How will US tariffs on China impact economic growth?

China’s economy had a solid start to the year as supportive government policy helped boost domestic demand and manufacturing activity expanded at the fastest pace in a year in March.

Strong government bond issuance, trade-in subsidy and tech upgrade schemes combined with front-loaded exports kept first quarter (1Q) growth steady at 5.4% year-over-year.

U.S. trade policy risks intensified to unexpected levels in April, after the Trump administration announced sweeping levies on China and other trading partners around the world, leading to downgrades to China’s growth outlook.

Following constructive talks in Geneva, the U.S. and China have agreed to reduce tariffs by 115% each for the next 90 days, announcing a 10% universal tariff rate.

U.S. tariff increases on Chinese imports year-to-date will fall to 30% from 145%, while Chinese tariff increases on U.S. imports will fall to 10% from 125%. During the 90-day window starting from May 14, the U.S. average effective tariff rate on China will fall to around 41% and China’s average tariff rate on the U.S. will fall to around 28%.

“The magnitude of the temporary tariff reduction is larger than expected. The replacement of the 34% reciprocal tariff with a 10% universal tariff (the same as other countries) is surprisingly positive,” said Haibin Zhu, chief China economist and head of Greater China Economic Research at J.P. Morgan.

China will also remove or suspend all non-tariff retaliatory measures, such as export control on some rare earth-related mineral items, as well as anti-monopoly and anti-dumping investigations on some U.S. companies. The two sides also agreed to regular dialogue and bilateral negotiations on economic and trade issues.

The current agreement presents a temporary pause that allows room for further reduction of tariffs. Equally, the bar for a potential deal between China and the U.S. is high and it could take longer than 90-days, so a possible resurgence in tariffs cannot be ruled out yet.

“For the moment, we assume the temporary tariff reduction will stay for the rest of 2025 and this will have a large impact on our growth forecasts,” Zhu said.

J.P. Morgan Research has raised China’s full-year growth forecast to 4.8%, up from lows of 4.1% at the height of the trade tensions.

Australia’s inflation rate, or CPI, rose 1.8% in the last quarter and 7.3% annually, overtaking the ABS’ June figure as the highest inflation rate since 1990.

The ABS released the quarterly inflation figures the day after Treasurer Jim Chalmers warned in his first Budget that Australians will be facing cost-of-living pressures for some time. The last quarterly inflation update was in July, when the inflation figure came in at 6.1%.

Since September 29, the ABS has been publishing monthly, rather than just quarterly, data of inflation to give economists and politicians the most accurate, up-to-date overview of the economy. However, the quarterly figure remains the most comprehensive measure of inflation because the new monthly updates only record inflation on up to 70% of goods and services, while the quarterly figures provide a full inflationary picture of Australia.

Using the quarterly figures, the ABS noted that the most significant price rises were new dwelling purchases by owner-occupiers (+3.7%), gas and other household fuels (+10.9%) and furniture (+6.6%).

There’s also been strong rises in grocery costs, with all food and non-food grocery items increasing in the September quarter. In the 12 months to the September quarter, fruit and vegetables prices rose 16.2% and dairy products increased 12.1%, the report reads. The recent floods in Victoria are expected to heighten inflationary pressures.

Yet for the first time in two years, Australian motorists will see some relief as fuel prices have dropped.

“Automotive fuel prices fell -4.3% in the September quarter as global oil prices have softened,” the ABS said.

“The annual movement in the September quarter remains elevated at 18%, however, is down from the peak in the March 2022 quarter of 35.1%”,

The ABS noted that fuel prices are expected to increase again in the December quarter due to the fuel excise restoration.

No city has been spared from the rising cost of living, either. Considering all groups in the inflation figure, the ABS notes that CPI rose across all eight capital cities, ranging from 1.6% in Sydney and Canberra to 2.1% in Adelaide, Brisbane and Darwin.

Related: The Bad News on the Budget? Australians will feel the pinch for some time

Will the Budget Help Inflation?

Last night, Jim Chalmers handed down the first Labor Budget since taking on his role as Australian Treasurer in May.

It’s also the first Labor Budget in almost a decade, which Chalmers said will provide “cost of living relief which is responsible, not reckless—to make life easier for Australians, without adding to inflation”.

He also said that “Australians know a complex combination of challenges at home and abroad is pushing up the cost of living”.

“They know that governments can’t make inflation disappear overnight.”

The Budget’s five-point plan for cost-of-living relief includes:

Cheaper child care;

Expanding Paid Parental Leave;

Cheaper medicines;

More affordable housing;

And getting wages moving again.

“This is a $7.5 billion package that helps put some money back in people’s pockets, boosts productivity, and grows the economy—but it’s carefully targeted and carefully timed, so that it avoids placing additional pressure on inflation,” Chalmers reiterated in his Budget speech.

The Central Bank is also working to curb inflation, with its six consecutive months of rate rises. As of October, the interest rate is 2.6%.

Speaking to Forbes Advisor earlier this month, Alexis Gray, senior economist for Asia Pacific at Vanguard, explained that rate rises work to curb inflation as they affect all Australians, and send a signal to become more cautious about spending money.

“Interest rates affect every loan across the economy, whether it’s a mortgage or a business loan. Higher rates make it more expensive to service your loan, and therefore cause you to cut back in other areas,” Gray explained.

Whether these rate rises will bring inflation down over the coming months remains yet to be seen, as a downwards trend is not expected until 2023.

Related: Why is Australia’s Inflation Rate so High?

Philippine economic growth would likely further slow in the next two years to remain below the government’s more ambitious annual targets amid a global deceleration fueled by trade and geopolitical tensions, according to the Washington-based Institute of International Finance (IIF).

A June 25 report authored by IIF managing director and chief economist Marcello Estevão and senior economist Jonathan Fortun showed that the global financial industry association forecasts the Philippines’ gross domestic product (GDP) to grow by 5.5 percent this year and 5.6 percent next year—both lower than last year’s already weaker-than-expected 5.7 percent.

These growth projections for 2025 and 2026 are also beneath the government’s goal of six- to eight-percent expansion for both years.

Despite this, IIF deputy chief economist Ashok Bhundia and associate economist Phoebe Feng cited the Philippines, alongside China and Thailand, among the few emerging markets (EMs) in Asia that had so far “delivered modest upside surprises on the back of fiscal support and resilient exports.”

Amid the threat of higher United States (US) tariffs, the IIF noted that total goods exports accounted for only 15.9 percent of the Philippines’ GDP—one of the smallest in emerging Asia, compared to the likes of Vietnam (87.8 percent of GDP), Malaysia (78.2 percent), Thailand (57.1 percent), Taiwan (55.2 percent), South Korea (36.6 percent), China (19.1 percent), and Indonesia (19 percent).

Philippine exports to the US account for an even smaller 2.6 percent of GDP, compared to Vietnam’s 25.9 percent, Taiwan’s 14 percent, Thailand’s 10.4 percent, Malaysia’s 10.3 percent, South Korea’s 6.8 percent, and China’s 2.8 percent.

With a relatively small trade-in-goods surplus—merchandise exports exceeding imports—with the US, equivalent to just 0.8 percent of GDP, the Philippines is facing one of the lowest reciprocal tariffs among America’s Asian trading partners, at 17 percent. The 90-day pause on US tariffs will end in early July.

Across Asian EMs, “the region’s outlook is clouded by high exposure to US trade and tariffs,” such that the IIF projected regional GDP growth at a lower 4.8 percent this year than the 5.1 percent recorded last year, “driven by a slowdown in global trade as the US administration lifts tariffs to a baseline of at least 10 percent.”

“With much of Asia highly open to international trade, a minimum tariff level of 10 percent imposed by the US remains the key downside drag to growth, with Thailand, Malaysia, South Korea, Taiwan, and Vietnam particularly vulnerable,” the IIF said.

“The impact on individual economies will hinge on the outcome of bilateral negotiations, compounded by a potential tit-for-tat trade war among the three major economies: the US, the European Union (EU), and China,” the IIF added.

The Department of Trade and Industry (DTI) is eyeing Philippine tariff rates of below 10 percent following negotiations with US economic and trade officials in early May.

For the IIF, “some economies may be able to mitigate the impact of tariffs as beneficiaries of supply-chain diversification and export rerouting.”

“Overall, these dynamics will slow global trade, depress investment, and have negative spillover effects on employment and consumption across the region,” the IIF warned.

The IIF said monetary policy easing by regional central banks as well as fiscal policy would mitigate tariff-inflicted downside risks to economic growth.

The Bangko Sentral ng Pilipinas (BSP) last week cut the key interest rate by 25 basis points (bps) to 5.25 percent while hinting at more reductions before year-end, citing the need for a “more accommodative monetary policy stance.”

“Inflation across the region has largely come down to or below targets,” the IIF noted. In the Philippines, for instance, end-May headline inflation averaged 1.9 percent, below the government’s targeted two- to four-percent range of manageable annual price hikes deemed conducive to economic growth, as domestic rice prices fell year-on-year.

The IIF said that “US tariffs are also expected to have a disinflationary effect on the region by dampening export demand.”

“Therefore, despite the next Fed cut not fully priced until September 2025, the inflation outlook in Asia together with a weak US dollar backdrop provides room for monetary easing ahead of the Federal Reserve,” the IIF said.

Globally, the IIF said that “while our current forecast for 2025 does not suggest a global recession, it points to a meaningful deceleration compared to historical benchmarks and now incorporates the rising geopolitical premium following the June Israel-Iran escalation.”

The IIF expects global growth to slide to 2.6 percent this year, well below the average of 3.7 percent from 2011 to 2019—the period marking the end of the global financial crisis (GFC) until before the Covid-19 pandemic wreaked havoc on the world economy.

Private sector economists have slashed their gross domestic product (GDP) growth forecasts for the Philippines to as low as five percent, citing the drag from shrinking exports and the broader impact of a global trade slowdown.

Singapore-based UOB has substantially shaved its full-year growth projection for the local economy from six percent to five percent.

This came after the first quarter of the year grew only by 5.4 percent, slightly higher than the 5.3 percent recorded in the last quarter of 2024. It was also far slower than the 5.9 percent in the same period last year.

If realized, besides falling far below the target of six percent to eight percent, UOB’s revised forecast could also mark the weakest annual expansion, excluding the 9.5-percent contraction during the pandemic, since the 3.9 percent growth recorded in 2011.

Also, UOB’s forecast would notably mark the weakest pace of Philippine economic growth in 14 years, or since 2011, during Benigno Aquino III’s second year in office. That year’s growth was blamed on the government’s underspending on infrastructure, and a continued drop in fishing, alongside global drag.

Meanwhile, the government put the blame on the escalating global trade tensions for the first-quarter growth rate that disappointed the market expectations.

Disappointing exports

Netherlands-based financial giant ING said the strong growth in consumer and government spending prior to the midterm election was expected. But the “disappointment was net export and investment growth,” said Deepali Bhargava, regional head of research for ING Asia-Pacific.

Bhargava noted that this reflects the “uncertainty around business confidence amid tariff escalations and a slowdown in trade.”

“We are concerned about the possible effect of the 17 percent tariff imposed by the government of the US to the Philippines especially for skilled Filipino workers employed in export sectors,” Makati Business Club (MBC) executive director Rafael Ongpin said in a May 8 statement.

“We believe that the government must prioritize reducing the cost of power and building a strong manufacturing base to attract investors. These factors have become all the more relevant in an increasingly uncertain global economy,” Ongpin added.

“Higher imports as government spending accelerated ahead of the elections also likely contributed to lower net export growth,” Bhargava added.

Capital Economics senior Asia economist Gareth Leather also said that while export growth jumped from 3.2 percent to 6.2 percent, “this is likely to reverse soon given the subdued outlook for global growth and the risks from higher tariffs.”

“And unlike other countries in the region (most notably Vietnam and India), the Philippines isn’t especially well placed to benefit from a plunge in Chinese exports to the US,” Leather further said.

HSBC ASEAN economist Aris Dacanay’s views aligned with Bhargava’s, stressing that the deceleration in service exports was the “unexpected” trend during the period.

Looking ahead, “goods exports will likely slow down as tariffs cascade throughout the globe,” Dacanay said.

Rizal Commercial Banking Corp. chief economist Michael Ricafort also cited US President Donald Trump’s “reciprocal tariffs, trade wars, and other protectionist policies” to potentially “slow down global trade, investments, employment, and overall world GDP growth.” Ricafort said these could, consequently, weigh on the local GDP growth.

Meanwhile, “higher fiscal spending ahead of the midterm elections this month, along with a continued push for infrastructure development and lower oil prices, should help cushion GDP growth from the drag caused by slower exports,” Bhargava noted.

Leather also expects “steady growth in 2025 as interest rate cuts and low inflation help offset the drag from weaker exports and tighter fiscal policy.”

Slower growth, bigger cuts

With the expected continued slowdown in net export growth, ING has lowered its within-target 6.1 percent forecast to 5.6 percent. Oxford Economics lead economist Sunny Liu expects a slower expansion at 5.5 percent.

Dacanay believes “the upcoming headwinds will be tough. We expect growth in the Philippines to weaken further in the second half of 2025 as trade uncertainties and challenges put a drag on the global economy. He earlier slashed his 5.9-percent forecast to 5.6 percent.

“Looking ahead, we reckon [that the first quarter] will be as good as it gets for the Philippines this year,” Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco and Asia economist Meekita Gupta also said.

As such, they have maintained their projection that the Philippines will grow by 5.3, even weaker than last year’s lackluster performance. Only Leather has a forecast that the Philippines could grow by six percent this year.

To support growth, Liu said she expects the Bangko Sentral ng Pilipinas (BSP) “to maintain an accommodative monetary policy stance.”

Leather and Bhargava have predicted an additional three-quarter-point cuts for the rest of the year, bringing the key borrowing costs down to 4.75 percent by year-end, from the present 5.5 percent.

Meanwhile, Dacanay sees another 50 basis-point (bps) cut “regardless of whether the Fed [US Federal Reserve] cuts its policy rate or not.” Considering the BSP’s more dovish signal, he said that “the risk of the BSP cutting its policy rate consecutively in June has also risen.”

Department of Finance Secretary Ralph Recto (File photo)

MANILA – Finance Secretary Ralph Recto on Thursday said the 5.4 percent economic growth in the first quarter of the year shows the sustained resilience of the Philippine economy despite rising global volatilities.

In a statement, Recto said the Philippines continued to grow among the fastest in the ASEAN region, outpacing Indonesia, Malaysia, and Singapore.

“Our performance highlights the continued strength and resilience of the Philippine economy, even amid rising global uncertainties. Our growth is strong, inflation continues to ease, private consumption is rising, and our job market remains vibrant. These are clear signals of accelerating domestic demand ahead, which is our strongest shield against external headwinds and trade wars,” Recto said.

The Finance chief said the government is confident in achieving its 6 percent economic growth target in the coming quarters, driven by steady fiscal consolidation, easing inflation, and progress in trade negotiations with key partners, among other initiatives.

In the first quarter of the year, revenue collections rose which Recto credited to the strong performance of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC).

Tax collections in particular reached PHP931.5 billion, a double-digit increase of 13.55 percent compared to the same period last year.

As inflation continues to cool down, settling at 1.4 percent in April, Recto expects private spending to further improve.

He said easing inflation provides more room for the Bangko Sentral ng Pilipinas (BSP) to further cut policy interest rates to help boost the spending power of Filipinos, attract more investments, and boost economic growth.

Private investments are also expected to increase with the implementation of the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Act. (PNA)