Next year, global growth is expected to be near 3.1%, 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 not the product of inertia. It reflects 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 lies in shifting growth patterns. The United States is cooling after a strong post-pandemic period, while Europe and Japan, long seen as weak links, have found firmer footing. China’s structural slowdown continues, but India and a broader set of Asian economies are growing faster.
Emerging markets as a group may still be expanding at close to 4.2% annually, but the strongest performers within that group have changed. The world economy’s engines are rotating, and they are no longer pulling in the same direction.
This redistribution shows up most clearly in capital flows. Nonresident flows into emerging markets reached about $1.18 trillion in 2025, well above historical averages. But this surge does not mark 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 fade, flows are projected to moderate to roughly $1.13 trillion in 2026 — a normalization rather than a retreat.
Capital-flow ratios put this into perspective. Nonresident inflows amounted to about 2.6% of emerging-market GDP in 2025 and are expected to fall to 2.3% in 2026. That is below pre-pandemic norms, but the aggregate figure is misleading because inward flows to China have collapsed. Excluding China, other emerging markets are absorbing capital at roughly the same pace as in the mid-2010s. The apparent softness reflects China’s weight, not a broad deterioration in fundamentals.
What matters, then, is direction. Capital is rotating away from China and toward emerging markets offering credible policy frameworks, resilient domestic demand, and clearer investment opportunities.
Several Asian economies are attracting larger shares of foreign direct investment and portfolio flows, and emerging Europe is recovering after a turbulent period. Latin America has stabilized across a range of external indicators, while some commodity importers are beginning to absorb larger inflows. These shifts are incremental, but they signal a world in which capital circulates more selectively than it did during the liquidity-heavy decade after the 2008 financial crisis.
China’s evolving role sits at the center of this configuration. The country remains the largest source of external savings among emerging markets, with a current-account surplus of roughly $500 to $700 billion. But the recycling of that surplus has changed. Instead of accumulating primarily as central bank reserves, a growing share now flows outward through firms, banks, and households investing abroad.
China has thus become a structural exporter of capital, helping to explain why global reserve accumulation remains modest even with a somewhat softer dollar. Chinese savings increasingly support investment in Asia, Africa, and the Middle East rather than flowing into traditional reserve channels.
A second shift is visible in external balances. Asia, excluding China, has emerged as a major surplus center. Vietnam continues to attract foreign direct investment with unusual consistency. India finances its deficit without strain, supported by strong services exports. South Korea and Malaysia have benefited from the global tech upswing and the depth of their information and communication technology sectors.
By contrast, commodity exporters are channeling more resources toward domestic transformation. 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 not under systemic pressure. Several African economies are gradually regaining market access as reforms strengthen their macroeconomic frameworks.
Together, these changes 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 their external accounts more effectively.
Technology adds another dimension. The rapid buildout of artificial-intelligence computing capacity made a visible contribution to US GDP in early 2025. These capital-intensive, energy-hungry investments are beginning to influence where global savings flow and where production capacity expands.
Emerging economies with domestic digital capabilities and strong exports of ICT services are well positioned to anchor the next phase of digital investment. Their participation, however, will depend not only on macroeconomic stability and regulatory clarity, but also on access to reliable energy and skilled labor.
All this is unfolding against familiar risks. The US fiscal trajectory remains uncertain, and China’s domestic demand is weak as its property correction continues. Geopolitical tensions have disrupted trade and raised costs, while AI complicates economic measurement as intangible investment grows.
Yet the global system has absorbed these pressures through exchange-rate adjustments and portfolio shifts rather than sudden stops or external crises. That resilience reflects the underlying rotation in capital flows.
The dollar illustrates the point. It weakened against most emerging-market currencies in 2025 as US growth cooled, but the adjustment was orderly. Several emerging-market currencies remain undervalued even after appreciation. The IIF’s baseline for 2026 is a broadly stable, perhaps slightly softer, dollar. Hedging costs have fallen, local-currency markets have deepened, and adjustment is occurring through foreign-exchange channels rather than reserve drawdowns.
The world economy is not drifting; it is rebalancing. Growth remains steady, but its composition has changed. Capital flows remain strong because their channels have shifted. With technology redrawing comparative advantage, policymakers should focus less on headline growth rates and more on the structural reorientation shaping the coming decade.
Estevao is a former deputy finance minister of Brazil and global director of macroeconomics at the World Bank
Project Syndicate
http://ednet.project-syndicate.org/ednet/ednet.cgi?rm=gct;mid=27452