How will emerging markets shape global growth?

The next decade will be defined by divergence across emerging markets’ performance and prospects—culminating together to contribute roughly 65% of growth to global GDP by 2035.

What we’re watching:

Key emerging market economies have emerged thriving after enduring the complicated challenges and successive shocks of the last several years—spanning the pandemic’s exacerbation of pre-existing fiscal and social challenges; an uneven economic rebound shaped by high inflation and rapid monetary tightening; continuing geopolitical conflict and uncertainty between Russia and Ukraine and in the Middle East; and heightened trade tensions between China and advanced economies.

Looking ahead, emerging markets will play a crucial role in shaping the global economy and driving growth.

In the near-term, we expect growth to accelerate in 2025 (with average GDP growth for the largest emerging markets of roughly 4%) and credit conditions to remain favorable. Over the longer horizon, the next decade will prove emerging markets’ potential.

Emerging markets will contribute approximately 65% of global economic growth by 2035, according to S&P Global’s latest Look Forward research. This growth will be mainly driven by emerging economies in Asia-Pacific (including China, India, Vietnam, and the Philippines) and will see India cemented as the world’s third-largest economy. Over the next decade, nine key emerging markets (including Brazil, Mexico, Poland, and Saudi Arabia) will be ranked among the 20 largest worldwide.

What we think and why:

Supportive demographics defined by a low old-age dependency and expanded labor force, abundant natural resources that will position critical mineral producers for the energy transition, evolving trade dynamics with nearshoring and friendshoring, and technological innovations that improve productivity in energy and manufacturing are key opportunities that could propel emerging markets’ development over the coming decade.

Demographics will continue propelling emerging markets. While fertility rates decline globally, most emerging economies will see advantages from an expanded labor force and consumer market—with an old-age dependency ratio averaging 24% through 2025 and 35% through 2050 (far below the expected 50% expected for high-income countries).

The energy transition will shine a spotlight on emerging economies leading in mining and processing minerals, such as China (with copper, cobalt, nickel, and lithium), Chile (with copper and lithium), Peru (with copper), and Indonesia (with nickel). Such minerals, along with other key components, are essential for electric vehicle, battery, and renewable energy production.

At the same time, supply chains are reconfiguring amid disruption and geopolitical uncertainty—bringing a plethora of possibilities and challenges for Mexico, Vietnam, and India due to their respective manufacturing ties. ?

But emerging markets also face risks in navigating an evolving geopolitical environment where disruption will likely remain constant, alliances appear more fluid, and policymakers prioritize strategic competition.

Divergence between emerging markets will also define this decisive decade, as shown in S&P Global Market Intelligence’s case studies of three emerging markets with long-term development strategies. South Africa has promising growth potential but will fall short of its 2030 growth objective; strong political will in Saudi Arabia is risk-positive, pending inflows of international investment; and Malaysia’s next frontier of economic gains is closely linked to labor upskilling plans that will enhance its competitiveness over the next decade.

Lower foreign-currency debt, improved external positions, higher reserve buffers, and increased monetary-policy effectiveness signal that most emerging markets are less vulnerable to global financial shocks than they were in previous decades. Still, the market events of the last four years show that shocks are in high supply. At large, growth prospects will be determined by how adeptly emerging markets traverse the global economy’s more volatile dynamics as trade and investment flows recalibrate.

What Could Change

Despite emerging markets’ vast opportunity, per capita income will remain well below advanced economies’. Although the combined share of global GDP of the 10 largest emerging markets has more than doubled (to 31% in 2023 from 13% in 2000, this is only likely to grow by 3% by 2030—relatively unchanged from today yet accounting for nearly half of the global population. By 2035, the average GDP per capita in purchasing power parity for emerging markets will stand at 37% of that of advanced economies.?

Emerging markets that benefit from the energy transition, supply chain reorientation, and productivity-enhancing reforms, among other structural advancements, will be better positioned to increase their income levels relative to developed markets. GDP per capita convergence is progressing the most in Saudi Arabia, Uruguay, Hungary, and Poland.

At the same time, we project government debt to rise in most major emerging market economies through 2030—albeit from modest levels compared to their developed sovereign peers. In our view, most larger emerging market sovereigns will be unable to return debt to pre-pandemic levels by the end of this decade.

Emerging markets’ ability to adapt may also be affected by the worsening physical climate risks that low- and lower-middle-income countries are disproportionally at risk of economic losses from and most exposed to. Mobilization of public and private funding is required to finance their transition and adaptation needs, which most often far exceed these countries’ domestic funding capacities.

CreditWeek, Edition 47

Contributors: Jose Perez-Gorozpe and Elijah Oliveros-Rosen

Written by: Molly Mintz

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