The Taiwan Banker

In 2024, Asia is facing a divergence on the growth trends among the major economies.Taiwan, South Korea and Southeast Asian economies GDP bounced from 2023’s lull despite stronger-than-expected USD rates and generalized fiscal conservativism to wean down the excesses of Covid and the energy crisis. US firm demand, especially for chips, propelled regional growth upward. While we end 2024 with China doing more than before to put the floor on growth deceleration, although fell short on fiscal support hope, most of 2024 was met with disappointment on the growth front. Whether it is retail sales or investment, China growth decelerated much more than expected in H1 2024. As such, Chinese imports from the US and EU decreased by 0.4% YTD YoY and 4.6%, respectively. Imports from Asia was positive thanks to integration of regional supply chains and China dependency on key regional inputs for production. Japan growth underwhelmed in 2024, recording -0.5% year-to-date YoY for the first three quarters. While falling real wages have contained private consumption, suspension in auto production has slowed manufacturing activities after testing scandals among major auto companies came to light. As a result, imports from Asia fell -3.7% for Asia, impacting North Asia most. A weak JPY not only hindered import demand but also reduced Japanese outbound tourism into the region. As such, Japan underwhelming growth and a weak JPY was a drag on regional economies, like China in 2024. Despite of weak Chinese and Japanese demand, strong shipment to the US rising and the upturn of the chip cycle as well as tourism helped ASEAN recovery in 2024. Data shows tourism arrivals rising in 2024. That said, the recovery is still shy of pre-Covid level. Moreover, due to soft growth in China and weakening of sentiment, spending per tourist was much lower than before. As such, while tourism was higher than 2023 and added to growth in 2024, it remains a softer source of growth than pre Covid. On the one hand, stronger US growth has helped Asian exporters, particularly those more linked to the US, but on the other, robust American economy has led to tight USD monetary policy for most of 2024. Even when the Fed did cut rates by 75bps, conclusion of US elections, which brought back Trump to not just the White House but also Congress, led to much higher USD rates and a stronger dollar. Capital flows reversed to the APAC region in Q4 2024 as uncertainty regarding not just US domestic policies but also tariffs and geopolitics. For longer term capital, India, South Korea, Vietnam and Indonesia received higher FDI while the rest suffered from risk aversion. The room to maneuver via fiscal policy was limited as policy was tight across Asia as countries try to consolidate from the energy crisis and Covid excess spending, limiting their job as a countercyclical tool. Overall, Asia growth decelerated, except for Taiwan, South Korea and key Southeast Asian economies such as Singapore, Malaysia, and Vietnam. As the recovery was driven primarily by higher exports, especially to the US and chips, those more exposed benefited more. Meanwhile, sluggish Chinese growth dragged down those most linked, such as Indonesia. Australia, too, while remained buoyant domestically, suffered externally as the mining sector dealt with higher rates and weak demand. Look ahead 2025 As we look at the Year of the Dragon in the rear-view mirror, the divergence the region faced in growth is likely to be even more acute in 2025. Taiwan, South Korea and Southeast Asian economies GDP bounced in 2024 but they are likely to underwhelm in 2025 as Trump imposes tariffs and lower corporate taxes, bringing investment to the US. On the positive side, the Fed easing should help but less than originally expected as inflation expectations pile up in the US. Against such backdrop, China should, in principle, be hit the hardest, which calls for additional and more-consumption oriented stimulus. Still, we don’t expect China to be able to avoid additional deceleration in 2025, even with laxer monetary policies, to around 4.5%, slightly lower than our expected 4.8% GDP growth for 2024. Japan should continue with its monetary policy normalization but with a more positive outlook in 2025 given the very negative base in 2024. For the rest of Asia, the outlook will very much depend on whether Trump extends import tariffs to the rest of Asia and whether capital flows continue to turn into outflows as has been the case in the last couple of months given the strength of the USD. The fast deceleration of the Indian economy deserves attention in the current context although India should be a relatively winner from Trump’s tariffs. We expect ASEAN, especially Vietnam, Malaysia, Singapore, and Thailand, as well as India to benefit from firm US demand in 2025. Trump extension of the Tax Cuts and Jobs Act (TCJA) will widen US fiscal deficit but at the same time boost corporate investment. Such perk of investment will likely boost machinery orders from Asia, especially Southeast Asia. Moreover, the Fed will likely continue to lower rates to 3.5% in 2025, albeit at a slower pace than previously expected. All of this should support US-linked economies more, such as Vietnam, Malaysia, Singapore, Thailand and India. But a Trump presidency, filled with China hawks, will also likely lead to higher tariffs for China. In such an environment, Chinese demand for APAC region imports will likely slow further from an already lowered height. With authorities likely to respond by lowering rates and weakening the yuan, Asian economies must contend with lower Chinese demand for goods and services such as tourism. Should China respond with aggressive monetary easing and weakening of the yuan, the APAC region cannot count on a rebound of Chinese demand in 2025 for growth as fiscal is expected to remain short of what’s necessary to slow the deceleration. While EM ex China region benefit from likely higher tariffs on Chinese goods, they will face greater competition with China in non-US markets due to China deflated PPI, a likely yuan depreciation and more Chinese goods flooding the region. Baring a situation where Chinese fiscal stimulus is larger than our expectation, we expect Chinese demand for Asian goods to sag in 2025, which it already started to slow end 2024. Even if overall US demand for machinery may hold up on the bounce of the capex cycle, we expect the chip cycle, especially for memory chips to be on the downturn. Already, there are signs of softness coming from South Korea. Given the importance of chips for the region, the aggregate impact on exports will likely be less positive than in 2024 where you have both the bounce of the semiconductor cycle and much stronger US demand. As such, we are cautious on overall demand for Asian exports. Another uncertainty regarding US demand is tariffs under the Trump Presidency. Should the US erect higher tariffs on China, the rest of EM Asia will benefit. But if the US impose 10% tariffs on the rest of the world, then EM Asia will be severely impacted, with Vietnam, Japan and South Korea worst off, respectively. Overall, even without tariffs, we do not expect exports to be a big lift to the region in 2025, in contrast to 2024, due to the downturn of the chip cycle and subdued demand in the EU and China. As the Fed lower rates, that eases financial conditions globally but less than previously expected. If it lowers rates and allows the yuan to weaken, then Asian FX and risk assets would feel stress of a currency war. Thus, we expect portfolio flows to recover but stay cautious as the US benefits from stickier rates and still robust growth. FDI flows will favor India, Vietnam, Malaysia and to a lesser extent Indonesia and Thailand for the continued reshuffling of supply chains and diversification of geopolitics. Overall, despite of general risk aversion due to uncertainty of Trump policy, we expect lower USD rates, geopolitical tailwind and diversifications push to favor EM Asia ex China for financial conditions. The one offsetting factor for most of Asian economies in 2025 will be weak oil prices. A risk of a currency war may keep exports lack luster and import prices high, especially if they keep their FX competitive. But one factor that will help will be lower oil prices. For oil refining countries like India, and South Korea, that will drag down export value but given that they have a larger import bill, the net impact for them and most of Asia will be positive, except for net energy exporting countries such as Malaysia and Indonesia (for coal). Generally, weak global demand coupled with low commodity prices are likely to keep the lid on prices. One uncertainly is food inflation, which is a key source of inflation in places such as India and the Philippines. We expect lower inflationary pressures to allow space for central banks to cut. That said, the cutting cycle will be shallow due to uncertainty regarding FX and external demand. We think the high yielders will be more aggressive than the low yielders in Asia in cutting rates. Overall, while exports face shocks from subdued EU and China demand as well as specter of higher tariffs, we expect financial conditions to be looser, as the dollar softens with Fed cuts. This will allow space for easier monetary conditions that will pave ways for consumption and investment recovery. Fiscal policy, too, will be looser in a few countries, notably Thailand and Vietnam in EM and in DM, Japan and Australia. Meaning, we expect Asia ex China growth to be resilient, even in the face of uncertainty and shocks. And that is especially the case if Trump imposes tariffs only on China, benefitting Asia ex China investment and trade, especially those more linked to the US. Our outlook for Asian economies in 2025 remains constructive as Asian central banks cut rates and fiscal policy becomes more supportive. However, risks remain high on several accounts. First, Trump’s policies could be very different from those announced in the campaign and potentially much more inflationary with a risk of stagflation for the US economy, which would have very negative consequences for Asian economies. Second, Trump’s protectionism may hit other Asian economies, such as Vietnam. Third, geopolitical risk is at its highest both due to increasingly aggressive US-China competition and also due to idiosyncratic risks as South Korea’s recent political shock demonstrates.