Marcello Estevão | The global economy’s hidden rebalancing

Next year, global growth is expected to be near 3.1 per cent, almost the same as this year. To many observers, such steadiness suggests a world economy drifting sideways, neither slowing nor accelerating.

But the stability implied by the headline figure is the product, not of inertia, but of a rebalancing that is quietly reshaping how global savings and investment interact.

The core message of the Institute of International Finance’s latest Capital Flows Report is about shifting growth patterns. The United States is cooling after a strong post-pandemic period, whereas Europe and Japan, long seen as weak links, have found a firmer footing. While China’s structural slowdown continues, India and a wider set of Asian economies are growing faster.

Emerging markets overall may still be growing at nearly 4.2 per cent per year, but the strong performers within this group have changed significantly. The world economy’s engines are rotating, but they are not all pulling in the same direction.

This redistribution of weight shows up most clearly in capital flows. Non-resident flows into emerging markets reached roughly US$1.18 trillion in 2025 – well above historical averages. But this surge is not the start of a boom. Much of the strength reflected bank-related flows, official financing, and balance-sheet rebuilding in emerging Europe and parts of Asia. As these temporary drivers ease, flows are projected to moderate to about US$1.13 trillion in 2026 – representing a normalisation rather than a retreat.

Capital flow ratios put this into perspective. Non-resident flows have amounted to about 2.6 per cent of emerging-market GDP in 2025, but will fall to 2.3 per cent in 2026. That is below pre-pandemic norms, but the headline distorts the underlying story, because inward flows to China have collapsed.

Remove China and you will find that all other emerging markets are absorbing capital at roughly the same pace as in the mid-2010s. The softness in the aggregate reflects China’s weight, not a broad weakening of emerging-market fundamentals.

What matters, then, is the direction of flows. Capital is rotating away from China and toward emerging markets offering credible policy frameworks, resilient domestic demand, and opportunities for investment.

Several Asian economies are receiving larger shares of foreign direct investment and portfolio flows, and emerging Europe is recovering after a turbulent period. Latin America is stabilising across a range of external indicators, and certain commodity importers have begun to absorb larger capital flows.

These are not dramatic changes, but they do reflect a world in which capital circulates more selectively than in the liquidity-heavy decade that followed the 2008 global financial crisis.

China’s evolving role lies at the centre of this new configuration. The country remains the world’s largest source of external savings among emerging markets, with a current-account surplus of between US$500 and US$700 billion. But the way that surplus is recycled has changed. Instead of rising through People’s Bank of China reserves, a growing share now moves outward through firms, banks, and households investing abroad.

China has thus become a structural exporter of capital, which helps to explain why global reserve accumulation remains modest, even with a somewhat softer dollar. China’s savings are increasingly supporting investment in Asia, Africa, and the Middle East, rather than flowing back into traditional reserve channels.

A second shift is visible in external balances. Asia, excluding China, has become a major surplus centre. Vietnam continues to attract foreign direct investment with unusual consistency; India finances its deficit without strain, owing to its strong services exports; and South Korea and Malaysia have benefited from the upswing in the global tech cycle and the depth of their information and communication technology service sectors.

By contrast, commodity exporters are channelling more resources toward domestic transformation. For example, Saudi Arabia’s external surplus has narrowed as it invests heavily in logistics, manufacturing, and non-oil sectors. Latin America remains broadly balanced, while emerging Europe is more mixed – though it is not under systemic pressure. Finally, several African economies are gradually regaining market access as domestic reforms strengthen their macro frameworks.

These shifts amount to a subtle but meaningful redrawing of global imbalances. Surpluses are concentrating in parts of Asia, commodity exporters are looking inward, and many emerging economies are managing external accounts more effectively.

Then there is the technological dimension. The rapid buildout of AI computing capacity made a visible contribution to US GDP in early 2025, and these capital-heavy, energy-intensive, globally interconnected investments are beginning to influence where global savings flow and where production capacity expands.

The handful of emerging economies with a combination of domestic digital capabilities and strong exports of ICT services are likely to anchor the next phase of digital investment. The extent of their participation, however, will depend not only on their macro stability and regulatory clarity, but also on their reserves of reliable energy and skilled labour.

These shifts are unfolding against a backdrop of familiar risks. The fiscal trajectory of the United States remains uncertain, and China’s domestic demand remains weak as its property market correction continues. Geopolitical tensions in the Middle East and threats to key shipping routes have raised costs and disrupted trade, and AI introduces new measurement challenges as intangible investment grows.

Yet, the global system has absorbed these pressures through exchange-rate adjustments and portfolio shifts, rather than through sudden stops or external crises. Such resilience is not accidental; it reflects the underlying rotation in capital flows.

The dollar illustrates the point. Although it weakened against most emerging market currencies in 2025 as US growth cooled, it did so in an orderly way, and several emerging-market currencies remain undervalued, even after appreciation.

The IIF’s baseline scenario for 2026 is that the dollar will remain broadly stable – though perhaps slightly softer. Hedging costs have fallen, and local-currency markets have deepened. Adjustments are taking place through foreign-exchange channels rather than reserves, implying a healthier global equilibrium than the one that emerged immediately after the pandemic.

The world economy is not drifting; it is rebalancing.

Growth remains steady, but its global composition has changed. Capital flows remain strong because their channels have shifted. With technology redrawing the map of comparative advantage, policymakers should recognise the underlying structural reorientation that will shape the world economy in the coming decade.

_______

Marcello Estevão, a former deputy finance minister of Brazil and global director of macroeconomics at the World Bank, is managing director and chief economist at the Institute of International Finance, and professor at Georgetown University.

_______

© Project Syndicate 2025

www.project-syndicate.org