Global economy feels growing impact of tariff hikes as central banks turn more cautious on monetary policy
US
US Fed flags inflation risks and considers reviewing monetary policy framework. Moody’s Ratings downgraded the US long-term credit rating from ‘Aaa’ to ‘Aa1’, citing a continued rise in public debt and interest burden, both significantly higher than those of similarly rated sovereigns. Public debt is projected to surge from 98% of GDP in 2024 to 134% by 2035.
Signs of economic slowdown have become more evident following tariff hikes. This is reflected in: (i) The Philadelphia Fed Manufacturing Index, which contracted for a second consecutive month in May; (ii) The Producer Price Index (PPI), which declined in April for the first time since October 2023, and; (iii) Retail sales, which grew just 0.1% MoM in April vs 1.7% the previous month. Nonetheless, the Fed Chair indicated that the Fed may need to review its monetary policy framework in light of shifting economic conditions and heightened supply shock risks. Meanwhile, President Donald Trump signaled intentions to unilaterally set tariff rates, rather than pursuing trade agreements with individual countries—a move that would heighten global economic and trade uncertainty. Krungsri Research expects the Fed to carefully assess the economic and inflationary impacts of Trump’s proposed policies before considering further rate cuts in 2H25.
Japan
Japan’s economy contracts for the first time in a year as officials propose a USD 400bn, five-year stimulus to boost SME productivity. The BOJ board member warned that it is still too early to raise interest rates, noting that US tariff measures could increase pressure on the economy—particularly on the auto industry, a key pillar of the country. The board member urged the BOJ to maintain a cautious approach to monetary policy.
The US tariff measures have added pressure to Japan’s economy, which saw GDP contraction in 1Q25, amid weakening consumption and a decline in exports. The outlook remains subdued, especially given Japan’s heavy reliance on the US market. Progress in negotiations with the US, expected later this month, will be closely watched. In a move to ease trade tensions, Japan expressed willingness to increase corn imports from the US as part of a potential deal to secure exemptions from auto tariffs. Meanwhile, Japan’s economic team has proposed a USD 400bn five-year package aimed at boosting productivity of SMEs, which account for more than 70% of the country’s workforce. Amid rising economic risks, Krungsri Research expects the BOJ to keep its policy rate at 0.5% in the near term, with a possible rate hike late this year under consideration.
China
China remains under pressure from excess supply, despite some easing in trade tensions. Headline inflation stayed negative for the third straight month in April at -0.1% YoY, while core inflation was unchanged at 0.5%. The Producer Price Index (PPI) fell further from -2.5% to -2.7%, marking the 31st straight month of decline. Meanwhile, China announced a 90-day suspension of its rare earth export controls following a temporary agreement with the US to lower import tariffs on both sides.
The latest inflation data reflect weak demand and excess supply that continue to pressure the economy. Meanwhile, previous stimuli may be insufficient to support a sustained recovery in consumption. On the other hand, the mutual tariff reductions between the US and China—from the previous 145% to 30%, and from 125% to 10%, respectively—could help ease some impact. We expect China’s long-term GDP to decline by -0.3% (improving from -0.8% based on their previous tariffs of exceeding 100%). However, the long-term impact on exports remains significant at -4.2% (vs. -6.3%), led by Rubber and Plastics (-6.2% vs. -11.4%), Electronics and Electrical Equipment (-5.9% vs. -9.5%), and Textiles and Apparel (-5.7% vs. -8.3%).
1Q25 GDP growth mainly driven by exports and public investment but momentum of private activities weakens
1Q25 GDP grows 3.1% YoY. Tariff hikes and domestic vulnerabilities could trigger a “scenario-ception” in our economic outlook. The NESDC reported that Thai economy grew by 3.1% in 1Q25, slightly exceeding both market expectations and Krungsri Research’s forecast of 2.9%. The main factors contributing to 1Q25 GDP growth included exports of goods and public investment. However, private consumption slowed down, and private investment contracted for the 4th straight quarter.
Although 1Q25 GDP growth slightly exceeded market expectations, underlying domestic pressures appear to be intensifying. (i) Export growth (+13.8%) offers limited domestic support. This uptick reflects front-loaded shipments and inventory drawdowns but this has not translated into a rebound in manufacturing output (+0.6%). (ii) Private consumption is losing momentum (+2.6% vs +3.4% in 4Q24), as the impact of the Phase I fiscal stimulus, amounting to THB140bn, diminished. The Phase II handouts (THB30bn) and the Easy E-Receipt scheme failed to sustain consumption momentum. (iii) A surge in public investment (+26.3%) could not lead to a crowding-in effect as private investment contracted by -0.9% in 1Q25.
For the 2025 outlook, the NESDC forecasts Thai GDP growth at just 1.8% in its baseline scenario, assuming higher tariffs with reciprocal tariffs raised to half of the announced rates (such as Thailand facing 18% tariffs, up from the current 10%). In a lower tariff scenario—with current 10% tariffs maintained—the NESDC projects Thai GDP growth of 2.3% in 2025. Conversely, under a higher tariff scenario, in which Thailand faces 36% tariffs, Thai GDP growth could fall to 1.3%.
Krungsri Research views escalating tariff risks as a key catalyst in a broader “scenario-ception,” where external shocks interact with domestic vulnerabilities—such as structural constraints, weak policy execution, and a slow tourism recovery. This convergence of risks reinforces each other, making downside risks to growth not only likely but structurally embedded.
Consumer confidence continues to decline in April, while economic stimulus measures still await clarity. The Consumer Confidence Index (CCI) declined for the third consecutive month in April, reaching a seven-month low of 55.4, down from 56.7 in March. The drop reflects consumer concerns over: (i) Thailand’s slow economic recovery and lower-than-expected growth, as several agencies have revised down this year’s growth forecasts; (ii) risks to the global economy and trade from the US import tariff hikes on trading partners; and (iii) ongoing domestic political uncertainty.
Private consumption shows increasingly negative signals, as the CCI continues to decline and remains well below the pre-COVID average of 75.5 in 2019. Additionally, the expected CCI (next 6 months) dropped to its lowest level since August 2023, reflecting rising concerns over the medium-term economic outlook amid mounting internal and external pressures. Although tensions between the US and China have recently eased following a temporary agreement to reduce tariffs by 115% for 90 days, overall uncertainty remains high. If the next round of negotiations fails to yield further progress, it could pose risks to the global economy and trade. Meanwhile, the progress of Thailand’s trade negotiations with the US remains a key issue to watch, despite some positive signs. In light of the impact from the US tariff hikes, the Thai government may consider reviewing its economic stimulus plans—particularly the THB 157 bn digital wallet scheme—with the possibility of reallocating funds to more effective programs that can help mitigate economic risks going forward.
