Rising trade tensions may create uncertainty about economic outlook and monetary policy direction.
US
US economy continues to grow but increasing risks loom on the horizon due to tightening financial conditions and rising trade tensions. January Manufacturing PMI rose to 50.9, its first expansion in 10 months, but Service PMI slowed to from 54 in December to 52.8. Nonfarm payrolls increased by 169,000, slowing from a 307,000 rise in December. The unemployment rate edged down to 4.0%, while average hourly wages increased by 4.1% YoY.
Despite still-healthy US economy, clearer signs of a slowdown are emerging. Consumer confidence has fallen to a 7-month low, and the Service PMI is decelerating. An escalation of US-China trade tensions also adds further uncertainty to the direction of economic growth and monetary policy. In case of the US imposing a 10% tariff on all Chinese goods and China retaliating with 10-15% tariffs of some US goods, Krungsri Research’s study shows that US and global GDP could decline from the baseline by -0.16% and -0.05%, respectively. Moreover, President Donald Trump is set to announce reciprocal tariffs on trading partners this week, likely intensifying trade conflicts further.
Japan
Japan’s economy is gradually recovering, driven by a strong service sector, along with improving wages and inflation. January Manufacturing PMI showed a contraction for the 7th consecutive month, standing at 48.7. Meanwhile, the Service PMI rose to 53, the highest in 4 months. In December, wages grew by 4.8% YoY, the largest increase in nearly 30 years, aligning with household spending, which expanded by 2.7%, the highest since August 2022.
Most indicators continue to point to a gradual recovery, supported by improved business confidence, ongoing service sector expansion, stimulus measures worth JPY 39 trillion, and improving consumption driven by higher wages and inflation. However, escalating trade tensions, along with continued sluggishness in manufacturing and exports due to economic slowdowns in trading partner countries, may hinder Japan's economic recovery this year. Given this backdrop, Krungsri Research anticipates that the Bank of Japan (BOJ) will likely implement its next policy rate hike in the second half of this year.
China
China saw a bustling economy during the Lunar New Year, while the US-China trade war has intensified. Tourism spending during the festival increased by 7% YoY, while consumption of goods and services grew by 9.9% and 12.3%, respectively. However, the trade war is intensifying after the US imposed a 10% tariff on all Chinese goods, effective February 4. In response, China imposed 10% tariffs on US crude oil, agricultural machinery, and certain types of vehicles, and 15% tariffs on US coal and liquefied natural gas (LNG), effective from February 10 onward.
Spending during the Lunar New Year and the trade-in program are expected to boost consumption in the first two months to surpass the 3.0-3.5% growth seen late last year. Meanwhile, the recent tariff hikes by the US and China are expected to reduce China’s GDP by -0.16%. The most at-risk sector is Electronics and Electrical Equipment, while some sectors may benefit from China’s retaliation, such as Motor Vehicles and Transportation Equipment.
1Q25 inflation may stay within target, with yearly average near its lower bound, opening door for rate cut amid trade war escalation.
January headline inflation stayed within target for the second month. The MPC is expected to cut the policy interest rate to 2.0% this year. The headline inflation rose to 1.32% YoY in January from 1.23% in December, mainly driven by higher fuel prices from a low base last year, coupled with rising food and beverage costs, particularly fresh fruits, seasoning, and non-alcoholic beverages. Core inflation (excluding raw food and energy prices) edged up to 0.83% in January from 0.79% in December.
Krungsri Research assesses that the headline inflation in 1Q25 may continue to stay within the BOT’s target range, partly due to the low base of diesel prices in the 1Q24, which was THB 30 per liter, compared to the current ceiling of THB 33 per liter. In addition, a further expansion in tourism activities early this year may support an increase in prices of goods and services.
The inflation rate is gradually returning to the official target range but the average for the whole of 2025 is expected to remain low, near the lower bound of the 1-3% range. In addition, domestic demand is projected to recover at a slower pace despite government stimulus measures, as reflected by the private consumption index (PCI), which remained sluggish in 4Q24 (-0.1% QoQ), even with the THB 10,000 cash handouts to over 14 mn people during the same period. The Thai economy is also facing pressure from external factors, including the US-China trade tension and uncertainty surrounding the Trump 2.0 policy. Krungsri Research therefore expects that the MPC may cut the policy interest rate from the current 2.25% to 2.00% this year.
Krungsri Research assesses that Thailand may see slight positive impact from China’s retaliation against the latest US tariff hike. After the US tariff measures took effect on February 4, China has retaliated by imposing a 15% import tariff on the US coal and liquefied natural gas (LNG), and a 10% tariff on the US crude oil, agricultural equipment, and certain types of automobiles, taking effect from February 10.
The latest assessment of the impact of the US-China tariff hikes, using the Global Trade Analysis Project (GTAP) model, indicates that Thailand's export volume and GDP would increase by +0.27% and +0.02%, respectively, from the baseline. However, the net positive impact on Thailand is expected to be minimal and limited to specific industries, such as electronics and electrical equipment. Importantly, most industries would experience negative effects. Moreover, the US-China trade tension remains at risk of further escalation in the coming periods, along with uncertainty surrounding President Trump’s trade policies toward other countries, including Thailand. These factors present significant challenges to Thailand’s economic trajectory and growth outlook this year.
