If recent events are a good indication, it is going to be a rough year for our region. The first measures announced by US President Trump augur poorly for the region. Despite China reporting 5% growth in 2024, facts on the ground still point to a troubled economy that is only recovering weakly. In addition, the region has seen bond yields rise, pushing up the cost of capital, while oil prices are also up around 10% so far this year, imposing a further cost burden on companies and consumers.
Taken separately, these challenges are not insurmountable. What is concerning is how they might confluence and amplify each other, which could pose significant challenges for Asia. Having said that, the region is not helpless in responding to a turbulent environment; it has many policy tools and can still emerge relatively better off than competing regions.
The net effect of the US: not good but not all bad either
The American economy is entering 2025 with extraordinary momentum, causing the International Monetary Fund (IMF) to upgrade its growth forecast for the year by an unusual 50 basis points to 2.7%. This is only slightly slower than the 2.8% expected for 2024. US businesses are expecting Trump’s tax cuts and deregulation to boost their profitability. Indeed, small business confidence is at its highest level since 2018. That is why the labour market is so strong — American companies are confident enough to hire more workers. It is also why capital spending intentions remain robust despite higher borrowing costs — core capital goods orders have been rising steadily through last year.
For us in Asia, the problem with the American economy is thus not slower growth. Rather, there are two major sources of concern.
First, newly inaugurated President Trump’s policies are likely to damage the world economy. The initial salvo of around 100 executive orders that he has signed, his various speeches made during his inauguration and the comments from his aides suggest more downsides than upsides.
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The major damage will come from Trump’s trade and related policies: Vowing to “tariff and tax foreign countries to enrich our citizens”, he is going ahead with tariffs, even creating a new agency to collect the big increase in tariff revenues that he wants. There are few details, but he has indicated that tariffs as high as 25% will be imposed on Canada and Mexico by Feb 1. Both countries have warned that they would retaliate with tariffs of their own.
Ominously, Trump has also asked for a review of countries that allegedly manipulate their currencies to gain an export advantage over American goods. Over the years, several Southeast Asian economies have been accused as such, including Singapore and Vietnam.
While not committing to higher tariffs on China right away, Trump has ordered a study on trade with China. Markets seem to have bought into the optimistic interpretation that he is doing this to give time for negotiations with China. Such hopes have been boosted by his interest in an early state visit to China and his positive comments on China President Xi Jinping.
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Sure, some kind of deal is not only possible but quite likely eventually, but we do not believe it will be so positive. Such a deal will take time to materialise and will, in our view, leave tariffs on China higher than current ones. After all, a leaked document from the Trump team talked about “reversing the destructive impact of globalist America’s last trade policy”.
Since China was the main beneficiary of this previous trade policy, one must assume that China will be at the heart of Trump’s more protectionist trade approach. There is also talk about reviewing the sale of intellectual property to China. The fact is that whatever the new administration plans for strengthening its hand in bargaining with China will provoke China into retaliating with trade and other measures of its own against the US.
The other measures Trump announced within hours of being sworn in are also highly concerning. He has withdrawn the US from the Paris Climate Accord, dealing a body blow to the almost-existential need for action to tackle climate change. Trump has also signed an executive order withdrawing from the World Health Organization as well. The World Trade Organization may be the next global organisation to face US withdrawal. An isolationist America that refuses to play its part in vital global cooperation on climate, health and trade will be hugely damaging to the world.
The second big concern about the US economy is that it might be too strong. Growth rates this year and last year are well above the 1.8%–2.0% that is generally seen as the US economy’s trend rate of growth. Such a prolonged period of above-trend growth risks adding inflationary pressures to the economy.
Indeed, labour markets seem so strong that wage rises could leave the pace of disinflation, especially in services, at too slow a pace to satisfy the US Federal Reserve’s inflation objectives. A drumbeat of statements from senior Federal Reserve officials in recent weeks has made it clear that many are re-thinking the need for rate cuts. It is now quite clear that the Federal Reserve will not be easing monetary policy anywhere near as much as markets had hoped for.
Global bond yields are rising
It is not only in the US that an upward spike in bond yields has been evident. Government bond yields in most G7 economies have risen significantly. There are good reasons why higher long-term interest rates will persist. As the IMF pointed out in its latest report, core inflation is struggling to fall to central bank targets, keeping markets concerned about inflation. In addition, there are growing worries over fiscal sustainability — Trump’s likely fiscal policies will not help in this regard.
In fact, advanced economies continue to struggle with the triple whammy of low growth (except in the US), high debt, and high interest rates. As countries such as France have shown, it is proving difficult to secure a political consensus on improving sustainability due to upward pressures on spending and restive electorates, rendering tax rises or spending cuts difficult.
Consequently, financial markets are expecting substantial bond issuances, which means that the elevated supply of bonds will exert upward pressure on yields so as to induce investors to absorb the increased supply.
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The resulting tighter financial conditions will hurt emerging Asia. Rising bond yields in advanced economies tend to lead to tighter financial conditions, increasing borrowing costs and potentially triggering capital outflows. This may ultimately weigh on investment activity in the region.
Oil prices headed higher, adding to cost burdens
Brent crude oil futures have spiked from around US$70/bbl ($105/bbl) in late December to around US$80/bbl more recently. The latest round of US sanctions against major Russian oil producers and secondary sanctions against those that assist them have pushed up oil prices. With the Chinese economy recovering, albeit modestly, and robust demand in emerging markets such as India, global oil demand is forecast to remain above 100 million barrels per day.
Against this, oil producers are maintaining their production cuts of 2.2 million barrels per day through March 2025 at least, and oil prices will remain elevated. Unless Saudi Arabia changes policies and disavows production cuts in an effort to defend its market share, we see oil prices remaining at current elevated levels.
It is possible that Trump’s deregulation of the oil industry in the US could boost oil production and bring down prices. However, the increased production in the US will take some time to materialise — if at all, since the oil producers are now showing more capital discipline, seeking to raise production only where it is clear that high oil prices are sustained at levels needed to deliver high returns on capital.
In short, we see oil prices roughly 10% higher than last year: that is yet another headwind for emerging Asian growth.
China is seeing only a tepid economic recovery
Beijing may have announced that it achieved its 2024 growth target but the reality on the ground is far less rosy. Other economic data such as consumer inflation, corporate profitability, credit and energy demand are all moving at rates that do not tally with the stronger official data for GDP growth. To all intents and purposes, the economy is still struggling to stay afloat from a debt-demand-deflation spiral.
Beijing is certainly ramping up its stimulus measures but its policy tools increasingly lack potency. Monetary policy loosening achieves little when demand for credit is fundamentally weak and when ordinary folks are so downbeat from seeing the value of their property fall that they are focused mainly on re-building savings. The debt overhang among local governments is also impeding these local agencies from following through with the level and pace of stimulus that Beijing is asking them to execute.
For emerging Asian economies, the resulting downward pressure on the Chinese yuan is another concern. Historical correlations suggest that a weaker yuan will induce other emerging Asian currencies to depreciate, increasing import costs and igniting inflationary pressures.
Heightened policy uncertainty will also be a headwind to growth as government actions both within and beyond the region shape business decision-making. For instance, Washington’s designation of Malaysia as a “Tier 2” country under proposed export restrictions raises questions about the government’s ambitions to build a semiconductor ecosystem. The upcoming structure of US tariffs will also be a key determining factor for supply chain locations. This may cause a prolonged period of “wait and see” attitude by firms before committing to their investments.
Conclusion: Asian governments can respond with policy actions
On a brighter note, the authorities in Asia will not sit still. They have the tools with which to mitigate these growing headwinds — though there will be some difficult trade-offs to make.
Monetary policy will be wielded. Central banks in the region, such as the Philippines and Thailand, have already begun loosening policy and are likely to continue doing so.
But the balance of risks is such that central banks will be cautious about how vigorously they loosen monetary conditions, wary in the knowledge that US dollar strength is restricting the scope for rate cuts. Too aggressive a pace of rate cuts while US rates remain high would invite further local currency depreciations with all the risks that will bring. Still, as Bank Indonesia’s recent rate cut decision shows, the growth imperative will spur central banks to loosen policy even with these concerns.
There will also be room for fiscal policy to be used as well. Governments had been keen to reduce deficits and stabilise public debt but, given the global environment, we believe they will choose to prioritise the growth outlook and leave fiscal consolidation for later. We also believe that Asian governments will resort to innovative methods to finance growth-boosting investments in infrastructure. Note how Indonesia and the Philippines have set up sovereign wealth funds with such intentions.
Policymakers also realise that supply-side reforms can also boost growth. The intimidating global environment is likely to spur further efforts in the region to liberalise restrictions on foreign investment, implement labour reforms and deregulate away the red tape that smothers businesses.
In essence, then, the region faces a period of intense global challenges. The good news is that emerging Asian economies do have the policy scope to respond to global shocks — and they will do so, finding ways to deal with the difficulties of doing so given concerns over currency dynamics and fiscal sustainability. Years of good growth and sound policymaking have given the region’s policymakers more wriggle room to navigate what is shaping up to be an increasingly tricky year for their economies.
Manu Bhaskaran is CEO of Centennial Asia Advisors
