Risks of spiralling tariff rates have eased, along with the probability of a US recession, reducing the headwinds to the emerging markets (EMs) outlook. 

That said, US tariff rates are still high and, with trade policy uncertainty elevated, we expect global growth to slow, weighing mostly on EMs highly reliant on trade. 

EMs have scope to make trade deals by offering to lower their own tariffs on US imports or opening their domestic markets to US corporates.

That said, few countries will be willing to reduce protections on politically sensitive industries, such as agriculture, and, with reciprocal tariffs facing legal challenges, EM policymakers may have fewer incentives to concede quickly on US demands.

China’s policy response will also prove a further challenge to EM exporters, given the country’s continued supply-side focused response and the economy’s lack of import demand growth.

Thus, Chinese exports could prove a disinflationary factor for EMs, and along with slowing global growth and a softer US dollar, inflation should ease in most EMs, creating scope for further monetary easing.

Indeed, the onus will fall on central banks to support their respective economies as room for further fiscal easing may be limited amid market sensitivities to worsening fiscal dynamics globally. 

Read the full article.