US flux will trim Asia growth

United States trade policy is still in flux, with little clarity on where tariff rates will eventually settle. It’s likely uncertainty will constrain business activity across the region, including in hiring and investment.

As a result, ANZ Research has downwardly revised its Asia (ex-China, India) growth forecasts for 2025 and 2026. The new forecast is for gross domestic product (GDP) growth of 2.9 per cent in 2025, down from 3.4 per cent, and growth of 3.3 per cent in 2026, down from 3.5 per cent.

These new forecasts incorporate ANZ Research’s expectations around the direct and indirect impact of tariffs, bilateral trade agreements between the US and individual economies, revised growth estimates for mainland China and the US and any potential policy response.

Singapore and Vietnam are likely to be the most impacted in the region. Growth forecasts for these economies are around 1 per cent lower than previous forecasts. Inflation is also set to be lower which sets the stage for deeper rate cuts.

Source: National Statistics Boards, ANZ Research

Evolving

The tariff situation is continuously evolving. We have moved from a combination of universal, product-specific and reciprocal tariffs to a 90-day pause on reciprocal tariffs and exemptions for mobile phones, chips and computers.

It is likely some Asian economies will negotiate or even do away with the April 2 tariffs owing to the potential damage to US growth.  ANZ Research assumes final tariff rates will be somewhere between those announced on April 2 and the universal baseline rate of 10 per cent. The outcome will vary for each economy depending on bilateral negotiations with the US.

ANZ Research recently downgraded its 2025 GDP growth forecasts for mainland China and US to 4.2 per cent and 1 per cent, respectively, from 4.8 per cent and 1.5 per cent, previously.

The region-wide impact of slower growth in these two economies is critical. For Asia (ex-China), exports to the US rose by around 1 per cent of GDP between 2019 and 2024. The increase for Malaysia, South Korea and Thailand was higher at 3.9 per cent, 2.7 per cent and 4.7 per cent, respectively. The Philippines is the only economy where this metric has declined.

Trade links with China have become more asymmetrical in the post-pandemic period. China’s imports from the region have broadly flatlined due to its weak domestic demand as well as its changing composition. Conversely, China’s exports into the region have risen, thereby resulting in rising weaker bilateral trade balances for most economies.

This rise in export penetration by mainland Chinese exporters has been bolstered by their competitiveness. Chinese exporters have aggressively lowered export prices since mid-2023 and have been supported by a relatively competitive exchange rate. ANZ Research believes this dynamic will become more entrenched over time.

Separately, it is unlikely Asian exporters can substantially frontload exports during the 90-day pause on reciprocal tariffs. US imports had already run up substantially ahead of the tariff announcements, corroborating with a rise in inventories. An indiscriminate rise in exports to the US also risks weakening bilateral trade negotiations.

Singapore has been subjected to only a 10 per cent baseline tariff rate. Nonetheless, any shrinkage in global trade and growth will cascade beyond manufacturing into related services such as wholesale trade, trade finance and re-exports.

There is also the possibility of sectoral tariffs on pharmaceuticals which has a meaningful weighting in its manufacturing index. Indeed, in its latest policy statement, the Monetary Authority of Singapore lowered its 2025 GDP growth forecast range to between 0 per cent and 2 per cent, from 1 per cent and 3 per cent.

Meanwhile, Vietnam is solidly reliant on trade with both mainland China and the US. Any trade deal with the US would diminish the scale of re-routing of Chinese goods with little or no value addition to the US. Most of all, foreign direct investment flows will remain tepid until trade uncertainties are cleared.

Malaysia, South Korea, Thailand and Taiwan have significant exposure to global trade. For Malaysia, ANZ Research lowered its forecasts in tandem with its exposure to global trade and the US economy.

The story diverges for the others. Pre-existing strength in Taiwan allows for a more moderate reduction. For Thailand and South Korea, growth downgrades follow earlier cuts in March. High-frequency data indicate the starting point before the US tariffs hit was even weaker than expected.

The much steeper-than-anticipated US tariffs on China adds additional growth pressure, given both economies' participation in Chinese supply chains. The spillover from intensified Chinese competition will also pose a challenge, particularly for Thailand, whose manufacturing sector was already grappling with declining competitiveness.

Finally, India, Indonesia and the Philippines are less exposed to global trade. The reduction in India and Indonesia’s growth is moderate.

India is expected to record GDP growth of 5.7 per cent in 2025 and 6.0 per cent in 2026, compared with 6.0 per cent and 6.3 per cent previously.

The reduction is comparatively higher for the Philippines owing to the lack of any improvement in private capital spending and the fact a little over 41 per cent of inward remittances are from the US.

Inflation

The revised forecasts also reflect lower inflation in most economies. This reflects intertwined developments including slowing growth that corresponds to negative output gaps, lower commodity prices (particularly crude oil), and the potential rise in imports from mainland China.

ANZ Research’s revised forecasts assume more expansionary fiscal and monetary policies but with the caveat they will not be able to offset challenges in the tradables sector.

In the current environment, fiscal policy should be the more effective policy tool if it is expenditure oriented. However, much would depend on the extent of fiscal deterioration governments will tolerate.

The pandemic resulted in a remarkable rise in public debt and most governments have laid out multi-year consolidation plans. The budgeted fiscal impulse is positive in South Korea and Thailand, but even so, this was designed to address pre-existing weaknesses, as opposed to responding to weaker global growth and tariffs. South Korea is the only economy where there is clear momentum for stronger fiscal support.

It will be easier to deliver on monetary policy. Apart from the evolving growth-inflation dynamics, the recent weakening of the US dollar supports rate cuts relatively independent of monetary policy. Accordingly, ANZ Research has increased the depth of the rate cutting cycle for most economies – at greater levels than currently being priced in.

The main benefit of monetary policy in the current environment will be to lower debt servicing costs. A lower cost of funds is not particularly useful when consumer and business confidence is weak. As such, the region’s credit cycle has been moderating in recent months. In fact, on an annual basis, credit has been contracting in Thailand.

On balance, the combination of US tariffs and slower growth in the US and mainland China represents a significant shock to the region. ANZ Research’s revised GDP forecasts correspond to negative output gaps. A permanent slowdown in global trade and growth could even result in lower potential growth.

Sanjay Mathur is Chief Economist Southeast Asia and India at ANZ

This is an edited version of the ANZ Research report “Downgrading Asia (ex-China)’s GDP growth forecasts”, published April 22, 2025