S&P sees China growth slowing to 4% in H2 amid tariffs, weak demand

China’s economy is expected to slow sharply, with real GDP growth projected at about 4 per cent year-on-year (YoY) in the second half of 2025 and through 2026, down from 5.3 per cent in the first half of this year, according to S&P Global Ratings. The deceleration is driven by weakening exports, sluggish organic domestic demand, and only modest macroeconomic stimulus.

China’s overall exports held up through August despite a steep 33 per cent YoY fall in shipments to the US, due to robust growth to ASEAN markets. However, exports are expected to slow in the coming months due to higher US tariffs, slowing global demand, and rising Mexican import duties on economies without free trade agreements, which also cover China.

S&P Global Ratings sees China’s growth slowing to 4 per cent in the second half of 2025-2026 on weak exports, housing slump, and muted demand.
Asia-Pacific faces US tariff headwinds, with India hit hardest, but resilient consumption, AI-led investment, and policy easing will cushion the impact.
Inflation easing allows further regional rate cuts.

Uncertainty is amplified by the 90-day review mechanism under which China’s trade status with the US can be reset based on bilateral politics, leaving exporters vulnerable, S&P Global said in a release.

Domestic demand, which began the year strongly, is losing momentum as consumption and investment soften, dragged down by a persistent housing slump, weaker confidence, and fading impact of earlier trade-in schemes. Fiscal support has so far been limited given robust headline GDP in H1 2025, where net trade contributed 1.7 percentage points, but this boost will fade.

Some fiscal measures could emerge later this year, though their impact on 2025 growth would be modest and felt more in 2026. Persistent downward pressure on prices highlights structural overcapacity and muted demand, with profit margins across industries squeezed and nominal GDP growth slipping to 3.9 per cent in Q2, the weakest since the 2020 pandemic shock.

Beijing’s efforts to curb ‘involution’—cut-throat competition pushing down prices—have only partly slowed producer price declines, and the fundamental demand-supply imbalance remains unresolved.

Across Asia-Pacific, growth has held up in H1 2025 thanks to resilient domestic demand and strong exports, particularly of tech products and components from Southeast Asia and Taiwan, fuelled by global AI-related investment in data centres and equipment.

Domestic consumption has been robust in most emerging markets, supported by healthy labour markets, low inflation, and policy easing, while investment has been buoyant in India, Malaysia, and Taiwan. India’s growth is projected to hold at 6.5 per cent in FY25, supported by a benign monsoon, GST and income tax cuts, and accelerating government capex, though private investment remains subdued.

In Southeast Asia, GDP growth is expected to ease to an average of 4.5 per cent in 2025, with similar below-trend levels likely in 2026 as the impact of US tariffs deepens.

US tariffs remain a key external headwind, weighing on trade, investment, and growth both within the US and globally. The latest tariff schedule has left China slightly better off relative to earlier expectations but still facing much higher effective US tariffs compared to the pre-2018 period. Southeast Asian emerging markets are experiencing somewhat higher effective tariffs, while India is facing much sharper increases than anticipated, potentially undermining its manufacturing export ambitions.

Developed Asia’s exposure remains broadly in line with projections. The risk of further tariff adjustments is significant, particularly with Washington’s plans to curb transshipment and re-routing of shipments to avoid duties.

Monetary conditions are becoming more supportive across the region. Inflation has been easing since early 2024, helped by softer commodity and energy prices, allowing regional central banks to cut policy rates by an average of 55 basis points so far in 2025.

Currency appreciation against the US dollar has been strong for most Asia-Pacific economies since late 2024, particularly for the Malaysian ringgit and Thai baht, though some currencies softened slightly in Q3. With US policy rates expected to fall further, S&P anticipates additional rate cuts in Asia, particularly where inflation is below target.

In India, inflation has dropped faster than expected, to 3.2 per cent for FY25, creating space for a 25 bps rate cut by the Reserve Bank of India. Japan is expected to continue gradually raising rates as inflation converges toward the BOJ’s 2 per cent target, supported by narrowing wage-price gaps.

As a region heavily exposed to external trade, Asia-Pacific will feel the negative impact of rising trade barriers. Still, relatively solid domestic demand should cushion the blow.

Fibre2Fashion News Desk (HU)