Intensifying trade war increases risks of economic slowdown in the US and Eurozone; China shifts focus to boosting its domestic economy
US
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Fed likely to hold rates this month, but concerns over economic slowdown are growing. In February, nonfarm payrolls increased by 151,000, up from 125,000 in January, while the unemployment rate edged up to 4.1% from 4.0% in the previous month. Meanwhile, average hourly earnings rose by 4.0% YoY, up slightly from 3.9%.
Given steady job growth, uncertainty over trade policy, and inflation still above the 2% target, Krungsri Research expects the FOMC to keep its policy rate unchanged at 4.25-4.50% at its March 18 meeting. However, concerns over US economic slowdown are becoming more pronounced, as reflected in weaker consumer spending, a slowdown in the services sector, and declining consumer confidence. These risks could intensify this year, given the tight financial conditions, as seen in rising corporate debt refinancing and increasing delinquency rates. Additionally, trade policy uncertainty has posted a downside risk to the US economy. These factors suggest that the Fed may consider cutting interest rates 2-3 times this year.
Eurozone
ECB cuts interest rates and lowers GDP forecast to reflect weak economic conditions. The European Central Bank (ECB) decided to cut its key deposit rate by 25bps to 2.50%, to support economic growth amid easing inflation towards the target of 2%. The ECB also revised down its GDP growth forecasts for 2025 and 2026 to 0.9% and 1.2%, respectively.
The euro appreciated significantly due to improved short-term sentiment following an agreement between Friedrich Merz's conservatives and the Social Democrats (SPD) to overhaul borrowing rules in a tectonic spending (Debt brake) shift to increase defense spending and stimulate economic growth through a EUR500 bn infrastructure fund. However, there remains uncertainty over whether the new government can propose the debt brake reform amid political debates and coalition constraints. Meanwhile, the ECB’s policy signals following its March 6 interest-rate cut continue to reflect a weak Eurozone economy and heightened trade war risks. These factors contributed to the downward revision of this region’s GDP forecasts for 2025 and 2026.
China
China keeps its 2025 economic growth target at around 5% and places greater emphasis on boosting consumption. The government has set most of its economic targets this year similar to those for 2024 (see table) but has increased the fiscal deficit and the issuance of special local government bonds to align with the shift in monetary and fiscal policy from “cautious” to “moderately loose.” Furthermore, boosting consumption will be the government’s primary goal this year, in contrast to last year’s focus on developing high-quality industries.
Despite trade war uncertainties, the government at the Two Sessions meeting expresses its commitment to maintain economic growth at around 5% by strengthening the domestic economy via measures to stimulate consumption such as subsidies, consumer protection, and boosting incomes for low- to middle-income groups. If these measures prove effective to some extent, the manufacturing sector—which is still facing excess supply issues—will also benefit. However, monetary easing may occur later than expected, partly due to concerns over the stability of the Chinese yuan.
Inflation may fall below the target range in 2Q25; Tourism sector faces challenges due to a sharp decline in Chinese tourists.
Headline inflation eases in February but remains within target range for the third straight month. It may fall below the target in the coming period. In February, headline inflation softened to 1.08% YoY from 1.32% in January, partly due to a decline in fresh food prices, particularly vegetables, as its output increased. Core inflation (excluding raw food and energy prices) edged up to 0.99% from 0.83% in January. For the first two months of this year, the average headline inflation and core inflation stood at 1.20% and 0.91%, respectively.
Although the latest headline inflation has slightly slowed, it is expected to remain within the official target range in the first quarter of this year, partly due to the low-base effect in the first quarter of last year. However, inflation is expected to fall below the target range in 2Q25 after the low-base effect dissipates. Additionally, a decline in Dubai crude oil prices compared to last year has led to a corresponding drop in domestic gasohol prices. The government is also likely to continue implementing cost-of-living relief measures, while favorable weather conditions may boost agricultural outputs. For the full year 2025, headline inflation is projected to average 1%, near the lower bound of the Bank of Thailand’s target range of 1-3%.
Chinese tourist arrivals declined faster than expected, which may impact the tourism sector's recovery this year. In February, a total of 3.12 mn foreign tourists arrived in Thailand, down from 3.71 mn in January and a 7% decline compared to the same month last year (YoY). However, tourism revenue reached THB 151 bn, marking a 2.3% YoY increase. The top five source countries for international tourists were Malaysia, China, Russia, India, and South Korea. For the first two months of this year (January–February), international tourist arrivals totaled 6.83 mn, growing by 6.9% YoY, while tourism revenue reached THB 332 bn, an increase of 17%.
The recovery of Chinese tourists has shown signs of weakening, as reflected in the February arrivals, which dropped sharply by -44.9% YoY to a 15-month low at 371,452. In the first two months of the year, Chinese tourist arrivals contracted by -12.6% YoY to 1.18 mn. The sharp decline in Chinese tourist arrivals, which remains significantly below pre-COVID levels, is partly due to concerns over travel safety and increased competition from other destinations that have implemented measures to attract tourists. Nevertheless, Thailand’s tourism sector continues to be supported by strong growth in key markets such as Malaysia, Russia, and India. As a result, international tourist arrivals to Thailand are expected to reach 38 mn in 2025, up from 35.5 mn in 2024. While the number would still be less than the pre-COVID level of 40 mn, tourism sector is expected to remain a key driver of Thailand’s economy in 2025.
