Asia-Pacific economies fared better than expected in the first half of the year but the IMF warns that the full blow of U.S. tariff hikes remains unclear, and growth will slow.
“The intensification of trade tensions continues to be a major downside risk for the region,” the International Monetary Fund said in a report on Friday.
Exports and economic momentum have outperformed expectations across the region, but part of that is likely down to tailwinds that could soon fade. A rush to lock in orders before tariffs rose inflated demand for Asia’s goods, as has the artificial-intelligence boom, which has been a boon for economies across the semiconductor and electronics supply chain.
While policy uncertainty has cleared somewhat as tentative trade deals were struck and U.S. tariffs settled at lower levels than initially announced, the potential for volatility remains high. That could weigh on investment and sentiment more than expected, the IMF said.
The external threat comes at a tough time for the region: Domestic demand, particularly consumption, remains below pre-pandemic levels in many countries, it said.
Weakness in service sectors, property-sector downturns and downbeat consumer sentiment have limited the post-Covid recovery in jobs and income growth, the fund said. Institutional constraints like limited scope for fiscal support due to high debt have hindered consumption too.
The IMF expects Asia’s gross domestic product growth to moderate in the second half, leaving annual growth at 4.5%. That would compare with 4.6% last year.
As the negative effects of U.S. tariffs build, regional growth will slow further to 4.1% next year, the fund projects.
The AI-driven investment boom has supported growth, but it could be a double-edged sword, the IMF said.
Rapid AI adoption could pose new socio-economic challenges, including widening productivity gaps between large and small businesses, and job displacement, the IMF said, calling for structural domestic reforms to spur demand and support income and job growth.
“Targeted fiscal and monetary policy should be used to smooth the impact of trade shocks and provide temporary support,” it added.
The IMF’s report comes ahead of a highly anticipated visit by U.S. President Trump in Asia, during which he is expected to meet with Chinese leader Xi Jinping.
Whether tensions between Washington and Beijing escalate or defuse will have implications for the region.
U.S.-China frictions since 2018 have already led to supply-chain changes in Asia-Pacific, the IMF report said. The U.S. is a top export destination for many Asian economies, and China is central to the region’s supply chains to serve overseas markets.
A cooling in tensions would help reduce uncertainty, boosting investment and productivity, while renewed escalation could further weigh on confidence, it said.