The Japanese economy has been showing some momentum for just over a year. However, this performance is likely to fade in the second half of the year, not least as a result of the tightening of US trade policy. The labour market remains tight, and inflation continues to exceed the 2% target. Caught between an economic situation that may signal a weakening and a sharp rise in long-term interest rates amid fiscal concerns, the Bank of Japan (BoJ) is exercising extreme caution by raising its policy rate very gradually.
In the first half of 2025 (H1 2025) and according to the Carbon Monitor website, China would have reduced its carbon dioxide (CO2) emissions by around 3% compared to the same period last year. Even if this is good news coming from the world's largest CO2 emitter (30% of the total), this is not surprising given the slowdown in the energy sector. In the same first half of 2025, the growth in electricity production slowed to 2.3% year-on-year, which is low by Chinese standards. Historically well correlated with emissions, weak electricity output largely explains the above-mentioned figure.
Since the beginning of the year, China’s economic growth has proved to be more robust than expected. Exports have withstood US tariff attacks and household consumption has recovered thanks to government stimulus programs. However, large clouds are casting a shadow over the picture and are likely to slow growth in the second half of the year. On the one hand, trade tensions with the United States remain high and the tech war continues, even though Beijing and Washington have agreed to extend their truce until November. On the other hand, internal structural problems remain (real estate crisis, labour market fragility, low confidence in the private sector, deflation). Despite this gloomy backdrop, economic policy easing remains cautious
Despite robust growth between April and June 2025 (probably overestimated), the government is stepping up measures to support the Indian economy. The “Goods and Services Tax Council”, which is due to meet on 3 and 4 September, is expected to approve a cut in VAT rates. This measure would counteract the effects of the increase in US tariffs without weakening the central government's finances.
Contrary to what was feared at the end of 2024-beginning of 2025, exports of goods of emerging countries held up well in the first part of the year. Asian countries are showing the best performances and Latin American countries are doing well. On the other hand, Central European countries appear, if not as the losers, at least as the most vulnerable to the transformations of global trade since the Covid crisis. For a large majority of EM, corporates’ expectations about their order books in June suggest a decline or slowdown in exports in the coming months.
Favourable developments for the business climate. The manufacturing PMI stood at 50.1 in June (+0.7 pp, the first expansion posted since May 2024) thanks to growth in output (51.2, +2.5 pp). The services sector also improved (51.7, +0.7 pp). In Q2, the Tankan business conditions survey remained stable overall (15) for both the manufacturing (7) and non-manufacturing (21) sectors, despite the issue of US tariffs.
Trade truce. The official PMI for the manufacturing sector has been in contraction territory since April, mainly due to the US-China trade war and worsening export prospects. However, the index rose slightly from 49 to 49.5 in May and 49.7 in June, following the agreement reached between Washington and Beijing (after discussions in London in early May and in Geneva in early June). The Caixin manufacturing PMI even rose above 50 in June (vs. 48.3 in May). In the services sector, the official PMI has been close to 50.3 for the past three months.
While FDI inflows into Southeast Asia have been higher on average since 2021 than in the 2016–2019 period, they have declined in India. As a share of GDP, net FDI inflows to India (non-resident FDI inflows minus disinvestment) reached only 0.7% of GDP in 2024, the lowest level since 2012. This decline is all the more surprising given that, according to UNCTAD, the value of greenfield FDI projects announced in the country has been rising sharply since 2022.
The protectionist shock imposed by the United States will lead to further adjustments in production chains and global trade. Will emerging countries (excluding China) be able to benefit once again, even as competition from Chinese products intensifies on their domestic markets? Will they be able to gain market share in the United States, or even in China? Will they be able to reduce their dependence on either of the two superpowers?
The sharp increase in US tariffs on Chinese imports is a major blow to Chinese exports and economic growth. However, Beijing has prepared for this, and the impact will be partially offset by its response strategy. In the short term, this strategy consists of redirecting exports to other markets, continuing monetary and fiscal policy easing, and boosting private consumption. The redeployment of exports has begun, but it could quickly run into new protectionist barriers. Domestically, the challenge will be to restore household confidence while the labour market may suffer as a result of the slowdown in the manufacturing sector.
India's economic growth is slowing down. Household consumption is sluggish, hampered by slower real wage growth and rising debt burdens, and private investment is weak. Given its low degree of openness, India will be little affected by US tariff increases, but it is unlikely to be spared altogether. Its room for negotiation with the Trump administration is limited. However, its domestic market is vast and allows for diversification of production in Asia. In order to take advantage of the Sino-US trade war, India will need to address the structural constraints weighing on the development of its industry quickly. However, the government's room for manoeuvre to push through reforms in the short term is very limited.
Thailand's real GDP growth remained solid in Q1 2025, but downside risks are high. Thailand is one of the Asian countries that has benefitted most from the trade tensions between the US and China, but the effects of the further tightening of US trade policy could be more painful. Its products might be taxed more heavily than those of its competitors in the US market, while the influx of Chinese goods could increase significantly. However, it could also benefit from new investment from foreign companies seeking to diversify their production chains. It has many advantages over some of its neighbours.
Poor trend in business surveys. According to the May JibunBank survey, the Composite PMI moved into contraction at 49.8 (-1.4pp). The slight rise in the manufacturing PMI – still in contraction territory at 49.0 (+0.3pp) -– was not enough to offset the steep decline in the services PMI (50.8, -1.6pp).
Fragility of the manufacturing sector. The official manufacturing PMI improved slightly in May (to 49.5 from 49 in April) but remained in contraction territory. The Caixin manufacturing PMI fell sharply from 50.4 in April to 48.3 in May, its lowest level since September 2022. Caixin covers a smaller sample of companies than the NBS but includes more private-sector SMEs. These are particularly vulnerable to US tariff policy and the deterioration in export prospects.
Services Driving Business Climate Up. Growth in activity resumed in April according to the Composite PMI (51.1, +2.2pp), supported by the Services PMI (52.2, +2.2pp). By contrast, the Manufacturing PMI remained in contraction territory (48.5, +0.1pp), penalized by the largest deterioration in new orders since February 2024.
Widespread deterioration. The official PMI for the manufacturing sector fell to 49 in April (from 50.5 in March) and the Caixin PMI fell to 50.4 (from 51.2 in March). The decline is widespread across all sub-components and heralds a significant slowdown in activity after the rebound in March. These are the immediate consequences of the new 145% tariffs imposed by the US on Chinese imports.
The tariff offensive led by Donald Trump since his return to the White House has quickly shifted into a face-off with China. Following a cycle of announcements and retaliation, the extra-tariffs applied by the United States to China amount to 145%, compared to 125% in the opposite direction. The shock is of unprecedented magnitude, and the two superpowers are engaged in a negative-sum game.
Japan is heading for a year without quarterly growth. Domestic demand is still constrained, with nominal wages rising at a slower pace than inflation. In addition, the trade policy of the United States, Japan’s largest export market, poses a downside risk.
The vulnerability of ASEAN countries to US trade protectionism has increased significantly since 2017. The US has become a key destination for these countries, which export low-intensity tech products (such as textiles and footwear) as well as medium-intensity tech products (mobile phones) and high-intensity tech products (integrated circuits and semiconductors). Vietnam, Thailand and, to a lesser extent, Malaysia have the largest trade surpluses with the US and are therefore the most exposed to a change in US tariff policy.On 2 April, the US government announced an increase in tariffs on ASEAN countries that goes well beyond simple reciprocity
How will Beijing react to the imminent US protectionist measures? Will the central bank allow the yuan to depreciate in order to offset the effect of tariff hikes on the price competitiveness of Chinese exports?
The message delivered by Beijing at the annual meeting of the National People's Congress at the beginning of March was clear: whatever the difficulties linked to trade and technological rivalries with the United States, the Chinese economy must achieve growth of close to 5% in 2025. The target has remained unchanged since 2023. It seems particularly ambitious this year, given that external demand, the driving force behind Chinese growth in 2024, is set to weaken significantly due to the rise in protectionist measures against China. The authorities are counting on domestic demand to pick up the slack, but this is still coming up against powerful obstacles
In a 1933 article on national self-sufficiency, British economist John Maynard Keynes advised “those who seek to disembarrass a country from its entanglements” to be “very slow and wary” and illustrated his point with the following image: “It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction”. Nearly a century later, what are the precepts of the author of the General Theory worth?
The upward trend in nominal wages continued in January, with contractual wages scheduled to rise by 3.2% y/y, a record since 1992. However, the real wages index fell sharply to -1.8% y/y in January (-2.1 pp), its lowest level since March 2024. At the same time, the unemployment rate was stable at 2.5%.
Manufacturing PMIs rebounded in February, returning to their average level of Q4 2024 (50.2 for the NBS index and 50.8 for the Caixin index). In services, the PMIs remain below their Q4 level but are above the expansion threshold (50 for the NBS index and 51.4 for the Caixin index). The latest activity data confirm this reassuring but rather lacklustre performance: growth in industrial production slowed in January-February after accelerating in December, but held steady at almost 6% y/y. The slowdown in growth in production in services was more marked (+5.6% y/y in January-February, vs. +6.3% in Q4).
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.
