IMF warns Asia’s growth will cool this year, next on trade risks

[SYDNEY] The Asia-Pacific region remains the fastest-growing region in the world, though higher tariffs and rising protectionism are likely to reduce demand for its exports and eventually weigh on activity, according to the International Monetary Fund (IMF).

Asia’s expansion in early 2025 was powered by brisk exports, fuelled by frontloading ahead of expected tariff hikes, and a resurgent tech cycle, while easier policy and loose global conditions kept domestic demand motoring.

Still, the region is expected to end 2025 with gross domestic product growth of 4.5 per cent, slightly below the 4.6 per cent recorded in 2024, the IMF said in a report released on Friday (Oct 24). The region’s economy is then projected to slow further to 4.1 per cent in 2026.

“While trade policy uncertainty has declined somewhat compared to April, it remains high and could weigh on investment and sentiment more than expected,” the IMF said. “Tighter financial conditions due to domestic or global developments could amplify trade shocks and compound vulnerabilities, and economic vulnerabilities could amplify social tensions.”

The IMF called on policymakers in the region, which accounted for about 60 per cent of the global expansion last year, to take steps to boost domestic demand, particularly consumption and to reinvigorate productivity growth. In the near term, it urged countries to adopt targeted fiscal and monetary stimulus to help smooth the impact of trade shocks.

At the same time, structural reforms to support the services sector, reduce incentives for capital misallocation and mitigate the impact of ageing are essential for enhancing medium-term growth potential and rebalancing regional economies, it added.

BT in your inbox

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign Up

Sign Up

“After benefiting from spectacular growth in China and integration in global value chains, countries in the region now face spillovers from weakened demand in China,” the IMF said. “More recently, rising youth unemployment and dissatisfaction with political leadership have undermined sentiment and fuelled social strains in several countries.”

Governments across Asia have been grappling with a surge of Gen Z-led demonstrations in recent months, with thousands taking to the streets in the Philippines, Indonesia and East Timor to protest corruption, joblessness and widening inequality. The demonstrations, fuelled by anger over lavish displays of wealth by ruling elites, have targeted governments – toppling administrations in Nepal and Bangladesh.

These mounting strains are reflected by a deceleration in economic growth in the current decade to about 1.8 percentage points lower than the average in the 2010s, the IMF said.

SEE ALSO

Asean+3 weathered the last global tightening storm. What about the next?

Asia’s youth struggle to find good jobs, World Bank warns

Asia draws US$100 billion in capital as investors diversify beyond US: Goldman executive

Asian factories struggle as soft China, US demand takes toll

Asia has an opportunity to stand out amid global turbulence: DPM Gan

More

On the positive side, the current AI-driven investment boom could deliver a stronger-than-expected boost to exports, investment, and productivity in the region, the fund said. Further policy support could cushion those shocks more than expected. A reduction in geopolitical tensions would help reduce uncertainties and lift investment and productivity, it added. BLOOMBERG