Asia’s broadening recovery: from tech to non-tech

WE SEE Asia’s economic recovery broadening as an uplift in non-tech exports drives stronger capital expenditure, improves labour market conditions, and ultimately supports consumption.

Tariffs were expected to dominate Asia’s economic performance in 2025. We anticipated they would weigh on exports – and to some extent, they did, with non-tech exports essentially flat since December 2024.

However, the overwhelming strength in tech exports meant that overall exports in Asia have grown at a faster pace year to date compared with 2024. While that looks positive on paper, tech exports are highly capital-intensive and offer limited spillover benefits to the broader economy.

As a result, despite robust tech exports this year, Asia’s labour markets have remained weak and wage growth subdued, leading to muted consumption.

Looking ahead to 2026, technology exports are likely to remain resilient. More importantly, we expect non-technology exports to join the recovery from early next year, supported by easing trade tensions.

In addition, US domestic demand should gradually recover on a sequential basis as the impact of recent policy shocks fades and the US Federal Reserve moves policy rates closer to neutral.

Manufacturing and exports continue to drive the region’s business cycles and are more tightly linked to non-tech exports, which account for 75 per cent of overall exports.

Any improvement in non-tech exports would therefore generate positive spillovers for capex momentum and help broaden consumption into urban discretionary segments.

We expect Asia’s gross domestic product growth to stage a recovery from the first quarter of 2026, accelerating from a trough of 4.3 per cent in Q4 2025 to 4.7 per cent in Q4 2026.

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As the recovery broadens and disinflationary pressures ease, we expect Asia’s nominal GDP growth to pick up from a trough of 4.7 per cent year on year (yoy) in Q4 2025 to 5.8 per cent yoy at end-2026.

Meanwhile, Asia ex-China nominal GDP growth should stage a stronger rebound from 5.5 per cent yoy in Q4 2025 to 7.2 per cent in Q4 2026.

Outlook

We expect exports and manufacturing to support growth, but the drag from continued weakness in the property sector remains.

The market-oriented nature and slow pace of implementation of anti-involution policy efforts, along with the gradual shift from investment to consumption, will likely mean only modest easing of deflationary pressures in 2026, with a clear exit from deflation more likely in early 2027.

A faster shift in the growth model is needed to accelerate the exit from deflation and get back to the normal inflation rate of 2 to 3 per cent.

Broad-based consumption recovery in India?

India’s consumption trend has already inflected higher from October 2025, and we see this recovery sustaining in 2026. This will likely be driven by a combination of income tax cuts, lower inflation boosting real incomes, front-loaded interest rate cuts, goods and services tax reductions, and regulatory easing for banks and non-banking financial companies.

We believe robust domestic demand and normalising inflation should lift nominal GDP growth to 10.7 per cent yoy by Q4 2026 – the strongest in Asia – up from 6.7 per cent in 4Q25.

Will Bank of Japan (BOJ) rate hikes dent Japan’s reflation story? While we expect one more rate hike in December 2025, we think the BOJ will hold rates steady next year to allow inflation to transition from supply-side and currency-driven factors to real wage and consumption-led dynamics.

More importantly, we anticipate a shift towards expansionary fiscal policy. Combined with domestic policy support, a recovery in non-tech exports should help keep Japan’s reflation story intact.

The key upside risks to Asia’s growth include stronger US expansion fueled by increased private spending and possible fiscal stimulus, or faster AI adoption driving US productivity. Accelerated rebalancing in China, focusing on social welfare and housing, could also spur regional growth and hasten the exit from deflation.

Downside risks involve a potential mild US recession in the first half of 2026 due to restrictive policies, which would hinder Asia’s non-tech exports. Additionally, a renewed investment push by China could worsen global deflationary pressures and weaken nominal GDP growth outcomes for the region.

Chetan Ahya is chief Asia economist and Derrick Kam is Asia economist, Morgan Stanley