There are very few silver linings in these dark clouds. Each country in this region will need to strengthen its defences against the turbulence that is likely in coming months. But individual responses will not be enough since the likely shocks will be severe. A collective Asean response is becoming more urgent.
The twists and turns of American trade policy are themselves damaging
Trump launched his trade war on April 2 with a bazooka shot of so-called “reciprocal tariffs” against virtually every country in the world except Canada and Mexico (which have separate trade disputes with the US). After the bond market gyrated dangerously in response, the tariff increases were suspended for a period to allow deals to be done with trading partners except China. Then after a dizzying series of tariff hikes against China provoked financial markets to swoon again, these were also reduced. This week’s talks between the US and China seemed to have produced a framework agreement that will cool their tariff war.
However, there are few details about this agreement while trust has broken down between the two big powers. Thus, we cannot have much confidence that US-China trade tensions will ease by much. Moreover, trade negotiators from Japan and the EU are finding it hard to get their American counterparts to set out detailed positions on specific trade issues, so finalising substantive trade deals by the July 9 deadline that Trump imposed seem almost impossible. Many countries that want to negotiate are not even able to secure meetings with their counterparts in Washington. In short, it is a mess and one that the region will have to learn to live with for some time.
The economy is slowing
Economic indicators in the past few weeks show the US economy losing momentum. Healthy growth is still possible in the second quarter of this year but the rest of the year will probably see a much weaker pace. A quick look at the data supports this downbeat view:
Discouraging lead indicators: The Conference Board’s Leading Economic Index plummeted 1% in April, reaching its lowest level in five years after a fall of 0.8% in March. That means a marked slowdown in the second half of this year. This is backed by surveys of purchasing managers which show order books in both the manufacturing and services sectors falling.
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Business and consumer confidence is falling, according to several surveys including the authoritative Federal Reserve Beige Book. Not surprisingly, businesses are cutting back on capital spending — core capital goods orders fell 0.1% in April, continuing the weakness that has been evident since February.
Consumer demand could falter as the job market sours: The average increase in employment over the last three months slowed to 135,000 in May, down from the 150,000 per month pace seen in early 2025. That is why consumer-facing companies such as McDonald’s, Starbucks and Chipotle Mexican Grill have been reporting declining sales. In fact, the growth rate of nominal personal spending halved in April after averaging 0.4% per month in Q1 of this year. There are also signs of stress in household finances with delinquency rates on consumer debt rising in the past year — that could portend a more pronounced ebbing in consumer spending later in the year.
Banks are more cautious about lending in Q2. A larger percentage of credit officers in banks have reported that they have been becoming stricter about lending standards compared to the early part of this year. They have also observed that credit demand is weakening.
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Ill-effects of the trade war more apparent: Business surveys indicate that suppliers are passing the full cost of tariffs on to consumers, which is bound to cause them to cut back on spending. Companies are talking about how the uncertainty over tariffs is impacting overseas orders while others complain about supply chain disruptions.
These headwinds are likely to offset the few positives there are such as falling oil prices and a weaker USD boosting exports. In fact, lower oil prices are leading oil companies to cut shale oil production, causing a slowdown in that sector.
This is why the World Bank is forecasting that America’s economy will expand by a desultory 1.4% this year, half the pace in 2024. It does not see a quick recovery in sight either — the longer range forecast is for the US economy to stumble along at just below 2% in both 2025 and 2026.
Financial markets don’t like what they see in the budget
Trump is pressing the US Congress to quickly pass his One Big Beautiful Bill which sets out the government’s budget for the fiscal year starting this October. The lower House has passed its version of the bill which is now being scrutinised by the Senate. The senators are not happy with some of its provisions and could water down some of the proposals. Still, the fact is that the American political class is inclined to cut taxes by more than it is prepared to cut spending.
Thus, the budget deficit is projected to be in the range of 6%–7% of GDP for the next few years. The Congressional Budget Office estimates that the bill will produce budget deficits through fiscal year 2034 that will cause public debt to expand by a stunning USD3 trillion ($3.86 trillion). These are scary numbers, which is why Moody’s Ratings downgraded the US government’s credit rating from Aaa to Aa1 — giving as reasons concerns over the trajectory of budget deficits and rising public debt.
Political dissension is growing and will get worse
The protests against Trump’s crackdown on immigration in California and elsewhere are worrying for several reasons. First, it shows that opposition to Trump’s policies is growing more determined and organised. Second, the anger led to violence. Third, Trump’s response was to go over the head of the California state governor to call up the state’s national guard and to deploy active duty marines to counter the protests. These moves have inflamed the opposition to Trump.
In the coming months, we expect dissension to intensify. There will be more protests and some of them could turn violent. Other states will also join California in taking up cudgels against the Federal government led by Trump — and find ways to obstruct controversial policies, not just the immigration crackdown. One should also expect a lot more court cases with many resulting in judgments that go against Trump’s actions. Already, some 50 of his roughly 90 executive orders have been partially or fully blocked by courts. Trump’s approval ratings are likely to fall further, encouraging more Republican congressmen and senators to turn against Trump.
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This dismal political backdrop will only deepen the uncertainty and loss of confidence among businesses and consumers in America and among financial investors looking to deploy money in American assets.
What does this mean for Asian economies?
It is going to be a rough period for the region.
First, the regional economies should not expect a quick agreement on trade deals that will do away with Trump’s reciprocal tariffs. Judging by the negotiations and the statements that have been issued so far and the US-UK trade deal, the only one to have been completed, it looks like the final outcome will be a significantly higher average US tariff rate. If that is the bottom line, it is a dismal one for export-oriented economies such as our region.
Second, forecasting agencies are unanimous in expecting a bigger hit to regional growth. Slower US consumer and business demand and continued uncertainty will take their toll on spending and hiring. The uncertainty could also mean that the impressive foreign direct investment commitments promised to Southeast Asian economies may be delayed or downsized.
Third, the unusual moves in some financial markets are a sign of growing financial market concerns. Bond yields in the US have not fallen by much even though markets expect the economy to weaken. Interest rates in Hong Kong have plunged to almost zero — despite the Hong Kong dollar being pegged to the USD, the yield spread between Hong Kong and the US is unprecedented. Similarly, rates have fallen in safe havens such as Switzerland and Singapore. Basically, investors are becoming keener to diversify away from USD assets. The USD, which has already depreciated by around 9% this year, is likely to fall even further.
Thus, financial market volatility is likely to worsen. Equity markets appear to us to be too optimistic and a correction is therefore likely. More commentators are warning about potential vulnerabilities in the financial sector. The collapse of Silicon Valley Bank is a warning — problems that the regulatory authorities missed can come out of the blue to hit us.
Conclusion: what must the region do?
Lower growth and more financial market stresses are a potentially dangerous mix which could result in small shocks being amplified into severe ones. In the near term, it is vital that policy makers review the elements of resilience:
Financial regulators need to tighten supervision over financial institutions to ensure that buffers and appropriate risk management measures are in place.
Central banks will be under more rigorous scrutiny by financial markets in such circumstances. While it may be appropriate to cut policy rates to bolster the economy’s defences against a slowdown, monetary policy officials need to communicate well with bond and currency markets and to proceed with caution so that their hard-earned credibility is not undermined.
The authorities should also prepare fiscal support packages that can be quickly implemented in case the projected economic slowdown is worse than expected.
Swap arrangements among central banks may need to be reviewed and expanded.
However, individual country responses are not going to be enough for the region to contain the threats to its well-being from a fundamentally more turbulent world, a world where protectionism is rife, financial stresses more common and geo-political accidents likely. Asean needs to go beyond rhetoric and coordinate its responses to American protectionism so that there is strength in numbers.
At the least, the region should look at leveraging off existing cooperation agreements. It would be a positive signal if a commitment could be made to expand the Chiang Mai Initiative-Multilateralised into an Asian Monetary Fund, to show that the region is able to tackle financial crises on its own without needing American intervention. The Regional Comprehensive Economic Partnership, which brings Asean economies into a free trade agreement with China, Japan, South Korea, Australia and New Zealand, can be strengthened and more countries invited to join.
Whatever it is, it cannot be business as usual in the region.
Manu Bhaskaran is CEO of Centennial Asia Advisors
