Can Asian growth withstand global challenges in 2025?

The return of Donald Trump to the US White House has raised questions over the future of Asia’s economic growth at a time when China’s economy is cooling. Asia’s underlying fundamentals, however, support an optimistic outlook for the year ahead.

HSBC’s Asia Macroeconomic Outlook webinar, held just hours ahead of Trump’s inauguration on January 20, outlined the case for Asia’s resilience in the face of global challenges.

“We are facing a lot of uncertainty in the Year of the Snake, but it's also true to say that we have a lot of pockets of resilience across Asia. Yes, tariffs may upset trade flows across the region, but domestic demand should hold up reasonably well.” said Frederic Neumann, HSBC’s Chief Asia Economist and Co-head of Global Research Asia, on the webinar.

Beginning January 29, 2025, the Year of the Snake, the sixth sign in the Chinese zodiac, is traditionally associated with wisdom, adaptability, and the ability to remain calm under pressure. In the January 20 webinar, Neumann explained why the Year of the Snake is likely to live up to its metaphorical reputation with a cautiously upbeat expectation for Asia.

Speaking ahead of President Trump’s inauguration, Neumann highlighted the new US administration’s expected policy changes as a major source of uncertainty for Asia.

Tax cuts and mass deportations, coupled with reduced immigration, would likely contribute to inflation in the US, limiting the Federal Reserve's ability to continue with rate cuts and keeping borrowing costs higher for longer for Asian businesses.

Trade tariffs could also have a negative impact on cross-border trade and investment, as well as adding to inflationary pressures. The incoming US administration has been ratcheting up trade tensions with promises to boost import tariffs to their highest levels since the 1930s – up to 60% on imports from China and 10% on those from other nations.¹

HSBC Global Research estimates these policies could result in an increase in US inflation of up to 2%.

Neumann highlighted that while President Trump has threatened high tariffs on China, any disruption to established trade flows will be felt across the whole of Asia. With exports from China and emerging Asia running at record highs in 2024, new tariffs would weigh on economic activity, with the electronics sector seen as the most exposed as new orders are already showing some signs of weakness.

Neumann noted that exports account for only 15% of China’s GDP, down from 30% in 2006; shipments to the US now make up just 2.5% of China’s GDP. In contrast, other Asian economies may be more vulnerable to tariff and trade disruptions, such as Vietnam, where US exports equal 11% of GDP, and Singapore (7% of GDP).

President Trump signed a flurry of executive orders on his first day in office but held off unveiling China-specific tariffs. According to Reuters, he instead ordered government agencies to study unfair trade practices globally, including China’s performance under a 2020 trade deal.²

“There's likely going to be a phase in of tariffs but make no mistake, tariffs are coming.” said Neumann. "Over the course of the next few months, we should see the implication of tariffs, not just on China, but on other economies as well.”

The challenges facing China revolve around weak consumer spending and overinvestment in manufacturing. Household consumption has increased since the end of the pandemic but remains below pre-pandemic trends. At the same time, manufacturing investment has surged, leading to excess capacity, lower prices, and intensifying competition.

While these near-term challenges will take time to resolve, China’s emergence as a global innovation powerhouse pains a positive picture over the longer term.

“Despite all the negative headlines about the Chinese economy, the main source of its weakness at the moment is not corporate dynamism. It's not a lack of invention or a lack of productivity potential. It’s purely that the consumer is very, very cautious.” he said. “Once we fix consumer spending through fiscal stimulus and the stabilisation of the property market, you should see China's economy reaccelerate, and that is good not just for China itself but also for regional economies.”

Hong Kong, similarly, faces near-term economic headwinds due to high interest rates and weak demand from China, with limited fiscal capacity to simulate growth. However, its long-term prospects are supported by a pivot towards innovation and its strengths a hub for Chinese capital flows. HSBC Global Research projects growth of 2% for Hong Kong in 2025.

Over the past decade, wage competitiveness in countries like Malaysia, Indonesia, and Vietnam has improved significantly, attracting investment and supply chains away from China. This trend should continue, regardless of global tariff and trade uncertainties, as businesses always seek cost-effective production hubs.

Foreign direct investment (FDI) into ASEAN has surged, with record inflows since the pandemic. Notably, Chinese investment in ASEAN is on an upward trend, rising from less than USD4 billion in 2010 to an all-time high of USD17 billion in 2023.³

“Investment is moving from China into Southeast Asia and South Asia because the labour costs are cheaper there, and there's plenty more investment that can come into these markets.” said Neumann.

South Asia also benefits from a strong demographic story, particularly in Bangladesh and India, where Neumann noted that working-age populations are growing by more than 1.5% a year. The services sector stands out as a significant growth opportunity in India, with its services sector – spanning IT, professional consulting, and R&D – emerging as a key driver of the economy.

“India’s future lies in services,” said Neumann. India’s services sector, he said, has the potential to become a global powerhouse, mirroring the development of China’s manufacturing industry. While China accounts for around 14% of global goods exports, India’s share of global services exports remains relatively modest, recently cresting 4%.

“We’re still very, very optimistic about India.” he said.

As the global economy enters the Year of the Snake, amid uncertainty over geopolitical tensions, inflation and global trade, the drivers of growth within Asia are likely to shift further.

Manufacturing sectors, particularly in electronics, could still encounter headwinds in 2025 from tariffs and supply chain disruptions. Asia’s services sector, on the other hand, could be set for faster growth as declining inflation lifts discretionary spending. Neumann sees room for further growth in tourism and domestic travel across the region, as well as healthcare.

The energy transition is set to remain a theme in Asia, even as US policy becomes more favourable to fossil fuels. Asian governments continue to invest in renewable energy for their own security reasons, and clean energy technologies are on a strong commercial footing. Asia’s electric vehicle sector, for instance, is well placed to capture global market share despite a slowdown in adoption.

The economic momentum will continue to shift from Northeast Asia to Southeast and South Asia in 2025, said Neumann, pointing to contrasting demographics as a fundamental long-term trend. Overall, HSBC Global Research forecasts 4.4% GDP growth in Asia ex-Japan this year – well ahead of a global growth forecast of 2.7%.⁴

“Growth is shifting across Asia, but it’s not faltering.” said Neumann. “The structural drivers are very important.”