Investors’ Picture of Global Growth Needs an Update

The Jiangbeizui Riverbank in Chongqing, China (Jade GAO / AFP via Getty Images)

About the authors: Marcello Estevão is managing director and chief economist at the Institute of International Finance and a professor at Georgetown University. Jonathan Fortun is a senior economist at the Institute.

Global growth is expected to stay near 3% in 2026, almost unchanged over the last two years. Investors are likely to read that as a sign that nothing important is happening in the global economy. But such stability in growth can be misleading.

The world economy is so steady not because it has gone still, but because it is rearranging itself. And the shape of that rearrangement tells us more about future returns than any single growth figure.

The economic hierarchy that dominated the past decade—the U.S. as the global engine, China as the main absorber of capital, and emerging markets rising or falling with the commodity cycle—is fading. A different configuration is taking shape.

The U.S. economy is cooling from its postpandemic pace. Europe and Japan, long treated as background noise, have regained their footing. China remains in a structural slowdown, while India and a wider circle of Asian economies have stepped into the space left behind. The world economy is advancing because its sources of momentum have rotated, not because they have synchronized.

Capital flows offer the clearest window into this transition. Flows into emerging markets reached about $1.18 trillion in 2025. That might have once suggested a broad rush toward higher yields. But much of the year’s increase came from balance-sheet rebuilding in emerging Europe and parts of Asia, from bank flows, and from official financing from governments and other authorities—forces that are now easing. Flows should slip to around $1.13 trillion in 2026. It would be a modest retreat that still leaves flows well above long-run norms.

The aggregate understates the real story. China now absorbs virtually no new foreign capital. Given its size, that single shift pulls down the global total. When China is set aside, emerging markets continue to attract capital at intensities similar to the before the Covid-19 pandemic. The demand for EM assets hasn’t weakened. It has redistributed.

Created with Highcharts 9.0.1Shifts Appear Within Global GrowthOverall growth is stable on the surface, but churn is visible on the inside.Annual GDP growth contributions by percentSource: Institute of International Finance

Created with Highcharts 9.0.1'05'10'15'20'251981'85'90'952000-4-202468%Asia minus China and​IndiaEuropean emerging​markets, Africa, Middle​EastLatin AmericaIndiaChinaU.S.Non-U.S. advanced​economies

Capital is moving toward economies where policy anchors are firmer, domestic demand is more predictable, and investment opportunities have broadened. Parts of emerging Asia are absorbing a growing share of capital. Several economies in EM Europe have re-established credibility. Latin America, for all its political noise, looks more stable than it did in the last commodity cycle. Even a group of large commodity importers that is often overlooked, including Thailand, Poland, and Hungary, is emerging as an important destination for new capital.

This redistribution matters for markets because it signals that the global cycle no longer runs through a single corridor. China’s inward flows may have stalled, but its outward flows have not. China has become a structural exporter of capital. The country still runs a sizable current-account surplus—roughly $500-700 billion—but instead of accumulating in official reserves, those savings are being deployed abroad by firms, households, and financial institutions.

Created with Highcharts 9.0.1China Dominates in Capital ExportsChina’s current account surplus dwarfs that of other emerging marketsCurrent account surpluses by region and yearSource: Institute of International Finance

Created with Highcharts 9.0.12005'10'15'20'25-600-400-2000200400600$800 billionEMs minus ChinaChinaMiddle EastAfricaAsia minus ChinaLatin America

That shift reduces one of the forces that once held global long-term yields down. It also makes Chinese outflows more sensitive to returns, liquidity conditions, and confidence—factors that can change far faster than central-bank reserve policy.

Outside China, Asia is becoming a more important capital anchor in its own right. Vietnam’s consistent foreign direct investment inflows reflect deeper supply-chain diversification. India’s external position is stronger than many expected, supported by services exports and rising investment. South Korea and Malaysia have benefited from the rebound in the tech cycle and their expanding information and technology service sectors. For investors, exposure to Asia now means exposure to several distinct growth and valuation stories, not a single dominant one.

Commodity exporters are in a different phase of this rearrangement. Several economies in the Gulf Cooperation Council in the Middle East are directing more of their capital toward large domestic projects. Saudi Arabia’s NEOM project is just one example of such capital-intensive projects.

The degree of capital recycling into global markets is shifting; external surpluses are narrower. Latin America is closer to external balance than in previous cycles. EM Europe remains mixed, but the range of stresses is narrower. Africa is showing early signs of selective market re-entry, particularly in countries where IMF-backed fiscal programs, debt restructuring, and exchange-rate reforms have started to restore credibility. Broad emerging-market benchmarks obscure the growing variations within these markets.

Technology is adding yet another layer to this investment map. The buildout of AI-related computing capacity added measurably to U.S. gross domestic product this year. Its impact is starting to show up in American firms’ earnings. But the second-order effects of artificial intelligence are global.

Only a handful of emerging economies combine digital capability, a skilled labor force, and a meaningful export base in tech. India, Korea, and Malaysia stand out. They are now forming ecosystems that can convert digital investment into tradable output. These economies are positioned to capture the early upside of AI’s global spillovers. Others will need more reliable energy systems, deeper talent pools, and clearer regulation before they can compete.

None of this takes place in a risk-free world. Investors still face uncertainty around U.S. fiscal dynamics and the future of long-term yields, a slow-moving property correction in China, and persistent geopolitical pressures on shipping routes and energy markets. These are material risks, yet the global system has absorbed them more smoothly than many expected.

In decades past, emerging-market crises produced sudden economic stops. Today, adjustments instead take place in currencies, spreads, and hedging costs. The rotation across regions has created a more diversified form of resilience. When one engine slows, another has been able to take up the slack.

The U.S. dollar weakened against most EM currencies in 2025 as U.S. growth cooled, but the adjustment remained orderly. Several EM currencies continue to trade below what fundamentals suggest. Hedging costs have come down. Local markets have deepened. This combination is more supportive for EM local debt and healthier for foreign exchange markets than what we have seen in recent years, particularly in the wake of the pandemic.

The global economy isn’t drifting. It is reorganizing. Growth is stable because the internal engines have shifted. Capital flows remain strong because their channels have changed. Technology is creating new centers of gravity. And China’s evolution from a destination to an exporter of capital is reshaping the financial plumbing of global markets.

For investors, the challenge isn’t to identify a single turning point on the horizon. The turn has already happened. Calm headline numbers conceal a transition that is in motion. That transition, not the stability of the aggregate, will define where the next phase of global returns is found.

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