It’s Complicated

On a personal level, a relationship that is “complicated” is one that is not straightforward or clearly defined. There can be issues with communication, differing expectations, unclear boundaries and ambiguity regarding the future.

America’s ties with global economic partners have become more complicated. President Trump’s tariffs mark a regime change in U.S. trade policy that would muddy its commercial relations with the rest of the world, particularly the Eastern world.

The Asia-Pacific (APAC) region has been the biggest beneficiary of globalization. Increased flows of goods, services and investment have contributed to sustained economic development. But the U.S.-led reconfiguration of the global trading system will challenge the region’s model of economic success.

While reciprocal tariffs have been deferred, the new array of levies from the U.S. will still be disorienting for trade-dependent APAC nations. China stands to be the biggest loser, due to its reliance on trade and escalating tensions with its single largest trading partner. Many governments will be pinning their hopes on consumers to sustain growth, as inflation cools and monetary policy settings become more supportive.

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

Japan

The combination of higher U.S. auto levies and weaker demand from major centers is casting a long shadow on Japan’s growth outlook. To enhance prospects of a trade deal with the U.S., the Japanese government has refrained from imposing any counter measures. Another year of strong wage increases will provide some support to domestic demand, thereby preventing an outright contraction.
With wages and price developments still playing out largely in line with the Bank of Japan’s expectations, we continue to expect the central bank to hike again later this year. That said, continued market volatility, a stronger yen, and the hit from America’s trade tensions could push monetary policy normalization further into the future.

China

Not long ago, the sky was the limit for trade between the world’s two largest economies. Today, only the tariffs are heading in that direction. Beijing is the primary target of the president’s trade offensive as U.S. levies on China surged to 145% in a matter of days and go as high as 245% on certain products. Beijing has struck back with 125% taxes on American imports. While it has indicated it won’t go further, it is also unlikely to back down.

Downward pressures on growth are mounting. At present, front-loading of export orders and the incentive to continue rerouting and white labeling through other nations has maintained a baseline level of output. But China will struggle in fending off deflationary forces as weak external demand will add to excess capacity. Depressed or negative returns from assets like property and equities will make consumers even more wary.
The Chinese government will use all available policy tools to provide a cushion to the economy. We expect more substantial fiscal stimulus, along with monetary easing and continued gradual depreciation of the renminbi (RMB). The RMB weakened to its lowest level since 2007 in the latest sign that Beijing is willing to use a weaker currency to combat U.S. tariffs. A sharp depreciation will further draw the ire of the U.S administration and would go against the country’s desire of having the currency play a bigger role in international trade and settlements. Capital flight would also be a risk under this scenario.

Singapore

Singapore is the only Southeast Asian economy that runs a trade deficit with the United States, with whom it has a longstanding free trade agreement. While this may have prevented the city-state from becoming a direct target of the U.S. tariff onslaught, its exports will still be subject to the minimum universal levy. Given its large re-exporting sector, diminished trade will exert downward pressure on growth. On the upside, Singapore could further establish itself as a re-exporting hub in the region as America’s actions currently are targeted at countries where exports to the U.S. set sail, ignoring their origin.
January marked the beginning of the Monetary Authority of Singapore’s (MAS) monetary easing as it reduced the slope of the Singapore dollar exchange rate policy band for the first time in five years. The MAS loosened its policy settings for a second straight meeting at its April meeting. With the monetary authority sounding more dovish and concerned over trade uncertainty, we expect the slope of the policy band to flatten further this year.

Hong Kong

Exports from Hong Kong to the U.S. are subject to the same 145% levies that apply to Mainland China. While the city has not followed Beijing’s lead in imposing a 125% retaliatory levy on American goods, it has waded into the trade conflict by suspending package postal service to the United States. Global trade uncertainties will put a dent in growth; worryingly, the domestic economy is unlikely to offer much support. The property sector is challenged by elevated interest rates and weak demand.
Greater economic stimulus from Mainland China will create some positive spillovers in the city. But the Federal Reserve, wary of potential inflationary pressures in the U.S., will sustain restrictive monetary conditions that will translate to Hong Kong through the currency peg.

Australia

Australia has escaped “lightly” with the minimum tariff of 10%, thanks to its trade deficit with the United States. The U.S is also not one of the top destinations for Australian goods. Therefore, the direct impact of duties will be negligible. But the knock-on effects from further escalation in trade frictions are poised to be far greater. China is Australia’s largest trading partner; weakness there will hinder Australia’s commodity exports, among others. On the domestic front, the economy will be underpinned by a strong labor market, moderating inflation, and cost-of-living rebates. Australia will also go to the polls on May 3 in what has been a tight race, with cost-of-living concerns at the top of voters’ minds.
The Reserve Bank of Australia (RBA) kept its cash rate steady at its April meeting, which predated the U.S tariff-driven market swing. With monetary policy still in restrictive territory and progress on disinflation broadly in line with expectations, we think the RBA will resume its easing cycle next month.

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