The impending change in the U.S. administration will be challenging for China and the rest of Asia-Pacific. U.S. tariff increases have become more likely, especially on China, and possible changes in the U.S. macro picture are leading to different interest rate expectations. While much of the region should be able to continue to grow solidly, central banks will probably remain cautious by not reducing their policy rates too fast. And risks have gone up.

U.S. Monetary And Trade Policy Outlook Is Changing And Uncertain

S&P Global Ratings expects U.S. growth to ease in 2025 after materially outpacing eurozone growth in recent years.  Following major monetary tightening, the U.S. and Europe have seen soft landings, with inflation coming down without significant economic downturns.

Policy changes by the incoming Trump administration are likely to alter dynamics in the U.S. and the world.  In several areas the uncertainty around its plans is too large for us to include changes in the baseline. In the case of trade tariffs on Chinese exports, an increase is likely. We have incorporated in our baseline a rise in the effective (weighted average) U.S. tariff on imports from China to 25%, from around 14%, from the second quarter of 2025 onwards. We expect China to retaliate in kind.

We now see fewer U.S. Federal Reserve interest rate cuts in 2025.  We expect one more in December. But we now see only three cuts in 2025 and think the terminal level of 3%-3.25% will be reached only in late 2026. On the other hand, in the eurozone, where inflation has fallen faster, we expect the policy rate to reach the terminal level of 2.5% already in the first quarter of 2025.

The change of administration in the U.S. implies a large degree of uncertainty around the baseline.  That is true for U.S. growth, inflation and interest rates, with implications for the rest of the world. In addition, the potential for new trade restrictions and trade conflicts has risen.

China's 2025 Outlook Is Shaped By Stimulus And U.S. Trade Policy

While China's GDP growth slowed in the third quarter amid a persistent property downturn and weak confidence, the latest data suggests a pick-up.  With weak demand weighing on prices and profits, nominal growth was unchanged at 4% year on year, lagging real growth. Still, growth of fixed asset investment and, especially, retail sales rose in September and October (see chart 1).

In our view, measures announced since end-September should have some positive impact on the Chinese economy.  Monetary, fiscal and other measures were meant to shore up confidence, support the property and equity markets, address local government debt problems, and buoy growth (see "Will China's Latest Stimulus Initiatives Achieve Lift-Off?", published on RatingsDirect on Oct. 25, 2024).

The large stock of unsold housing means that it will take time for the property market to stabilize (see chart 2). The monetary easing will have a limited impact, given weak confidence and credit demand. On the fiscal side, a large share of "hidden" local government debt will be swapped with new debt from bond issuance.

Only modest new growth-enhancing fiscal expansion has been announced so far, and no significant new support for households and consumption. But Finance Minister Lan Fo'An on Nov. 8, 2024, said China would "actively utilize" the room for a rise in the official budget deficit in 2025, suggesting more growth support from fiscal policy next year.

We expect China's economy to be hit by the U.S. trade tariff increases on its exports.  Exports will obviously grow much less and investment too. The impact on investment will in part kick in even before U.S. tariff implementation, because of the increased uncertainty. Spill-over to employment, income and confidence will weigh on consumption.

As a result, we have reduced our China GDP growth projection for 2025 and 2026 despite the stimulus.  Following an expected 4.8% in 2024, we now see 4.1% GDP growth in 2025 and 3.8% in 2026, down by respectively 0.2 percentage points (ppt) and 0.7 ppt from our September forecast.

Because of the expected U.S. tariffs and the associated downward pressure on prices, we have further reduced our forecast for inflation in coming years. Our new forecast also features a weaker outlook for the renminbi.

Risks have increased.  The uncertainty about the next U.S. government's policies and responses from other governments and financial markets implies particularly large risks around the baseline forecast.

In a recent FAQ article, we discussed how 60% U.S. tariffs on Chinese exports would imply an even larger hit to China's economy, with GDP growth in 2026 falling significantly below 2% (see "How Would China Fare Under 60% U.S. Tariffs?", published Nov. 18, 2024).

Chart 1

Chart 2

The Shifting Trade Picture Could Also Hurt Asia-Pacific

The three key factors driving our growth forecast remain in place but are evolving.

Asia's exports have continued to expand, but external headwinds and risks have risen.  

• The semiconductor cycle is likely to ease, and we expect the expansion of global trade to slow in 2025 as global economic growth falls.
• Higher U.S. tariffs on Chinese exports would make other Asian economies more competitive in the U.S, and they may attract more foreign direct investment, including from U.S. firms.
• But weaker growth in China will weigh on its imports from the region. Moreover, the headwinds for Chinese exporters on the U.S. market are likely to intensify their push into other markets, increasing the competitive pressure there.
• We have not assumed U.S. trade restrictions on Asian economies other than China in our baseline. But the risks on this front have risen, especially for the many Asian economies that have a goods trade surplus with the U.S. (see chart 3).

A gradual fall in interest rates and inflation should ease their drag on spending power,  allowing growth to pick up in 2025 in several developed economies.

In emerging markets, robust domestic demand growth is generally supporting solid overall growth,  even as it is moderating in some.

In India we see GDP growth easing to 6.8% this fiscal year  as high interest rates and a lower fiscal impulse temper urban demand (see chart 4). While purchasing manager indices (PMIs) remain convincingly in the expansion zone, other high-frequency indicators indicate some transitory softening of growth momentum due to the hit to the construction sector in the September quarter.

In Japan, we expect annualized quarterly GDP growth of 1.2% through end-2025.  Third quarter GDP growth disappointed at 0.2% quarter on quarter. While consumption expanded solidly, fixed investment fell. Following several earlier downward revisions, this time statisticians revised down second quarter growth. We now project a decline in GDP of 0.3% in 2024. Still, growth should persist as real household income and consumption are likely to improve amid rising wage expansion.

In Australia and New Zealand, growth should pick up in 2025 with gradually lower inflation and interest rates.  In 2024, elevated interest rates and inflation have weighed on domestic demand. In Australia, a resilient labor market, buoyant government spending and solid exports have kept GDP growth just about positive.

In New Zealand, the labor market has noticeably weakened with a contraction in employment in the third quarter, and consumer activity is slow. But with inflation easing, we expect growth to pick up in 2025 due to more accommodative monetary policy.

In South Korea and Taiwan, we see GDP expansion easing in 2025 on softer export growth.  In the third quarter, domestic demand outpaced exports. While South Korea's overall growth was weak, domestic demand, especially investment, expanded considerably. Taiwan's GDP clocked another strong performance. In both places, net trade contributed negatively as import outpaced exports; in South Korea exports fell.

Southeast Asia remains a global growth driver.  Domestic demand will remain broadly resilient, with services including information technology, communication services and finance driving economic activity. The recovery of tourism is a significant theme this year with travel-related activity growing strongly. Tourism growth should normalize over 2025. In manufacturing, the electronics sector continues its outperformance, while trade more broadly is steady. These factors are driving some upward revision to our growth projections.

In all, we project 4.5% GDP growth in 2024 in Asia-Pacific (including China), compared with 4.4% in September. We expect 4.2% expansion in 2025 and 4.1% in 2026, down from our September projection of 4.4% growth for both 2025 and 2026.

Key growth risks include a sharper-than-expected slowdown in the U.S., weak growth in China and rising pressure from Chinese exports amid U.S. trade restrictions on the country. Financial turmoil in international markets amid shifts in expectations about monetary policy in major economies could affect Asia-Pacific markets.

Chart 3

Chart 4

Central Banks Will Be Cautious In Reducing Policy Rates

With inflation mostly under control, some central banks have started cutting policy rates.

But swings in capital flows amid shifts in expectations about U.S. interest rates and trade policies require central banks to be vigilant and cautious.

• Asia-Pacific currencies have recently lost ground because of these factors.
• There may be more such pressure to come. Specifically, risks of U.S. trade restrictions have risen, including economy-specific ones in the case of bilateral trade surpluses with the U.S.
• Asia-Pacific currencies may also be affected by renminbi weakening due to U.S. tariffs on China.

In this setting, we expect Asia-Pacific central banks to take their time bringing down policy rates.  That is all the more so given that uncomfortable interest differentials with the U.S. make currencies and markets more vulnerable to shocks.

Indonesia stands out as an economy where inflation has receded sharply, but interest rates are only falling gradually due to capital outflow pressures. We expect policy rates to come down the most through the end of 2025 in New Zealand and the Philippines, and the least in Taiwan and Malaysia (see chart 5).

Chart 5

Persistent food inflation is delaying rate cuts by the Reserve Bank of India (RBI).  We expect the central bank to cut only once in the current fiscal year (ending March 31). Consumer inflation is fueled by supply shocks in agriculture, which have driven up food prices. These shocks are linked to changing rainfall patterns and climate change-driven heatwaves. Traditionally volatile and hard to predict, food inflation has become even more capricious lately. The RBI cannot ignore food inflation when considering rate cuts. Food items make up nearly 46% of the inflation basket and persistently high food inflation raises inflationary expectations.

In Australia, we see only moderate cuts by the central bank next year.  The recent reduction in inflation is deceiving, in large part because of energy rebates by the government. Consumer inflation has remained sticky (3.5% in the third quarter) if judged by trimmed mean inflation, the Reserve Bank of Australia's preferred gauge for underlying price increases. Amid a significant upward impact from government measures in 2025, we expect the decline in headline inflation to take time.

In Japan, we expect the central bank to gradually raise its policy rate in coming years.  Changes in price and wage formation are driving the domestically generated inflation that the authorities have been aiming for (see "Japan's Long Wait For Sustained Inflation Is Likely Ending," April 16, 2024). We expect consumer price index (CPI) inflation can be sustained at around 2%, even with modest real growth.

Chart 6

Chart 7

Appendix

Table 1

Table 2

Table 3

Table 4

Table 5

Related Research

• Will China's Latest Stimulus Initiatives Achieve Lift-Off? Oct. 25, 2024
• How Would China Fare Under 60% U.S. Tariffs?, Nov. 18, 2024
• Japan's Long Wait For Sustained Inflation Is Likely Ending, April 16, 2024