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.
----- Transcript -----
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.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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