By Libby George
LONDON (Reuters) – Global growth will slow in 2025, and offshore investors are set to cut the cash they send to emerging markets by nearly a quarter, as promised policies from incoming U.S. President Donald Trump reverberate through global markets, a banking trade group said on Wednesday.
The threatened tariffs, a stronger U.S. dollar and slower-than-expected interest rate cuts from the U.S. Federal Reserve are already impacting investor plans, the Institute of International Finance (IIF) said.
“The environment for capital flows has become more challenging, tempering investor appetite for risk assets,” the IIF said in its semi-annual report.
The shift is hitting China the hardest, and emerging markets outside China are expected to pull in “robust” inflows in bonds and equities – led by resource-rich economies in the Middle East and Africa.
Already in 2024, China marked its first outflow of foreign direct investment in decades, and total portfolio flows to the world’s second-largest economy are expected to turn negative, an outflow of $25 billion, in 2025.
“This divergence highlights the continued resilience of non-China EMs, supported by improving risk sentiment, structural shifts like supply chain diversification, and strong demand for local currency debt,” the IIF said.
The IIF projected that global growth will moderate to 2.7% in 2025, from 2.9% this year, while emerging markets are set to grow 3.8%.
It expects capital flows to emerging markets, though, to fall to $716 billion, down from $944 billion this year, driven primarily by weaker flows to China.
The IIF warned that its base case assumed only selective tariff implementation. If Trump’s threatened 60% tariffs on China – and 10% for the rest of the world – come into force, the scenario would worsen.
“A stronger and swifter implementation of tariffs by the United States could exacerbate downside risks, amplifying disruptions to global trade and supply chains, placing
additional strain on EM capital flows,” it said.