Rising debt and sticky social spending—which rose during the pandemic—could further curb the EM investment ratio, cut productivity and curtail potential economic growth. Already EM’s growth premium over DM’s has narrowed over the past decade. This trend could persist if economic scarring is widespread.
Green Growth Shoots Could Provide Lift
Thankfully, three encouraging global developments could provide lift to some emerging economies.
First, public infrastructure investment in DM appears to be shifting into high gear. With the multiplier effect of public investment greater than for other forms of government spending, and with borrowing costs near record lows, public-led infrastructure investment in DM—and EM—could form the foundation of the global economic recovery.
Second, infrastructure investment is becoming greener. That points to strong demand for a wide range of commodities and strong tailwinds for commodity-producing EMs. A broad range of EMs are also starting to prioritize sustainable infrastructure investment, as shown by increased issuance of green bonds and other ESG-linked structures. It could take longer for this investment trend to take off and to yield positive results in EM, but a gale of creative destruction could reset potential growth.
Third, world trade may be looking up. Growth in world trade volumes decelerated after the GFC, slowed to a standstill in 2019 and recovered rapidly since the pandemic’s onset (Display 3). It may now be at a crossroads. We think sustainable infrastructure in conjunction with the prospect of improved multilateralism could create a more constructive trend in post-pandemic trade, which would be positive for EM. Even relations between the US and China likely bottomed already, though the long-term outlook for the relationship between these superpowers remains clouded.