Emerging Markets Outlook January 2026: Growth, Policy Easing, FX Risk, and Key Themes

Emerging Markets Economic Review — December 2025

Across December’s four-week data flow, emerging markets (excluding China) delivered a mixed but stable macro tape: pockets of demand resilience (notably in parts of LatAm), ongoing disinflation in several high-rate markets, and a gradual spread of policy easing. At the same time, the key constraints remained external balances, FX buffers, and policy credibility—especially where easing began before inflation risks were fully extinguished.

The December macro regime: “disinflation + uneven growth.”

Two themes dominated the month: (1) disinflation is progressing across several EMs, creating room for measured easing cycles, but markets continue to differentiate between “credible easing” and “FX-sensitive easing”; and (2) growth is holding up in pockets, not broadly—some economies show resilient consumption or improving confidence, while others continue to print weak manufacturing/investment signals.

Regional read-through

1) Asia EM:

Strong surveys in India and Korea look externally supported

India: Surveys remained very strong, but December’s hard data pointed to softer industrial momentum and wider external gaps. PMIs stayed firmly expansionary (manufacturing 56.6, services 59.8, composite 59.7), while industrial production slowed sharply to 0.4% y/y. The current account swung to a $12.3B deficit (-1.3% of GDP), and the Q3 trade deficit widened to $87.4B; FX reserves remained high near $686B. Policy-wise, the RBI cut 25 bps to 5.25%, raised the CRR to 4.0%, and announced OMOs plus a $5bn FX swap, signaling an effort to support growth while managing liquidity and external sensitivity. Net takeaway: India still screens as a growth standout, but December highlighted deteriorating external balances alongside more uneven activity momentum.

South Korea: The Korean set looked more externally supported: Q3 GDP was cited at +1.3% q/q, exports were strong (+8.4% y/y), and the current account remained in surplus ($6.81B). Inflation stayed moderate (headline CPI 2.4% y/y), and FX reserves were solid at around $430.66B. In the later-week Asia detail, export and import prices firmed (export prices +7.0% y/y, import prices +2.2% y/y), consistent with an exporter tailwind but slightly higher domestic input-cost pressure. Net takeaway: Korea ended December with a supportive external backdrop and manageable inflation, leaving risk primarily tied to global demand and risk sentiment rather than domestic instability.

2) EMEA

Turkey’s easing shift is the key “risk premium” story; Russia buffers improve; South Africa remains low beta

• Turkey:

December increasingly looked like a managed slowdown plus early disinflation, but with a meaningful policy pivot that markets will treat as TRY- and credibility-sensitive. Growth slowed to 3.7% y/y (Q3); manufacturing PMI improved but stayed contractionary at 48.0; inflation eased but remained very high (headline CPI 31.07% y/y, core ~31.6% y/y, PPI 27.23% y/y). The key inflection was the CBRT’s rate cut to 38.00% (from 39.50%) alongside a corridor adjustment. On buffers, the current account stayed in surplus ($0.46B), inflation expectations improved (end-year CPI forecast 31.17%), and reserves rose (gross FX reserves up to $76.76B, later readings up to $78.65B). Net takeaway: Turkey’s December story is easing into still-high inflation, partly offset by improving reserves and expectations—an inherently high-beta setup for data surprises and global risk tone.

• Russia

The Russia tape remained unusual: “hard” activity and income data looked firm (monthly GDP +1.6% y/y, retail sales +4.8% y/y, real wages +4.7% y/y, unemployment ~2.2%), but PMIs still showed manufacturing below 50 (manufacturing PMI 48.3, services 52.2). External balances softened (trade surplus down to $11.14B), yet reserve buffers improved (CB reserves up to $741.5B). Policy easing continued with a cut to 16.00% (from 16.50%). Net takeaway: Russia finished December with strong buffers and pockets of resilience, while activity composition remained split (services vs. manufacturing) and the outlook stayed heavily linked to external constraints rather than conventional policy transmission.

• South Africa

South Africa retained the classic “low growth, improving external cushion” profile. Manufacturing indicators were weak (one PMI down to 42.0; S&P Global manufacturing PMI 49.0), while Q3 GDP was modest (0.5% annualised q/q, 2.1% y/y). The current account deficit narrowed to -0.7% of GDP, and FX reserves rose to $72.07B. Inflation stayed contained (CPI 3.5% y/y, core 3.2% y/y, PPI flat m/m). Net takeaway: December’s improvement was more about external repair and sentiment than a clean domestic growth turn.

3) Latin America

Funding resilience (Brazil) and gradual easing (Mexico), with activity cooling at the margin

• Mexico

The clearest policy signal was Banxico’s rate cut to 7.00% (from 7.25%). Demand data suggested a softer sequential pace but a better y/y tone: aggregate demand +0.7% q/q, +1.1% y/y; private spending +1.1% q/q, +1.6% y/y. Industry later showed signs of stabilization (industrial production -0.4% y/y vs much weaker expectations; +0.7% m/m), but inflation remained somewhat firm (CPI 3.80% y/y, core 4.43% y/y), keeping the easing path measured. Net takeaway: gradual easing with cooling—but not collapsing—demand, constrained by sticky core inflation.

• Brazil

The key positive was external financing quality: the current account deficit was around -$4.94B, while FDI stayed strong at $9.82B, comfortably funding the gap. Domestically, services growth cooled (+0.3% m/m, +2.2% y/y); policy remained restrictive with the rate held at 15.00%; and FX flows improved materially (turning positive 4.709B). Net takeaway: cooling activity plus tight policy, with external funding resilience limiting tail risk—while markets remain sensitive to domestic headline risk.

• Argentina

The clearest “split” story: external accounts improved (trade surplus $2.498B; unemployment down to 6.6%), but industry remained under pressure (industrial production -2.9% y/y). Net takeaway: better external prints helped, but the sustainability narrative remained tied to domestic credibility and inflation conditions.

Bottom line for December 2025

Emerging markets finished December in a differentiated but broadly orderly configuration: policy easing is spreading, but markets are rewarding credible disinflation plus strong buffers while penalizing FX-sensitive easing; external resilience (improving reserves in Russia and Turkey, strong funding in Brazil, contained inflation in South Africa) remained the primary stabilizer; and growth stayed uneven, with pockets of resilience but persistent weak spots in manufacturing/investment in parts of EMEA and Argentina.

Emerging-Economies Outlook — January 2026

Growth and policy backdrop

Emerging markets are expected to expand around 4% y/y in both 2025 and 2026, preserving a clear growth premium versus advanced economies. Triodos Investment Management projects emerging-market inflation declining to around 5% in 2026, reflecting improved policy frameworks, stronger fiscal positions, and rising importance in global supply chains. Major EMs such as India, Brazil, and Turkey are expected to grow well above the global average, supported by reforms and robust domestic demand; however, AI-driven investment benefits and new trade patterns are unevenly shared, and inequality remains a challenge. The OECD warns that elevated U.S. tariffs and slower global trade could temper growth in parts of EM.

Key emerging-market events and themes in January 2026

• Central-bank decisions: Several EM central banks (e.g., Brazil, India, Turkey) typically meet in January or early February. After aggressive hikes in 2023–24, many have begun cutting as inflation falls, and markets expect further gradual easing in early 2026.
• PMIs and trade data: Early-January PMI surveys (S&P Global) will indicate whether EM factories and services are expanding. December trade data from export-oriented economies (e.g., China, South Korea, Taiwan) will help assess how U.S. tariffs are impacting shipments.
• Inflation releases: Many EMs publish monthly inflation around mid-January. With broad declines in commodity prices and currency strength versus the U.S. dollar, inflation is expected to continue trending lower toward targets.
• Policy-linked headlines: Negotiations over critical minerals and AI-related technology continue. Resource-rich EMs (lithium, rare earths, etc.) may pursue trade deals that influence investment flows.

Outlook and drivers

Emerging economies are expected to continue outpacing advanced economies, with growth around 4% in both 2025 and 2026—supported by domestic demand, favorable demographics, and deeper integration into global supply chains. India is positioned to remain one of the fastest-growing major economies, supported by digitalization, infrastructure investment, and manufacturing incentives. Brazil and Mexico benefit from nearshoring (relocation of production closer to the U.S.), supporting industrial activity and reducing exposure to geopolitical tensions. Turkey’s return to orthodox monetary policy—raising rates to tackle inflation—alongside fiscal consolidation is framed as improving investor confidence and stabilizing the lira.

Inflation is trending down in EM but remains higher than in advanced economies. Triodos projects price growth around 5% in 2026. Many EM central banks, after tight policy in 2023–24, are now cutting to support growth while staying vigilant on currency depreciation and imported inflation. Fiscal positions have improved (commodity revenues and reforms), and several countries have received credit-rating upgrades; however, public debt remains elevated in some economies, limiting counter-cyclical capacity if global conditions deteriorate.

Risks include spillovers from a slowdown in the U.S. or China, renewed trade tensions, and domestic political instability. A U.S. recession could reduce demand for EM exports and trigger capital outflows; weaker China growth could weigh on commodity prices and Asian supply-chain activity. Food/energy inflation spikes could force central banks to delay rate cuts, undermining growth. Structural challenges—inequality, weak institutions, and infrastructure gaps—remain pervasive. If reforms continue and global trade stays stable, EMs are positioned to benefit from demographic dividends, technology adoption, and opportunities in green-energy supply chains.

What to watch in January (Monitoring list)

1. FX buffers and external balances (reserves trajectory; current account stability) in economies that have begun easing but remain inflation-sensitive—especially Turkey.
2. India’s external gap (current account/trade) versus continued high-growth surveys—whether the divergence narrows.
3. LatAm inflation constraint: Mexico’s core inflation and Brazil’s activity cooling as determinants of how quickly easing can proceed without reintroducing volatility.
4. Russia’s two-speed structure (services vs. manufacturing) and whether reserve support remains durable amid softer trade flows.