The world economy is unlikely to experience a synchronized recovery from the COVID-19 shock. Despite robust global growth of 5.8% and 4.8% in 2021-22, we see uneven and fragile prospects. Emerging markets will be vulnerable due to the early withdrawal of monetary and fiscal support. Furthermore, vaccination progress differs considerably as the Delta variant continues to spread. A further weakening of growth in China could have important effects on the broader EM universe. Despite an expected tightening of global liquidity, we still see an EM “taper tantrum” as unlikely. We project non-resident flows to emerging markets excl. China to reach around $850 bn in 2021. Driving factors are a recovery in FDI, strong portfolio debt flows, and the IMF’s SDR allocation. Looking ahead, our main concern is ”secular stagnation” in EM following an incomplete recovery.

The COVID-19 shock has us forecasting a global recession of -4.1 percent in 2020, substantially worse than the -0.4 percent contraction in the 2009 global financial crisis.

We revise global GDP growth in 2020 down significantly to -2.8%. This means that the COVID-19 shock is worse than the GFC in 2009. The IIF’s tracking of portfolio flows shows an unprecedented outflow. Our projections show some risk of further outflows in the 2^nd quarter.

We see global growth slowing to 2.6% in 2019 and only recovering modestly in 2020. Trade tensions weigh on growth and stoke volatility in emerging market capital flows. Increasingly accommodative monetary policy supports risk appetite and flows to EM. Global push factors appear to be the key drivers of EM flows and asset performance. Investors’ search for yield is deepening synchronization across emerging markets. Differentiation is, to a significant degree, the result of changes in benchmark weights.

Surprisingly,  EM currencies have been quite a mixed bag, and our high frequency tracking of flows shows a mixed rebound in Q1. We believe the underlying issue is that investors are over-positioned, with a positioning overhang after a decade of loose G-3 monetary policy. We upgrade our capital flows projection to EM only modestly, with non-resident flows of $1,260 bn in 2019, after $1,135 bn in 2018.

Despite a sharp drop in portfolio flows, 2018 should see broadly stable non-resident capital flows to emerging markets of over $1.1 trillion, with FDI