By Vaibhav Tandon

Global trade has made Asia-Pacific (APAC) the fastest growing region in the world over the past two decades.  During that interval, APAC markets have endured twists and turns on the road to development.  But an outright global trade war has the potential to apply the brakes to APAC’s growth story.

The Trump administration‘s potential “overhaul” of the global trading system has raised the specter of tariffs and trade hostilities, especially between the world’s two largest markets.  The new measures will be most painful for the Chinese economy, while challenges for other nations will depend on their linkages with China.  Policy turns are expected to take time and be rolled out gradually.  Thus, the full impact on APAC economies will likely be felt after 2025. 

We expect growth to remain resilient in most places.  Domestic demand will help partially offset the hit from souring sentiment around global trade.  Inflation has retreated across the vast majority of the region.  With the exception of Japan, monetary conditions are expected to become more accommodative.  But the risks of upward pressure on inflation, weaker exports and tighter financial conditions will need to be accounted for. 

Following are our views on how major APAC markets are poised to perform in 2025.

Japan

• In the year ahead, we expect the Japanese economy to preserve its return to normalcy.  Consumption will be the main pillar of growth, as households’ purchasing power gets a further boost from rising wages.  But the outlook for exports is not particularly bright.  Japan is not high on the list of the new U.S. administration’s trade concerns, but weaker demand from Europe and China will weigh on the country’s external sector performance.
• With inflation and its underlying drivers trending in the right direction, the Bank of Japan is poised to raise rates again.  An increase in policy rates at this week’s meeting is likely, followed by another 25 basis point hike after the spring wage negotiations.  Persistent structural issues and the uncertainty around international trade will prevent policy from going deep into restrictive territory.

China

• China’s economic activity bounced back in the last quarter of 2024, supported by more forceful policy easing and overseas factories pushing out exports ahead of Donald Trump’s inauguration.  However, the recovery remains uneven and susceptible to downside risks.
  
  Another wave of U.S. tariffs and restrictions, potentially more disruptive than prior policies, are forthcoming.  The real estate market is still in disarray, with a bottoming out of housing activity or prices not yet in sight.  Deflationary forces are taking hold, with consumer inflation hovering just above zero and producer prices in negative territory.  Consumption-oriented stimulus measures like the expansion of the consumer goods trade-in program will underpin growth.  But a durable rebound is unlikely without addressing structural issues.  The Chinese economy is entering a new era of much slower growth.
• In order to reflate the economy, the central bank has shifted its policy stance from being prudent to moderately loose.  More proactive support in the form of quantitative easing, reductions to benchmark policy rates and lower reserve requirement ratios are in store.  These measures will likely be accompanied by a large demand-side push.  We expect fiscal policy to do more heavy lifting after the March National People’s Congress meeting, but policymakers will find themselves constrained by the country’s high debt burden.

Singapore

• The economy experienced a robust recovery in 2024, led by booming manufacturing activity and durable consumption.  The labor market has remained resilient, but is showing signs of cooling.  While front-loading of orders could underpin exports in the near term, momentum is likely to slow as the external backdrop becomes less supportive.  Intensification of geopolitical conflicts and trade tensions present downside risks to Singapore’s growth prospects.
• Inflation is now within the Monetary Authority of Singapore’s (MAS) comfort zone of “just under 2%.”  Given the uncertainties around global trade and the focus on currency pressures, the MAS is likely to leave the Singapore dollar exchange rate band unchanged in January.  We expect the central bank to wait for more clarity on U.S. tariffs before it starts unwinding tight monetary policy later in the year.

Hong Kong

• Hong Kong’s economy will continue to face multiple challenges in 2025.  Higher American tariffs on imports from mainland China will have a negative impact on Hong Kong’s goods trade.  Fraught Washington-Beijing trade relations will hold investments back.  Spillovers from a slowing Chinese economy will weigh on the real estate and tourism sectors.  Negative wealth effects from weak asset markets will prevent a rebound in private consumption.
• Given the Hong Kong dollar’s peg to the U.S. greenback, the Hong Kong Monetary Authority (HKMA) will remain Fed-dependent.  With the U.S. Federal Reserve expected to move more cautiously this year, monetary conditions in Hong Kong will remain restrictive for longer.  The upper limit of the dollar peg could be tested, but the HKMA has ample foreign reserves to ensure the smooth functioning of the exchange rate system.

Australia

• The Australian economy avoided a recession last year, led by strong population growth and a large expansion of public demand.  Tight monetary conditions restrained the private sector.  But there are better prospects in store.  Consumption growth is set to improve steadily, with labor market dynamics shifting from loosening to tightening.  Australia is unlikely to get directly caught up in a tit-for-tat trade battle, given the country’s relatively small share of trade with the United States.  But export performance could get tempered by developments in China and commodity markets.
• The Reserve Bank of Australia (RBA) is “gaining some confidence that inflation is moving sustainably towards target.”  Given the clear dovish guidance, we expect the RBA to begin a short, shallow easing cycle in May.  The recent tightening in labor market conditions could stall disinflation progress, delaying the long-awaited pivot.