After a good start to the year, Chinese economic growth will slow down in 2025 due to still weak domestic demand and the effects of the upcoming protectionist shock on exports. China has tools at its disposal to respond to President Trump’s new tariff plans, even though its room for manoeuvre to offset the effects of rising tariff barriers with a depreciation of the yuan and a drop in export prices has narrowed compared to 2018. The authorities will continue to ease their monetary and fiscal policies in the short term to stimulate activity and boost private consumption, and try to support a rebalancing of China’s economic growth model.
Economic growth forecasts for the fiscal year 2024/2025, which ends on 31 March, have been revised significantly downwards. The outlook for the next three years could also be downgraded unless the government and the private sector significantly increase their investment. However, the international economic climate is not conducive to either domestic or foreign investment, even if the direct impact of a potential increase in US tariffs on Indian economic growth would be limited. The recent downward pressure on emerging currencies has not spared the Indian rupee, and the depreciation trend is likely to continue, especially as the new Governor of the Central Bank seems to be focusing on supporting economic growth rather than currency stability.
South Korea's economic growth slowed throughout 2024, with limited prospects for a rebound. The political crisis and unprecedented government instability in the country are likely to result in a marked slowdown in domestic demand. The outlook for the export sector (mainly semiconductors) will depend in part on the trade policy adopted by the new US administration. South Korea is not directly targeted by tariff measures for the time being, but the resulting upheaval in value chains will adversely affect exports. Economic policy will remain accommodative: the Central Bank and the interim government have already proposed support measures, but the stimulus will not be enough to significantly boost growth, which is likely to continue to slow in 2025.
GDP growth remained robust in 2024 and the outlook for 2025 is favourable. Consumer spending is expected to remain strong, but investment is expected to slow. Monetary easing by the central bank is expected to be constrained by pressures on the rupiah, while real interest rates - already high - have risen further. In fiscal terms, the government is expected to favour its social policy over capital expenditure. This will impact economic growth in the short and medium term. Exports are expected to suffer from the Chinese economic slowdown. In addition, although modest, the direct impact of a potential increase in US tariffs could also have a negative impact on the Indonesian economy.
The Vietnamese economy posted strong growth of 7.1% in 2024. The conditions for this success could continue on into 2025: the export sector is benefiting from buoyant global demand for electronic goods and is continuing to increase its production capacities thanks to FDI; the property sector is recovering from the 2022-2023 crisis; private consumption is likely to increase further; and the government has some room for manoeuvre for increasing its spending and investment. However, Vietnam’s economic outlook is also exposed to high downside risks. Firstly, a strong dollar and unchanged interest rates in the US pose a risk of capital outflows, and pressures on the dong and external liquidity would then constrain monetary policy
According to the Jibun Bank PMI survey, the Japanese economy has started 2025 in different directions. The manufacturing PMI fell to 48.7 in January (-0.9 pp, the lowest since March 2024), against a backdrop of a wider deterioration in production and new orders. By contrast, the services PMI accelerated according to the flash estimate, with Business Activity rising from 50.9 to 52.7.
Chinese economic growth accelerated in Q4 2024 (+1.6% q/q and +5.4% y/y), driven by strong export performance and a recovery in private consumption. These supporting factors should persist in early 2025, but economic growth will then resume its downward trend. Domestic demand is likely to remain fragile and the rise in US tariffs will be a significant negative shock to exports.
The Japanese economy continues to be characterised by weak growth, which slowed in Q3. The positive momentum in inflation and wages is in line with the Bank of Japan's objectives. This picture should enable the Bank to continue its gradual monetary tightening. However, domestic political developments (general elections resulting in a loss of political strength for the government), as well as external ones (Donald Trump's victory) are not helping stability.
The Japanese economy slowed down in the third quarter, with GDP growth declining to +0.2% q/q (-0.3 pp) – a pace that is expected to continue in the fourth quarter. However, it is worth highlighting the acceleration in private consumption (+0.9% q/q, +0.2 pp). Conversely, investment figures were negative, both for the residential component (-0.1% q/q, -1.5 pp) and the non-residential component (-0.2% q/q, -1.1 pp). The largest negative contribution (-0.4 pp) came from net exports, with growth in imports (+2.1% q/q) significantly exceeding the exports one (+0.4% q/q).
In China, economic policy has taken a firmly expansionary turn since late September. This has given a boost to activity, which is expected to strengthen further in the very short term. However, over 2025 as a whole, economic growth will continue to slow. The constraints weighing on domestic demand persist, as the adjustments in the property sector are not yet complete, private sector confidence remains fragile and households are waiting for conditions in the labour market to improve. In addition, the risks to growth have increased with the election of Donald Trump. China will be able to respond to new US customs barriers in various ways, ranging from retaliatory measures to depreciating its currency and continuing to re-route its trade flows
The difficult recovery in economic activity experienced over the past two years reflects all of the constraints on the Hong Kong economy. Monetary policy, which must follow the United States' monetary policy, was restrictive until September 2024, with particularly painful consequences, as inflation in Hong Kong remained moderate and domestic demand, conversely, needed support. The economic cycle is much more in sync with mainland China's economic cycle. In the very short term, economic growth is expected to accelerate, supported by ongoing monetary easing and the expected strengthening of Chinese demand. In the medium term, Hong Kong’s prospects hinge on its continued economic and financial integration with mainland China.
Indian economic growth slowed in the first quarter of the current fiscal year and leading indicators suggest that it will stand at 6.9% over the fiscal year as a whole (vs. 8.2% last year). There are a number of risks to GDP growth, but they remain moderate. Apart from rising inflationary pressures, which could delay the expected monetary easing in December, the slowdown in foreign demand is the main risk. Weakening Chinese demand, in particular, may hinder the development of India’s manufacturing sector, which is already undersized due to competition from Chinese consumer and capital goods at increasingly competitive prices. While India’s growth is the highest among emerging countries, it clearly cannot supplant China as the engine of global growth
Economic growth remains solid, but it is expected to slow down in 2025. Due to its very open economy, Malaysia is more vulnerable to the slowdown in China than India or Indonesia. In addition, tensions between the United States and China could make it more complicated to implement its New Industrial Master Plan, a key pillar in the country’s efforts to revitalise growth. The authorities have limited room for manoeuvre in order to support the economy. The Central Bank of Malaysia is expected to leave its key interest rates unchanged over the next six months, unlike other central banks in Asia. Inflation risks are on the upside due to the abolition of energy subsidies and wage increases. In addition, fiscal consolidation, which began two years ago, is hurting investment spending.
Activity indicators for October showed encouraging signs of accelerating growth. The support policy measures implemented by the authorities are finally beginning to bear fruit. However, the improvement is not widespread, as deflationary pressures persisted and credit growth continued to weaken.
The economic slowdown in China and the implementation of its industrial policy will have large consequences for the rest of the world. Effects will vary from country to country, depending on the transmission channels. For emerging countries, the overall impact will not be necessarily negative, notably thanks to the foreign direct investment channel, which could well change the situation. We are discussing this with Christine Peltier.
Activity surveys were negative in October. Jibun Bank’s preliminary survey reported a decline in the manufacturing PMI to 49.0 (-0.7pp). The decline was more pronounced for activity in the services sector, with the corresponding PMI losing 3.8pp to 49.3, contracting for the first time since June. According to the Bank of Japan’s (BoJ) quarterly Tankan survey, the overall business climate improved slightly in Q3, but remained stable for large manufacturing companies. We expect growth to fall to +0.3% q/q in Q3 (-0.4pp compared to Q2 2024), due to the dissipation of the technical upturn that had buoyed it in the previous quarter.
In Q3 2024, Chinese economic growth accelerated to +0.9% quarter-on-quarter (q/q), after its poor performance in the previous quarter (+0.5% q/q). It stood at +4.6% year-on-year (y/y), which is slightly lower than in Q2, and reached +4.8% y/y over the first three quarters of 2024. In order to hit the official growth target of "around 5%" set for 2024, activity will have to rebound strongly during the final quarter of the year. This means that the fiscal stimulus measures announced by the authorities since the last week of September need to be rolled out quickly. These announcements have provided less details than expected on the stimulus measures and were less significant than expected by the markets
In China, economic activity data of the last few weeks has been bad enough to shock the authorities into action. While support for domestic demand had remained stubbornly cautious for several months, the last week of September saw a succession of announcements of new monetary easing and then fiscal stimulus measures. This change in policy direction reduces, but does not eliminate, the downside risks to short-term economic growth. If the fiscal expansion plan, the precise content of which has yet to be specified, is implemented quickly, the growth target of "around 5%" set by Beijing for 2024 could be achieved.
The Bank of Japan is continuing with its incremental and cautious monetary tightening, with a single policy rate hike in Q3, which is expected to precede further movement in December, while the July decision has contributed to major financial market volatility. At the same time, the economy is recovering from a turbulent start to the year and inflation is still above the 2% target. In addition, the country has a new Prime Minister and early general elections are now scheduled for October 27th.
Australian growth is facing an undeniable slowdown, which is linked to the prolonged constraints on households as a result of rising prices and interest rates, as well as slowing demand from its Asian trading partners. Stubborn inflation is currently an obstacle to easing interest rates. On the other hand, the migratory influx is boosting a labour market which remains buoyant.
Bank Indonesia unexpectedly cut its monetary policy rates on 18 September (-25 bps). This easing was largely due to the rupiah strengthening against the USD since August (+6.4%).
Economic indicators for August 2024 once again show that Chinese economic growth is lacking strength. The real GDP growth target of “around 5%” set by Beijing for 2024 can only be achieved with a stronger impetus generated by monetary easing and fiscal expansion.
Growth in emerging markets held up fairly well until the spring of 2024, partly thanks to the easing of monetary policies since mid-2023. The imminent one in the United States should make it possible to extend or even strengthen it. In the most likely scenario of a soft landing of the US economy, the main risk for emerging economies is a sharper-than-expected slowdown in the Chinese economy. The slump in the real estate sector is spreading through the fall in commodity prices. On the one hand, most emerging countries will gain in disinflation. But, on the other hand, commodity-exporting countries of which China is the main customer will suffer. Above all, the risk of contagion lies in the implications of the Chinese authorities' strategy of supporting growth through foreign trade
The Chinese export sector has weathered well the rise in trade tensions and tech rivalry with the US since 2018. The Chinese industry has shown a solid capacity to adapt to the increase in trade barriers and it has kept its leadership position in global trade.
After a rebound to +1.5% q/q in Q1 2024, Chinese economic growth slowed to +0.7% q/q. It stood at +5% year-on-year in the first half of the year. The economic growth target of “around 5%” set by Beijing for 2024 remains achievable.
