In Singapore, the analysts project 2025 GDP to grow by 1.4% y-o-y, compared to 2024’s 4.4% growth. South Korea is expected to see a GDP growth of 1.1% y-o-y this year compared to last year’s 2%. At the same time, Taiwan, Malaysia, Thailand and Hong Kong are expected to see GDP growths of 2.6%, 3.8%, 1.9% and 2.1% compared to their 2024 GDPs of 4.7%, 5.1%, 2.6% and 2.5% respectively.
Even before the trade tensions, however, the analysts note that Asia’s underlying growth momentum was soft. For the trailing four quarters ending 4Q2024, the region’s growth had been averaging around 4.6%, compared to the 6.1% growth in 1Q2018 when the previous round of trade tensions hit.
Thanks to the tariff hikes, global growth and US growth are also expected to slow down. Morgan Stanley’s chief global economist, Seth Carpenter is expecting global growth to slow to 2.5% y-o-y in 4Q2025, from 3.5% y-o-y previously, led by a “significant” cooling off in US growth. Morgan Stanley’s chief US economist, Michael Gapen is forecasting the country’s GDP to slow to 1% y-o-y in 4Q2025 from 2.5% y-o-y previously.
With the US dollar (USD) not appreciating as it did back when the first tariffs hit in 2018 to 2019, this means that the tariff hikes will pass through to the US corporate sector and consumers, the analysts note. The tightening of immigration and a lack of fiscal impulse are also key reasons behind the expected slowdown in the US economy, which will eventually spill over to Asian economies.
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That said, a weaker USD and a faster pace of monetary easing may help cushion the impact, unlike the previous trade cycle in 2018 to 2019. Back then, the appreciation of the USD in 2018 and 2019 delayed monetary easing in Asia, with the region seeing the first rate cut in February 2019, months after trade tensions emerged.
“The weakening dollar in this cycle will allow a timely monetary policy response and ease financial conditions,” the analysts note.
“One key element of the global macro strategy team’s call that the dollar will continue to weaken is the economics forecast that US growth will slow more than rest of the world and Asia,” they add. “Moreover, unlike in 2018 when the Fed was still on a path to lift policy rates, the Fed is guiding to take policy rates lower this time around.”
Even with the mitigating factors, however, the analysts still expect growth in Asia to slow down by 90 basis points y-o-y to 3.8% in 4Q2025.
“This means that the extent of the slowdown we are expecting now will be similar in magnitude to the 2018 - 2019 cycle,” say the analysts.
In China, Morgan Stanley’s chief economist, Robin Xing, expects the country’s growth to decline notwithstanding additional stimulus, given that 40% of the country’s growth was contributed by net exports in 1Q2025.
For sectoral tariffs, especially for electronics, the analysts point out that Korea and Taiwan are among the most exposed economies in the region.
On the other hand, India is the “best placed” within Asia given its supportive policy easing and low ratio of goods exports to GDP. The country’s economy is also regaining momentum thanks to improvements in government spending and strength in services exports.
The analysts also like Australia as it is less exposed to the tariff developments and the country has tailwinds from its fiscal easing. However, they see “modestly slower growth” for the country due to global growth developments.
At the same time, the analysts note that Japan’s consumption tailwinds, propped up by stronger real wage growth, as well as prospects of more fiscal easing will help provide some offset to the external headwinds.
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“Indeed, we think that the reflation narrative in Japan will stay intact as long as the US does not enter into recession,” they write.
‘Reprieve’ not ‘relief’
Despite talks and potential deals being made between the US and its trading partners, the analysts at Morgan Stanley see these updates as a “reprieve” and not a “relief”.
While the lower rates following the US’s initial “Liberation Day” tariffs may have averted the worst of the disruption to trade flows, the analysts are still questioning how the situation will pan out.
“Over the past seven weeks or so, all of our conversations with investors have been dominated by one over-arching question - where are trade tensions headed?” the analysts reveal.
Despite the negotiations, tariffs remain higher at this point compared to at the start of the year. Overall weighted average US tariffs are still at their highest levels since the 1930s, the analysts add.
Given that the uncertainty plays a “central role” in determining the analysts’ forecasts, they note that the lifting of any uncertainties may be the “only path to a better outlook”.
“This would have to take the form of tariffs on China going to 10% quickly (i.e. reduced further from 30%), while sectoral tariffs may not be implemented or may be watered down by exemptions,” the analysts write.
“Also, for the rest of Asia, this may also mean that tariffs may be lowered to beyond the 10% headline on the completion of a deal,” they add.
‘No quick fix’ for US-China trade relations
Even though the reciprocal tariffs for the US and China came lower than expected, the risks of escalation remain high.
On May 12, the US and China said they would temporarily lower tariffs, with the 145% US levies on Chinese imports lowered to 30% by May 14. The 125% Chinese tariffs on US goods will drop to 10%, according to a joint statement. The analysts previously assumed that tariffs on imports from China would end the year 34 percentage points higher y-o-y, before the recent revisions
However, they remain unconvinced that a deal will be signed any time soon and still see risks that trade tensions could re-emerge.
That said, they note that the trade balance between both countries reflects two fundamentally different growth models.
“The sizeable trade deficit reflects a deeper issue about the behaviour of US consumer spending (high) and saving (low). Against this backdrop, a sustainable turnaround in the bilateral trade balance between the US and China would require fundamental lasting changes to the growth model of these two economies — a tall order,” they write.
They add that at this point, increasing manufacturing capacity in the US and building a US-centric supply would take time.
To begin with, US participation in global manufacturing value chains is just 13%, while China is more than three times higher at 41%, the analysts point out.
“In China, there is a very clear policy preference for generating growth via investment, even more so during a downturn. Policymakers prefer to stimulate investment because they believe it creates tangible assets and boosts productivity rather than using it for consumption, which would only mean a rise in debt levels for future generations,” they add. “Moreover, from a geopolitical standpoint, China aspires to be on the technological frontier and retain its cutting edge when it comes to high-end manufacturing.”
Even though policymakers may force the issue by requiring China to increase its active purchases from the US via a trade agreement, the fix is only temporary, with the analysts noting that the US may not have a ready sizeable supply of goods to export to China.
Strategic competitive considerations may also be a hindrance. “The US is unlikely to be willing to sell high-tech and defence equipment to China, and China will not want to rely on the US as a key supplier of food and energy, preferring to diversify its sources,” they say.
While a comprehensive deal is required, the process will be complicated and take time, given the multiple issues involved.
To this end, the analysts see both parties discussing further issues such as a non-compliance of the first phase of the trade deal where China only fulfilled 60% of its purchases, the fentanyl issue, the sale of TikTok, market access into China, as well as the exporting of rare earth materials.
“For instance, China has continued to maintain global export controls on rare earth metals and has continued to pledge to crack down on the smuggling of critical minerals last week. Meanwhile, China’s Ministry of Commerce has characterised the continued guidance by the Commerce Department on the “risks of using PRC-advanced computing ICs’” as “seriously damages the consensus reached” – a sign that tensions are still lingering,” the analysts highlight.
Tariffs in Asia
For the rest of Asia, the analysts also believe more deals may be signed with the US, although the “sheer volume” of negotiations will make it difficult for deals to be worked out with every trade partner by the end of the 90-day pause.
“Our current assumption is that even if trade deals were to be agreed, the 10% headline tariff rate will remain in place, albeit with exemptions granted on an economy by economy basis,” the analysts say.
