Growth in emerging markets (EM) has been a key driver of global economic expansion for many years. These countries, characterized by their rapid economic development, have consistently outperformed advanced economies by a significant margin. However, recent trends suggest that the potential for future growth in emerging markets may be hindered by several challenges.
The exceptional growth witnessed in emerging markets, particularly in the early 2000s, was largely fueled by the rise of the Chinese economy. China’s remarkable growth rates and its influence on global trade and investment played a crucial role in boosting the overall performance of emerging markets. However, the aftermath of the Global Financial Crisis in 2007-2008 and the subsequent challenges posed by the Covid-19 pandemic have weakened the growth momentum of these markets.
Looking ahead, it is expected that growth in emerging markets will converge towards more moderate rates, reaching around 4% by 2030. Several factors contribute to this projection, and they highlight the headwinds that emerging markets are likely to face in the coming years:
1. Slowing investment growth: Investment growth in emerging markets, which was robust in the past, is projected to decline below the average rates seen over the last two decades. Factors such as worsening terms of trade, elevated debt levels, and economic and geopolitical uncertainties have contributed to this slowdown. This trend is expected to persist, which poses a significant challenge as capital accumulation is crucial for sustained growth.
2. Stalled trade expansion: International trade has historically been a driver of economic growth, but in recent years, trade has experienced stagnation due to a trend towards de-globalization. Tariffs are already low on average in both advanced and emerging economies, reducing the scope for trade to provide additional support for growth. Additionally, structural factors, such as a shift towards services-focused economies, further diminish the role of trade in driving growth.
3. Chinese economic deceleration: The Chinese economy, which has been a major catalyst for growth in emerging markets, is undergoing a significant slowdown. After decades of exceptional growth, averaging 9.5% from 1980 to 2019, China’s growth rate is expected to fall below 5% on average. Structural factors such as demographic headwinds, declining productivity growth, and high debt levels contribute to this deceleration. The slowdown in China poses a substantial challenge for emerging markets due to their close economic ties.
4. Slowing productivity growth: Productivity growth in emerging markets has been decelerating, and this trend is expected to continue. Factors such as a declining working-age population, slower educational attainment growth, and a smaller productivity gap with advanced economies contribute to this slowdown. Leveraging artificial intelligence to reverse this decline in productivity growth remains uncertain for emerging markets.
In light of these challenges, the prospects for future growth in emerging markets are subject to significant headwinds. Structural reforms will be crucial for developing countries to continue their catch-up process with advanced economies. As investment growth slows, trade stalls, China’s economy decelerates, and productivity growth weakens, emerging markets must navigate these obstacles to ensure sustainable economic development.
In conclusion, after a period of exceptional performance, emerging markets are expected to experience a moderation in growth due to significant headwinds. These include weakening productivity and investment growth, the deceleration of the Chinese economy, and stagnating global trade. Addressing these challenges through necessary reforms will be crucial for emerging markets to maintain their path towards closing the gap with advanced economies.
