Asia GDP outlook improves on China tariff deescalation, but growth will still slow

UBS analysts project a marginal slowdown in Asia-Pacific GDP growth, averaging 4% in 2025 (4.4% excluding Japan) compared to 4.6% in 2024 (5.1% excluding Japan), citing peaking growth in some economies and moderating U.S. tariffs as key factors. While Q1 GDP was better than expected due to strength in the Greater China region, export growth is anticipated to wane from Q3 2025, with India expected to outperform with 6.8% growth, while Japan and South Korea are projected to lag behind at 0.6% and 1% respectively.

Analysis

UBS projects a moderated growth trajectory for Asia-Pacific economies in 2025, with average GDP growth forecast at 4.0%, down from an estimated 4.6% in 2024, and 4.4% excluding Japan, compared to 5.1% in 2024. This slowdown is attributed to decelerating exports and manufacturing investment, despite a marginal improvement in the overall outlook stemming from an easing of U.S.-China trade tensions. Recently observed first-quarter GDP growth across the region surpassed initial expectations, largely aligning with fourth-quarter 2024 figures, supported by resilience in the Greater China region; however, UBS notes that headline growth appears to be "peaking" in certain previously fast-expanding economies such as Malaysia and Singapore. A critical factor shaping this forecast is the anticipated moderation of U.S. trade tariffs, with UBS's base scenario projecting a decline in the overall U.S. tariff rate to between 15% and 20% by the end of 2025, following a temporary U.S.-China trade agreement in May, which could offer "significant relief" to regional growth. Nevertheless, export strength, driven by front-loading activities by western buyers, is expected to continue into the second quarter before potentially waning from the third quarter of 2025, and risks persist from potential new U.S. tariffs on key sectors like semiconductors and pharmaceuticals. Country-specific projections reveal significant divergences: India is anticipated to outperform with 6.8% real GDP growth in 2025, bolstered by robust domestic conditions and comparatively fewer headwinds from U.S. tariffs. Conversely, Japan and South Korea are expected to experience sluggish growth at 0.6% and 1.0% respectively, with New Zealand also projected at a modest 1.0%, while Mainland China's growth is forecast at 4.0%, below its official 5% target. Potential support for regional growth in the latter half of 2025 may arise from lower global interest rates, particularly if economic weakness in the U.S. prompts easing by the Federal Reserve, in conjunction with moderating inflation across Asia.

Key Decisions for Investors

• Investors should consider a selective approach to APAC, potentially overweighting markets with robust domestic demand and stronger growth forecasts like India (6.8% projected GDP growth in 2025), while exercising caution towards economies such as Japan (0.6%), South Korea (1.0%), and New Zealand (1.0%) that exhibit more sluggish outlooks.
• Actively monitor U.S. trade policy and tariff developments, as further moderation could provide a tailwind for export-oriented Asian economies, whereas an escalation or the imposition of new tariffs, particularly on sensitive sectors like semiconductors, would present a significant headwind.
• Given the projected overall slowdown and indications of 'peaking' growth in some markets, focus on identifying companies and sectors with inherent resilience against slowing global exports and external economic headwinds, factoring in the expected waning of export strength from Q3 2025.
• Evaluate the potential impact of moderating regional inflation and anticipated shifts in global monetary policy, especially potential U.S. Federal Reserve rate cuts, on currency valuations and investment flows within the APAC region.