To that point, we expect the global economy to grow ~2.8% next year, slightly softer than our estimate for 3% global GDP growth this year. Our 2026 outlook highlights how China will be the driving force of the global growth deceleration. China's economy is fraught with structural issues (i.e., poor demographics, declining productivity, excessive leverage etc.), but we also make the point that U.S. imposed tariffs and severing trade relations with the U.S. will prevent the Chinese economy from seeing much of the benefit from resilient U.S. consumer demand next year. While not solely responsible for the global economic deceleration next year, China will nevertheless be the largest contributor to the softer pace of expansion. In 2025, we estimate China's economy grew ~5% and contributed 0.89 percentage points to the global economy's estimated 3% growth. Next year, as domestic and external challenges sink in, we believe China's economy will grow 4.3% and contribute 0.75 percentage points to global economic growth. While China is not the only economy set to contribute less robustly to global growth next year, China will certainly be leading the charge.

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