Asian economies are set to keep growing steadily this year and the next, but momentum has moderated and policy changes under the incoming Trump administration pose a major risk for the region, the Asian Development Bank said.
Though developing Asia's expansion remains solid, weaker consumption and exports led to a slowdown in the third quarter that has brought year-to-date growth to 5.0%, the multilateral bank said in its December outlook on Wednesday.
The ADB now projects annual gross domestic product growth for developing Asia, comprising 46 of its members--including China, South Korea and India--at 4.9%. That's down from the 5.0% growth forecast in September and compares with 5.1% last year.
There have been diverging economic patterns across the region, with powerhouses India and China losing steam while growth in Association of Southeast Asian Nations economies has been surprisingly strong.
India's economy slowed much more sharply than expected in the most recent quarter, expanding at the weakest pace since the fourth quarter of 2022.
The ADB has cut India's growth forecast to 6.5% for the year ending March 2025 and to 7.0% for the year after. That compares with September projections of 7.0% and 7.2%, respectively. But India's economy will remain robust, the ADB said, with forward-looking and labor-market indicators signaling recovery in the coming quarters.
China's 2024 and 2025 growth forecasts were kept at 4.8% and 4.5%, respectively, as the government continues its rollout of measures to boost the economy. Domestic demand and a continued property sector slump have held the economy back, but exports and industrial activity have been strong, the bank said.
A further deterioration in China's property market could weaken growth prospects in developing Asia's largest economy, affecting the rest of the region, it said.
Inflation has stabilized across the region, and central banks have continued to ease monetary policy. But the risk posed by U.S. policy shifts under President-elect Donald Trump could rekindle price pressures.
"Changes to U.S. trade, fiscal, and immigration policies could dent growth and boost inflation in developing Asia," the ADB said.
Among the policies Trump has floated are higher tariffs on China and other economies, more expansionary fiscal policy and tighter immigration controls.
As significant changes will take time to implement, the ADB thinks most of the effects won't start being felt in Asia until after 2025.
It sees the short-term impact on China as muted. Growth next year could even benefit from the front-loading of U.S. imports to get ahead of tariffs, though investment could decline, the bank said.
If tariffs are raised higher and implemented more quickly than expected, the economic impact could hit Asia sooner, the ADB said.
The policy changes could also lead to a more dovish Federal Reserve. If the Fed keeps rates higher for longer then central banks in Asia could reconsider their policy positions as well, the ADB said.
While it can be said that Asia is better-placed for policy shocks this time around as economies are more resilient and haven't been caught off-guard as they had been under the first Trump presidency, there is a high degree of uncertainty about how things will unfold.
Trump's policies could be very different from what was said during the campaign, Natixis CIB economists said in a recent report. Policy could be much more inflationary than expected, which would have very negative consequences for Asian economies.
Complicating matters is a high degree of geopolitical risk, fueled by increasingly aggressive U.S.-China competition and idiosyncratic events like South Korea's recent government turmoil, economists Alicia Garcia Herrero and Trinh Nguyen said.
Despite that, Natixis CIB remains constructive on Asian economies in 2025, as central banks cut rates and fiscal policy becomes more supportive.
Exports face shocks from subdued E.U. and China demand, and tariffs, but financial conditions will be looser, the economists said. That allows space for easier monetary conditions that can pave the way for recovery in consumption and investment, they added.
"We expect Asia ex-China growth to be resilient, even in the face of uncertainty and shocks," Natixis CIB said. That's especially the case if Trump only imposes tariffs on China, benefiting investment and trade in other Asian countries, especially those more linked to the U.S.
Write to Fabiana Negrin Ochoa at [email protected]