Overview
Key takeaways
- DeepSeek and stimulus prompt more hope of improvement.
- Asian countries have policy tools to mitigate the burden of tariffs as and when they come.
- Region may prove a draw for investors seeking a calmer environment amid increasing uncertainty around global trade.
Arguably, the year got off to a flying start. Chinese stimulus was beginning to nurture some green shoots and then a hitherto under-the-radar start-up made everyone think twice about China’s ability to ride out US restrictions and produce world-leading technology. As the Year of the Dragon drew to a close, DeepSeek single-handedly brightened China’s economic outlook, and also boosted optimism about Asia’s lead in AI innovation.
But then came the tariffs and heightened uncertainty around global trade.
All adding up
US President Donald Trump has imposed 20 per cent additional tariffs on imports from China since the inauguration. The market expects more to come. While the rest of the region has mostly been spared, US policy is a risk that remains front of mind for many countries. Eight out of the 15 economies with the largest trade surplus with the US are in Asia.
Trade is vital to this export-oriented region. More tariffs will weigh on the profits of Asian exporters, many of whom have already been grappling with the knock-on effects of China’s economic pains in the past two years. That said, it’s possible that bilateral negotiations could alter or even deter some trade actions. Perhaps more importantly, Asian countries have policy tools at their disposal to mitigate the burden of tariffs as and when they come.
In a twist of fate, further trade pressures could in fact lead to a bump in regional growth as reactive policies are put in motion. One China-based real estate equity analyst says: “If the external environment becomes more severe, domestic supportive policies on the property sector may strengthen and companies could benefit from policy loosening.” Although there’s a happy medium that could be overshot, she warns: “If the macro backdrop significantly weakens and income expectations are negatively impacted, demand will also be affected.”
Policy put
Inflation has stayed subdued across most Asian economies, allowing central banks room to ease monetary policy to support growth. A gradual reduction in interest rates could lead to mild currency weakness but should also give exports a more competitive advantage in international markets. That said, Asian central banks will be careful about the timing, keeping a close eye on Fed policy decisions to maintain stability in cross-border capital flows.
The exception is Japan, which faces negative real yields. While the BoJ chose to hold in March, it may hike interest rates further if inflation picks up. We expect the economy to continue its moderate recovery, driven by improved consumer demand and solid corporate spending.
Broadly there is also room for more fiscal easing in Asia, should the economic environment worsen. At China’s annual legislative meeting in March policymakers raised the official deficit to 4 per cent of GDP, the highest in more than three decades and up from 3 per cent last year. The real GDP growth target of 5 per cent – the same as 2024 despite pressures – speaks of an intention to maintain growth momentum, again, leaving the door open for further stimulus.
Relative calm
It cannot be ignored that the region is facing increasingly complex international relations. The tariff threats are real. But Asian economies are resilient, which will help them withstand the potential impact of most tariff-related shocks. Southeast Asian nations will continue to benefit from the shift of supply chains from China, which will bolster investment inflows and support overall growth. India’s economy is on an upward trajectory, driven by robust consumer demand and government spending.
The pace of China’s recovery is critical to the rest of Asia, given how deeply it’s integrated into regional and global supply chains. After a slew of stimulus measures, the Chinese economy has shown signs of a pick-up, most noticeably in the property sector. A positive wealth effect from the stock market is also expected to restore household confidence to some extent.
On top of the economic fundamentals, the evolving AI story will strengthen Asia’s leadership in tech innovations and further boost the region’s growth outlook over the long term.
Capital is flowing into north Asian equities as well as Asia high yield and investment grade bonds. We expect to see these flows to the region increase in the second quarter, driven by attractive valuations and relative policy certainty.
As the world contends with a challenging White House agenda and the sudden shift in narrative around US exceptionalism, the sanguine outlook for Asia may prove a draw for investors seeking a sense of calm.
