Asia needs to look inward for growth
The trade picture is complicated by the potential imposition of US tariffs
TRADE has been the lifeblood for many economies across Asia, and it certainly was the case in 2024. As trade rebounded, it supported Asia’s growth directly via stronger exports and indirectly via a stronger capex cycle.
However, the outlook for 2025 is less promising. As it is, non-tech-related exports have been softer than tech exports and we think the tech cycle is moving past its peak. Moreover, the trade picture is further complicated by the potential imposition of tariffs as a new administration takes office in the US.
Asia is the most exposed to tariffs on account of three factors:
- A high level of tariffs may be imposed on imports from China
- The impact would spill over to other Asian economies with relatively high exposure to China
- Asia’s economies are still trade and manufacturing-oriented
In our recently released year-ahead outlook, we incorporated a phased implementation of US tariffs on imports from China in our base case. We see the effective tariff rate rising by 15 percentage points in 2025 and by another 10 percentage points in 2026. While we still think that the growth shock will not be as big as what transpired in 2018-19, it will nonetheless slow Asia’s growth from 4.5 per cent in 2024 to 4.1 per cent in 2025.
With a less supportive backdrop for trade, Asia will have to look inward towards domestic demand as a growth driver. We are at a juncture where consumption will play a critical role in whether these economies will reflate.
For China, addressing deflation remains key. Tariffs or not, a key issue remains that the policy mix is still encouraging investment and therefore entrenching deflationary pressures. As tariffs are imposed, we think this could intensify the deflationary pressures and increase the need to provide policy support, especially for consumption. The series of easing measures policymakers have undertaken since September have been positive steps. But high public debt levels, a decline in government revenue-to-gross domestic product ratios, as well as lingering moral hazard concerns are hindering the pace and size of the fiscal easing.
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Moreover, policymakers appear to retain a bias towards boosting investment in the hope it will raise productivity to offset the drag from a declining working-age population, while creating tangible assets for future generations.
However, we believe supporting investment growth leads to excess capacity, weaker returns and continued deflationary pressures, while supporting consumption via increasing social security spending (healthcare, education and housing) will help reduce household precautionary saving and lead to sustained, moderate inflation.
Japan will face downward pressures on the external front, but the good news is that a recovery in consumption can help offset this. Private consumption growth just turned positive in Q3, supported by gains in purchasing power. Going forward, the real wage growth trend should be sustained at stronger levels.
Rengo – Japan’s largest trade union – has asked for strong wage increases, in line with the demand in 2024. We believe that this will mean nominal wage growth could go above 3 per cent in 2025. With headline inflation likely to be at 2 per cent, real wage growth would be supported. Moreover, recent political developments mean that policymakers will likely take up moderate fiscal easing, which will be another supportive factor for private consumption recovery.
For India, we have just been through a temporary soft patch in growth but we are moving back onto a strong growth path. The reacceleration in government spending after an election-induced pause, a pickup in hiring trends, the worst of the regulatory action in the unsecured personal loan space behind us, and moderation in food inflation – these are all factors that will help put consumption back on the recovery path.
More importantly, the fundamentals of the cycle are still intact. The structural positives of a capex-led cycle and the uplift to demand that will come about will continue to play an important role in driving the recovery. The government is taking concerted efforts to minimise social stability risks by focusing on investing and job creation rather than redistributing. We expect the cycle to continue to broaden out to private capex and consumption.
The key upside surprise to Asia’s growth outlook will be if China reflates demand via consumption. We see a possibility of a policy pivot towards consumption if social stability indicators deteriorate.
The key downside risk would be if trade tensions escalate beyond our base case – for instance, if the US moves to impose universal tariffs on all imports. Across-the-board tariffs would likely bring a repeat of the 2018-19 growth shock by a similar magnitude or more.
Another rewiring of the global supply chain by discouraging near/friendshoring and favouring onshoring in the US could also lead to significant disruption and damage to corporate sector confidence and capex.
Chetan Ahya is chief Asia economist, and Derrick Kam is Asia economist, Morgan Stanley.
Morgan Stanley’s 23rd Annual Asia Pacific Summit kicks off in Singapore today.
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