Asia Can Boost Economic Resilience Amid Surging Trade Tensions
IMF Blog, April 24, 2025
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- Authors: Thomas Helbling, Andrea Pescatori, Krishna Srinivasan
- Published: April 24, 2025
Overview
- US tariffs are the highest in a century, with some of the steepest aimed at Asia.
- Asia accounted for nearly 60 percent of global growth in 2024.
- Trade policy uncertainty has increased amid escalating tensions between the United States and China.
- The region’s export-led growth model faces mounting challenges from weaker global demand, reduced trade, tighter financial conditions, and heightened uncertainty.
Growth projections and near-term risks
- Reference forecast: regional growth projected to slow to 3.9 percent in 2025 from 4.6 percent in 2024.
- The slowdown reflects a downgrade of 0.5 percentage point—described as the sharpest since the pandemic.
- Projected growth for 2026: 4 percent (also slower than previously forecast).
- Advanced economies in the region: growth likely to be 1.2 percent in 2025, a downward revision of 0.7 percentage point compared to January.
- Japan: growth projected to increase to 0.6 percent in 2025 from 0.1 percent in 2024 (real wage pickup expected to support consumption).
- Emerging market and developing economies (EMDEs) in the region: growth projected at 4.5 percent in 2025, a downward revision of 0.5 percentage point.
- China: fiscal expansion in the 2025 budget expected to partially offset tariff impacts; growth downgraded to around 4 percent in 2025 and 2026.
- India: growth projected to slow moderately to 6.2 percent in 2025 and 6.3 percent in 2026.
- ASEAN: growth downgraded to 4.1 percent in 2025 due to external shocks and domestic demand weakness in some economies.
- Downside risks: greater trade tensions, tighter financial market conditions, and increased uncertainty.
- Upside possibilities: diversification of export markets, new trade agreements, and renewed structural reform momentum.
Transmission channels and vulnerabilities
- Tariffs will weigh on the global economy and dent the region’s post-pandemic momentum because exports have led growth in many emerging economies amid lackluster domestic demand.
- High household borrowing in some economies has weighed on consumer spending and increased debt-service burdens.
- Asian exports to the United States and other advanced economies have been strong, especially for high-technology products and AI-driven demand—raising vulnerability to fluctuating US demand and rising protectionism.
- Structural headwinds: population aging and decline in some countries, and a recent trend of declining productivity.
Rebalancing and diversification policy priorities
- Need for a more balanced growth model: stronger and structurally durable domestic demand in some countries, greater diversification of exports, and stronger regional economic ties.
- Boosting private consumption requires structural policy action:
- More effective social safety nets to reduce precautionary savings and foster confidence (noted as a step in the right direction in China).
- Where household debt is high: coordinated measures to restructure debt for heavily burdened households, improved financial literacy, and prevention of excessive borrowing. Thailand examples: repayment assistance and debt restructuring programs.
- Boost private investment via labor market reforms, improvements in the business environment, and investments in health and education to build human capital.
- Further diversify export markets and deepen regional integration:
- Significant scope for more intra-regional trade in ASEAN through greater integration in trade and financial spheres.
- The Regional Comprehensive Economic Partnership (RCEP) can deepen cooperation in goods, services, the digital economy, and regulatory harmonization.
- Digital capabilities increasingly critical; Singapore noted as highly digitally competitive, Korea and India lead in digital government services.
Fiscal, monetary, and financial policy guidance
- Policies must be flexibly calibrated and tailored to country circumstances.
- Fiscal trade-off:
- Rebuild fiscal buffers after pandemic-related debt increases is critical for resilience.
- At the same time, fiscal policy should cushion near-term external demand shocks.
- Recommended policy mix where appropriate:
- Targeted and time-bound support to vulnerable people and companies, especially in hard-hit export sectors.
- Carefully select public investment to sustain demand.
- Support with monetary easing where inflation is near or below target, and allow exchange rates to act as shock absorbers.
- Manage financial stability risks from disorderly market movements using an integrated policy framework.
- Adopt credible strategies for consolidation in coming years, typically gradual fiscal adjustment anchored in a well-defined medium-term framework, including improving public spending efficiency and tax reforms to raise revenue.
- Country examples:
- India: introduced a new policy to contain debt at a set level and efforts to raise revenues by promoting tax administration efficiency while safeguarding social spending.
- Mongolia: strengthened fiscal rules to enhance transparency, accountability, and long-term fiscal anchors.
- Korea: aims to introduce a formal fiscal rule (legislation pending in parliament).
- Sri Lanka: under IMF-supported program, achieved significant revenue mobilization and deficit reduction since 2022, with tax revenues rising and the fiscal deficit narrowing markedly.
Structural reforms and long-term resilience
- Productivity growth in Asia has slowed over the past decade, particularly in emerging economies.
- Adoption of artificial intelligence and other advanced technologies could help reverse productivity declines if supported by investments in skills, infrastructure, and regulatory frameworks.
- Digitalization can increase productivity and generate new jobs, particularly in services.
- Complementary reforms needed: deepen capital markets, enhance financial inclusion, and improve governance.
- For Pacific Island countries, resilience to natural disasters and climate change is paramount; access to climate finance is critical.
Strategic conclusions and policy imperatives
- Asia’s export-led model delivered unprecedented prosperity, but changing global conditions require reorientation.
- Policymakers should:
- Use fiscal policy judiciously to support near-term growth where hit hardest, while committing to reducing the fiscal deficit in the next five years.
- Unlock domestic market potential through structural reforms.
- Forge stronger regional ties to build collective resilience.
- Smart policy choices can help Asia evolve from “the world’s factory” into a dynamic, resilient, and integrated economic power.
Thomas Helbling, Andrea Pescatori, Krishna Srinivasan — April 24, 2025
Content in this bundle
- APD REO Note: Asia-Pacific's Structural Transformation: The Past and Prospects