Global growth is expected to slow in 2025, and offshore investors are likely to cut their investments in emerging markets by nearly a quarter as promised policies from incoming U.S. President Donald Trump resonate across global markets, according to a report released by the Institute of International Finance (IIF) on Wednesday.
The IIF highlighted that the threatened tariffs, a stronger U.S. dollar, and slower-than-anticipated interest rate cuts from the U.S. Federal Reserve are already influencing investor decisions. “The environment for capital flows has become more challenging, tempering investor appetite for risk assets,” the IIF said in its semi-annual report.
The report noted that the impact is particularly severe on China, where the outflow of foreign direct investment in 2024 marked the country’s first in decades. Looking ahead, the IIF projects that total portfolio flows to China will turn negative, with an expected outflow of $25 billion in 2025.
“The divergence highlights the continued resilience of non-China emerging markets (EMs), supported by improving risk sentiment, structural shifts like supply chain diversification, and strong demand for local currency debt,” the IIF stated.
The report also warned that global growth is expected to moderate to 2.7% in 2025 from 2.9% this year, while emerging markets are projected to grow 3.8%. However, capital flows to these markets are anticipated to decline to $716 billion, down from $944 billion in 2024, largely due to weaker flows to China.
The IIF cautioned that this forecast assumes only selective tariff implementation by the U.S. If Trump’s threatened tariffs—60% on Chinese goods and 10% on the rest of the world—come into full force, the scenario could 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,” the IIF said.
In particular, the report highlighted that resource-rich economies in the Middle East and Africa are expected to continue attracting robust inflows in bonds and equities, largely due to their unique market conditions and demand for diversification from global investors.
This forecast underscores the vulnerability of emerging markets to external shocks and policy changes from major economies, suggesting that while other regions may offer stability and growth opportunities, the global economic environment in 2025 will be more uncertain.
