Our macroeconomic projections for emerging markets (EM) are subject to a higher-than-normal degree of uncertainty, mostly because of low levels of visibility regarding U.S. trade policy. We believe this uncertainty alone will have a negative impact on growth in EMs as investment decisions are delayed until there is more clarity. The direct impact of tariffs will be modest in most major EMs outside of Asia and Mexico. However, if tariffs lead to slower growth in the U.S., other major advanced economies, and China, the knock-on effects on most EMs could be substantial. We expect to learn more details about U.S. tariffs in the coming weeks and months, which could influence our growth expectations for EMs. However, on balance, we believe the risks to our growth outlook are mostly to the downside.

Chart 1

Our Assumptions On U.S. Trade Policy

U.S. trade policy is likely to remain highly unpredictable in the coming months. We will likely get more details in April, when we expect the administration to announce reciprocal tariffs under the Fair and Reciprocal Plan. However, even after the announcements, more modifications to U.S. trade policy could take place, and the duration of tariffs could be subject to significant change. For the purpose of our baseline, we assume the following:

• We expect the 25% U.S. tariffs on steel and aluminum to remain in place indefinitely.
• We assume reciprocal tariffs to be announced in April across all countries under the U.S., regardless of their trade balance with the U.S. As part of this announcement, we also assume 10% sector-specific tariffs on autos, pharmaceuticals, and semiconductors.
• The additional 20% U.S. tariff on goods imports from China remains effective indefinitely.
• We assume the effective U.S. tariff on Mexico and Canada to be roughly 10% and that it will remain in place throughout 2025. Despite the initial 25% tariff announcement, tariff exemptions on United States-Mexico-Canada Agreement (USMCA)-covered goods is a sign that trade policy negotiations between U.S., Mexico, and Canada are progressing. We therefore think it is likely the actual tariff will end up being lower than the initial 25%.
• We expect USMCA to remain in place after the 2026 review process, at which point we assume U.S. tariffs on Mexico and Canada will be removed. Some modifications on topics such as rules of origin seem likely. However, despite those possible changes, we expect the reviewed USMCA to preserve the ongoing strong trade ties between the U.S., Canada, and Mexico.

What Our Assumptions On U.S. Trade Policy Mean For EMs

The direct impact of the U.S. tariffs we assume in our baseline is modest in most major EMs outside of Asia and Mexico.

Tariffs on steel and Iron, and aluminum

Of the major EMs we rate, exports of steel, iron, and aluminum to the U.S. as a share of their GDP is relatively small (see chart 2). It's the highest in Vietnam and Mexico. However, even in those countries, those exports account for just about 0.3% of GDP.

Chart 2

Reciprocal tariffs

It is not clear how tariff differentials will be calculated by the U.S. administration to implement reciprocal tariffs given the complexities of the trade classification system. U.S. officials have also said they would consider non-tariff barriers, such as value-added taxes, which increases the intricacy of estimating the potential reciprocal tariffs.

We made our own estimates of trade-weighted tariffs based on the harmonized system code for trade classification to calculate tariff differentials between the EMs that we rate and the U.S. According to our estimates, India has the widest tariff differential with the U.S. at 7.3 percentage points (see chart 3). After India, Brazil, Chile, and Argentina have roughly 4.5 percentage points higher tariffs on the U.S. than the U.S. on them. In the rest of the EMs, tariff differentials are 3.5 percentage points or lower, and in some cases such as Indonesia and Turkiye, their tariff differentials with the U.S. are negative.

Chart 3

However, even in the EMs that have the widest tariff differentials with the U.S., their export exposure to the U.S. is relatively small (see chart 4). For example, India's goods exports to the U.S. accounted for 2.3% of its GDP in 2024. In Brazil they account for about 2% of GDP, and in Argentina 1% of GDP. In Chile, the export exposure is higher at 5% of GDP, but a 4.5% increase in tariffs on those exports, if tariffs are reciprocated, would still be manageable. In Vietnam, while we estimate the tariff differential with the U.S. is relatively small given its large export exposure to the U.S. (over 28% of GDP), a small increase in tariffs could have a large impact on growth.

Chart 4

Tariffs on China

Tariffs between China and the U.S. have increased sharply since the start of trade frictions in 2018. Including the latest tariff escalation, we estimate that U.S. weighted average effective tariffs on imports from China is now about 35%, while China levies about 20% on U.S. imports. Because China relies significantly more on trade than the U.S., we expect the impact on GDP to be larger in China. This underpins our projection for GDP growth in China to slow to 4.1% in 2025 from 5.0% in 2024 (see "Economic Outlook Asia-Pacific Q2 2025: U.S. Tariffs Will Squeeze, Not Choke, Growth," published March 25, 2025).

We expect EMs with closer trade ties to China to be more vulnerable to weaker demand. These are mostly in Southeast Asia and tend to have large shares of final goods exports that go to China (see table 1). Their supply chains are also closely integrated with China's, which means weakness in Chinese exports translates into weaker export performance in their economies.

Table 1

Tariffs on Mexico

Our view is that Mexican officials will likely continue to be pragmatic in their negotiations with U.S. officials to lessen the magnitude and duration of tariffs. The recent exemption of USMCA-covered goods from the 25% tariff the U.S. imposed on Mexico is a sign, in our view, that negotiations between U.S. and Mexican officials is progressing. As a result, we are assuming a 10% effective U.S. tariff on goods imports from Mexico starting in April and lasting throughout 2025. As we know more details about the tariffs, we will adjust our assumptions for Mexico.

Under our 10% effective tariffs scenario, we project GDP growth of 0.2% for Mexico in 2025. If tariffs end up being higher than 10%, our 25% tariff scenario--in which we project a 0.5% contraction in GDP in 2025--can serve as guidance for revised assumptions (see "Growth Prospects Strained After The U.S. Takes The Tariff Plunge," published March 5, 2025).

We anticipate only modest retaliatory measures from Mexican officials as part of their pragmatic approach to minimize U.S. tariffs on Mexico. Retaliation, such as the one implemented in 2018 when Mexican officials put tariffs on about $6 billion worth of U.S. goods, targeting specific Republican jurisdictions seems like the most likely scenario. We don't assume a major impact on Mexico's growth from retaliatory measures.

Another potential trade policy-related measure that has been discussed as part of a strategy to reinforce the U.S.-Mexico trade relationship is tariffs by Mexico on goods imports from China. Mexican imports of Chinese goods have grown rapidly in recent years. They now account for 7% of Mexico's GDP, from less than 5% 10 years ago and less than 2% , 20 years ago (see chart 5). Therefore, imposing tariffs on those goods could have significant implications for the Mexican economy.

We analyze the potential impact from two angles:

• Manufacturing sector competitiveness: out of the 7% of GDP worth of imports from China, about 70% of those are intermediate goods, raw materials, or capital goods, many of which end up in Mexico's manufacturing supply chain. About 65% of these intermediate goods come from three broad categories: transportation equipment, electronics, and mechanical appliances. The impact on manufacturing competitiveness will depend on how quickly and cost-effectively firms can substitute those goods to other providers. Many of these goods are very niche, especially auto parts, and are subject to safety parameters, so it can be timely and costly to switch to new suppliers. In many cases, it is likely firms would need to absorb the majority of the increase in the cost associated with the tariff and pass it on to the consumer.
• Inflation: the impact of potential tariffs by Mexico on China is likely to be relatively small on inflation. This is because the imported final goods from China have a low incidence on the consumer basket. The two main consumer goods imports from China are smart phones and electric vehicles, and their combined weight in the consumer basket is just below 3%. Furthermore, both smart phones and electric vehicles have a high availability of substitutes, lowering their potential incidence on inflation.

Chart 5

Key will be whether tariffs are seen as a precursor to a material long-term change in the trade relationship between the U.S. and Mexico. USMCA comes under review next year and may be subject to changes. For now, we expect USMCA to be reaffirmed, remaining a key anchor of the U.S.-Mexico trade relationship. If that is not the case, then Mexico's long-term growth prospects will come under significant pressure.

Investment Likely To Remain Subdued Until There Is More Clarity On Trade Policy

In most major EMs outside of Asia and Mexico, the direct impact of tariffs is modest, but the indirect impact through weaker investment could be significant. Fixed investment in the median EM represents 23% of GDP--much higher in EM Asia and lower in Latin America (see chart 6).

The unpredictable and volatile nature of U.S. trade policy announcements so far is likely to at least delay some investment decisions until there is more clarity. Delay in investments could slow employment growth, especially in manufacturing-related sectors, which tend to be major employers in EMs. This could consequently lower consumption.

Chart 6

The Evolution Of The U.S. And Other Major Economies Will Matter For EMs

There's an increasing risk that supply-side shocks from tariffs, slowing immigration growth, and curbs on the federal government workforce will create a lasting negative feedback loop that weakens aggregate demand in the U.S. The evolution of the hard data alone points to low risk of a U.S. recession this year. However, given the rising risk of persistent supply shocks and negative sentiment, our we believe there's a 25% probability of a U.S. recession starting in the next 12 months (see "U.S. Business Cycle Barometer: Increasing Likelihood Of A Slowdown," March 13, 2025).

Our baseline view is for the U.S. economy to see a slowdown in growth, not a recession, in 2025. We project GDP growth in the U.S. to slow to 1.9% this year, from 2.7% in 2024 (see "Economic Outlook U.S. Q2 2025: Losing Steam Amid Shifting Policies," published March 25, 2025). However, if the U.S. economy weakens beyond our expectations, the knock-on effects to the rest of the world could be significant. A weaker U.S. economy could also deteriorate growth in Europe and China, and lead to lower demand for exports across most EMs, dampening the investment outlook further.

Limited Fed Easing In 2025 Will Limit Space For Rate Cuts In Some EMs

We expect tariffs to temporarily increase inflation in the U.S. Currency adjustment, product substitution, or cost absorption along the supply chain from the exporter to final consumer offers some price relief, but any relief is probably going to be limited. Consumer price index (CPI) inflation will likely stay close to 3% through 2025. In such an environment, we suspect the Fed would likely err on the side of keeping inflation expectations anchored. As a result, we only expect one 25 bps cut in 2025. We expect the Fed to resume its downward path toward a neutral fed funds rate in 2026.

Central banks in many key EMs have been lowering their policy rates for more than a year. We still expect several EM central banks to continue lowering interest rates in the coming months. However, the pace of easing will be constrained by elevated U.S. interest rates. EM central banks will be cautious about cutting rates to prevent a rapid narrowing of their countries' interest rate differentials with the U.S. A rapid narrowing of interest rate differentials, in an environment of high risk aversion, can trigger abrupt capital outflows. This can weaken exchange rates and consequently increase inflation expectations.

Chart 7

Forecast Update

Our 2024 real GDP growth forecast for EMs excluding China is 10 basis points (bps) lower for 2025 at 4.3%. We made the largest downward revisions to our 2025 GDP growth projections to Mexico (-100 bps), Hungary (-60 bps), and Malaysia (-40 bps). In Mexico, our revision to growth is driven by the impact of U.S. tariffs. In Hungary, continued weakness in Germany and manufacturing continues to result in lower-than-expected GDP growth. In Malaysia, a weaker outlook on global trade is the main driver of slower growth.

We made the largest upward revision to our 2025 GDP growth projection to Argentina (+100 bps) and Turkiye (+70 bps). In Argentina, the revision was due to better-than-expected inflation and economic activity results in recent months, which we expect to continue into 2025. In Turkiye, growth was also stronger than expected in the fourth quarter, driven by consumer demand.

Table 2

Regional Summaries

Latin America

We continue to expect growth in the region to average just over 2% in the coming years, which is lower than most other EMs. The main changes to our country-specific GDP forecasts are for Mexico (down) and Argentina (up).

In Mexico, the direct impact of U.S. tariffs and the indirect impact on investment will result in a significant weakening in growth this year. After the economy contracted in the fourth quarter of last year, there is a high likelihood that the economy entered a recession in the first quarter of this year. We lowered our GDP growth forecast for 2025 by 1 percentage point to 0.2%. Our baseline scenario assumes no material changes to USMCA that significantly change the country's strong trade relationships with the U.S. As a result, we expect the economy to start recovering slowly in 2026, and we project GDP growth of 1.7%. However, there are significant downside risks to our macro baseline for Mexico.

In Argentina, President Javier Milei's administration has delivered on the fiscal front, returning the budget to surplus in a very short period, and is making significant progress in lowering inflation. The economy returned to sequential growth in the third quarter and continued that trend in the fourth quarter. While we are still waiting for the final 2024 GDP numbers, high-frequency data points to a better-than-expected result, with a contraction of about 1.7% (we anticipated a 3.5% decline). As a result, we now project a stronger rebound in 2025, of 4.8% (compared with 3.8% previously). That said, the risks to our growth outlook are substantial. Foreign reserves continue remain low, and there is a lot of uncertainty regarding exchange-rate policy.

In Brazil's case, there are clear signs the economy is slowing. This is partly driven by high real interest rates and the impact on consumption and investment. We kept our GDP growth projection for 2025 unchanged at 1.9%, which implies a deceleration from about 3% in 2024. We expect interest rates to continue to rise in the first half of 2025 and end at 14.75% this year, given above-target inflation expectations.

In Colombia, we kept our growth projections unchanged at 1.7% for 2024 and 2.5% for 2025. While investment is slowly recovering, we expect it to remain relatively weak in the coming quarters due to uncertainty over several reforms proposed by President Gustavo Petro and the government's fiscal path. Growth in Colombia is likely to remain relatively weak until investment recovers more markedly.

In both Chile and Peru, we maintain our 2025 GDP growth forecasts at 2.2% and 2.7%, respectively. We expect growth in both economies to be driven by a recovery in private investment and consumption, supported by lower inflation and interest rates. Additionally, exports will provide a further boost, particularly as copper prices are likely to remain elevated.

Europe, the Middle East, and Africa 

We now expect stronger growth for Turkiye and Saudi Arabia, and slower growth for Hungary. Changes to our growth outlook for Poland and South Africa are marginal.

In Hungary, fourth-quarter GDP fell significantly below our and consensus expectations. A weaker carryover into 2025 prompted us to now project 2.0% GDP growth in 2025 (down from 2.6%), after 0.6% growth in 2024. Ongoing weakness in investment (which is a consequence of a partial freeze of EU funds, weak car production volumes in Germany, and ongoing trade disputes between China and the EU) remain a key factor behind our sluggish near-term outlook. In both Poland and Hungary, household consumption has been strong in the fourth quarter, and we expect that to continue, due to ongoing growth in real wages. In Poland, we expect 2025 GDP growth of 3.3% (up from 3.1%).

We increased our GDP growth forecast for Turkiye due to stronger-than-expected household consumption growth in the fourth quarter. Nevertheless, the recent arrest and imprisonment of opposition politicians last week pose a risk to our inflation and exchange rate outlooks (see "Political Uncertainty In Turkiye A Risk To Reforms," March 24, 2025). We now expect 3.0% growth in 2025 (up from 2.4%), supported by the recent minimum wage increase and ongoing post-earthquake reconstruction in Southeastern Turkiye. Our current forecast assumes the completion of reconstruction efforts this year.

Investments into gas production facilities in Saudi Arabia, as well as recent OPEC+ announcement to increase oil production, prompted us to increase our GDP growth projection for 2025 to 4.0% (from 3.5%).

In South Africa, third-quarter GDP was significantly below our expectation due to the impact of drought on agricultural output. However, the effect was largely one-off, and agricultural production rebounded in the fourth quarter. As a result, our GDP projections for 2025 remain largely unchanged.  

Southeast Asia

Our forecast for EM southeast Asia (SEA) is broadly unchanged from the last quarter as external demand softness goes up against steady domestic demand. As an externally oriented region that relies on global demand to drive growth, the EM SEA economy is particularly vulnerable this year due to weak global trade and U.S. tariffs.

In our recent publication ("Asia-Pacific Economies Likely To Be Hit By U.S. Trade Tariffs," Feb. 23, 2025), we said that Vietnam and Thailand may be exposed to reciprocal tariff risks given their economies' higher reliance on U.S. demand and due to meeting criteria that may lead to U.S. tariffs. Vietnam runs a large trade surplus with the U.S. and is on the U.S. Treasury's currency monitoring list, while Thailand has a moderate trade surplus with the U.S. and has higher effective tariffs on U.S. goods.

Sectoral U.S. tariffs on autos and semiconductors could affect Thailand and Malaysia, respectively. One related theme to higher U.S. trade frictions is the intense manufacturing competitiveness resulting from China's spare manufacturing capacity pushing for new markets in the region. This has led to lower capital expenditure intentions out of manufacturing companies in EM Asia.

While external risks have risen, domestic demand looks to have stabilized after easing in parts of the region in late 2024. Gradually easing monetary policy, low inflation, and low unemployment are supporting domestic activity.

We expect modest easing out of central banks this year. Inflation is low and stable, and output gaps have closed, but central banks are wary of capital outflow risks due to elevated U.S. interest rates. We expect more cuts in Indonesia, where inflation is running below target and domestic demand has softened. In Thailand, the central bank has eased interest rates by 25 bps to 2%, and we expect one more cut as inflation remains low. In the Philippines, we expect two 25-bps cuts this year.

Our other expectations include:

• We do not have upward forecast revisions this year, reflecting the external volatility facing the region.
• We see some moderation in economic activity in Indonesia. External risks are driving the downward revision in Malaysia.
• A lower-than-expected fiscal impulse on growth in Thailand means our forecast is lower.
• Offsetting external risks and improved domestic activity means forecasts are broadly unchanged in the Philippines and Vietnam.

Risks To Baseline Growth

The risks to our growth forecasts are firmly to the downside, given the uncertainty surrounding U.S. trade policy under the Trump administration. More trade policy announcements are expected in April, which could have an impact on our macroeconomic baseline. Under a scenario of aggressive trade protectionism, we would expect a large hit to global trade and, consequently, global demand. This would likely have spillovers to EMs due to lower demand for exports. This could also increase risk premia, tightening financial conditions for EMs, especially for those with weaker macroeconomic fundamentals.

Appendix

Table 3

Table 4

Table 5

Table 6

Table 7