Our Chief Asia Economist Chetan Ahya discusses how tariffs, the power of the U.S. dollar, and the strength of domestic demand will determine Asia’s economic growth in 2025.
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Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Today on the podcast: three critical themes that will shape Asia’s economy in 2025.
It’s Tuesday, January 21, at 2 PM in Hong Kong.
Let's start with the big picture: We foresee Asia's growth decelerating from 4.5 per cent last year to 4.1 per cent in 2025. The whole region faces a number of challenges and opportunities that could sway these numbers significantly. We highlight [the] following three key factors.
First up, tariffs. They are our single biggest concern this year. The pace, scale and affected geographies will determine the magnitude of the growth drag. In our base case, within Asia, we expect tariffs to be imposed on China in a phased manner from the first half of 2025. As Mike Zezas, our Head of US Public Policy states, this will be about fast announcements and slow implementation.
Given tariffs and trade tensions are not new, we think this means corporate confidence may not be as badly affected as it was in 2018-19. But the key risk is if trade tensions escalate. For instance, into more aggressive bilateral disputes outside of US-China or if [the] US imposes universal tariffs on all imports. Asia will be most affected, considering that seven out of [the] top ten economies that run large trade surpluses with the US are in Asia. If either of these risk scenarios materialize, it could bring a repeat of [the] 2018-19 growth shock.
Next, let's consider the Fed and the US dollar. Asian central banks find themselves in a bind with the US Federal Reserve's hawkish shift – which we think will result in only two rate cuts in 2025. The Fed is taking a cautious approach, driven by worries over inflation concerns, which could be exacerbated by changes in trade and fiscal policy. This has led to strength in the US dollar and on the flipside, weakness in Asian currencies. This constrains Asian central banks from making aggressive rate reductions -- even though Asia’s inflation is in a range that central banks are comfortable with.
Finally, with [the] external environment not likely to be supportive, domestic demand within key Asian economies will be an important anchor to [the[ region's growth outlook. We are constructive on the outlook for India and Japan but cautious on China.
China has a deflation challenge, driven by excessive investment and excess capacity. Solving it requires policy makers to rely more on consumption as a means to meet its 5 per cent growth target. While some measures have been implemented and we think more are coming, we remain skeptical that these measures will be enough for China to lift consumption growth meaningfully. We see investment remaining the key growth driver and the implementation of tariffs will only exacerbate the ongoing deflationary pressures.
In India and Japan, we think domestic demand tailwinds will be able to offset external headwinds. We expect a robust recovery in India fueled by government capital expenditure, monetary easing and acceleration in services exports. This should put GDP growth back on a 6.5 per cent trajectory. In Japan we expect real wage and consumption growth reacceleration, which will lead [the] Bank of Japan to be confident in the inflation outlook such that it hikes policy rates twice in 2025.
This week marks the start of the new Trump administration. And together with my colleagues, we are watching closely and will continue to bring you updates on the impact of new policies on Asia.
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