Asia’s economic giants should look inwards for growth
Rising trade uncertainties may serve as a catalyst for China, India and Japan to search for resilience and growth via bolder reforms and more support for domestic demand
GLOBAL markets have had a rocky start to 2025. US President Donald Trump unveiled sweeping tariffs last Wednesday (Apr 2), with several markets hit with steep additional increases in tariff rates.
With the lingering uncertainties, markets expect inflation to remain higher for longer, especially in the US. This may slow the pace of potential interest rate cuts by the US Federal Reserve over the medium term.
Asia, for its part, grapples with the impact of potentially steep tariffs on growth and inflation. Asian central bankers will also need to strike a balance between maintaining stable financial flows and stimulating domestic demand.
Despite the challenges, there have been dynamic shifts within the region that are creating attractive opportunities for Asia’s economic giants – China, India and Japan.
US trade policy uncertainties and tensions may be a drag on Asia’s growth outlook, but not all economies face equal risks. Beyond the immediate impact of tariffs on exports and global demand, rising trade uncertainties may serve as a catalyst for markets to search for resilience and growth via bolder reforms, more regional collaborations, and more support for domestic demand.
China’s controlled stabilisation in rising volatility
China’s recovery, particularly with regard to its domestic demand growth, will become more critical and could potentially be an alternative source of demand for most of the export-oriented Asian economies.
Since the first episode of trade tensions with the US in 2018 and 2019, China has already started preparing for trade-related uncertainties. Over the past few years, it has greatly diversified its supply chain to more trading partners such as the Asean bloc, Latin America and African countries while decreasing its share of exports to the US. With this proactive realignment of the supply chain, we think China might be able to withstand higher tariff pressures.
At the same time, China has also pivoted inwards to support domestic demand, which could partially offset potential external pressures. Since the last quarter of 2024, China has decisively made boosting domestic consumption and nurturing “new productive forces” a top priority. In the latest National People’s Congress (NPC), China rolled out a moderately expansionary fiscal easing package and a special task force to promote consumption. These policies could effectively support consumption as external pressures mount.
It is worth highlighting that the Government Work Report has signalled degrees of flexibility and highlighted the willingness to remain nimble to allow additional policy easings to be announced swiftly and implemented decisively, should external conditions deteriorate.
India’s domestic demand recovery and services exports to drive growth
While India may face higher risks from reciprocal tariffs, given its higher tariff differentials with the US, its relatively low dependence on exports as a growth driver could make the economy more resilient in a global trade slowdown.
India’s services exports have grown significantly over the past few years, and are now almost on a par with goods exports in terms of annual values. Moreover, with a vast domestic market and supportive fiscal and monetary policy settings, we think India will likely pivot into domestic consumption-driven growth in coming quarters.
In the latest budget, the Indian government announced a significant tax cut for low- and middle-income households, which could be a marginal boost to consumption given their relatively higher propensity to consume. Easing inflation, especially food prices, may also help with consumption.
However, we do not expect a steep rebound of growth momentum, given the softening of public capital expenditure the last few quarters as fiscal policy turned more prudent. Private sector investments might pick up and might further accelerate should the Reserve Bank of India lower the policy rate further.
Japan’s wage-inflation virtuous cycle
Japan is gradually marching into a new phase of more sustained inflation and higher nominal growth as the Bank of Japan (BOJ) embarks on the road of policy normalisation. The ongoing Shunto wage negotiation is sending positive signals for another year of strong wage growth of around 5 per cent for Japanese workers, which will serve as a benchmark for the wage growth momentum for the broader economy.
As wages continue to rise, households with real income growth will be more receptive to price increases, leading to a higher inflation equilibrium over the medium term. We expect the wage-inflation virtuous cycle to gradually take hold, and domestic consumption will again become a main growth driver as external headwinds intensify in coming months.
With rising global trade uncertainties, Japan could potentially benefit by encouraging friend-shoring as more countries diversify and realign their supply chain. However, the BOJ may remain cautious in adjusting its policy rate.
We believe the BOJ will continue to assess the momentum of the wage growth and its associated impact on inflation, and we expect more hikes from the BOJ as inflation stays above target. But any moves will be gradual and at opportune times when the financial markets are relatively calmer and Japanese yen within a comfortable range.
The writer is Asia economist, Fidelity International
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