US and Japan face growing risks to growth and fiscal stability. Impact of trade wars on Chinese economy may ease only temporarily.
US
Fiscal risks in the US increase after the Lower House approves Trump's tax bill. In May, although flash PMI figures showed improvement with the manufacturing sector rising to a three-month high of 52.3 from 50.2 the previous month and the services sector increasing to 52.3 from 50.8, early signs of weakening employment began to emerge, amid heightened uncertainty around trade policy. Recently, President Trump has threatened to impose a 50% tariff on EU imports on 9 July, and a 25% tax on iPhones manufactured outside the US.
The US 30-year Treasury yields climbed to a 19-month high of over 5%, reflecting mounting concerns over fiscal stability following the House's approval of the tax and spending bill. This policy is expected to raise government debt by USD 3.8 trn over the next 10 years. Meanwhile, the overall economy shows signs of slowing down from Q2, with the tariff impacts expected to become more apparent. As trade policy continues to pose risks and uncertainties for economic growth and inflation in the coming months, Krungsri Research expects the Fed to hold the policy rate steady at 4.25%–4.50% at its next meeting on June 17–18, before considering potential rate cuts in 2H25.
Japan
Japanese exports begin to slow down while recession risk is rising. In April, export growth decelerated to 2% YoY from 4% in the previous month. In May, flash manufacturing PMI remained in contraction territory for the 11th consecutive month. The services PMI also declined to 50.8 from 52.4 in April. In response to concerns over cheaper imported rice, the Ministry of Agriculture is planning to release government rice reserves at significantly lower prices to prevent consumers from switching to imports. In addition, Japan is preparing for a third-round of trade negotiations with the US on 30 May.
Mounting concerns over inflation and fiscal risks have driven Japan’s special long-term government bond yields to record highs. This followed reports that some political parties may push for a reduction in the consumption tax (VAT). At the same time, key economic indicators—including exports and industrial production—have shown signs of weakening, as Japan begins to feel the impact of US tariff hikes that took effect in April. These developments have heightened the risk of a technical recession as early as Q2. As a result, Krungsri Research expects the BOJ to maintain its policy rate at 0.5% until late this year to provide continued support for the economic growth.
China
China’s domestic economy is still fragile, while pressure from the trade war has eased temporarily. Retail sales growth slowed from 5.9% YoY in March to 5.1% in April, while industrial production growth decelerated from 7.7% to 6.1%. This was in line with the manufacturing new orders index, which slipped back into contraction zone, falling from 51.8 to 49.2. However, after the US and China temporarily reduced tariffs, starting 14 May, trade began to show signs of improvement. This was reflected in freight rates for 40-foot containers as of 15 May, which rose by 15.6% and 19.3% on the routes from Shanghai to Los Angeles and New York, respectively, compared to the previous week.
China’s latest economic indicators reflect weakness in the domestic economy. Meanwhile, recent growth has relied on stimulus measures that may yield only short-term effects. However, easing trade tensions between China and the US may lead to a surge in US imports from China in preparation for the Back-to-School season in 3Q25 and ahead of the scheduled end of the temporary tariff reduction on 14 August. As a result, Chinese exports to the US are likely to improve from the sharp contraction of -21% in April, which could help limit the negative impact on China’s economy in 2Q25.
Authorities reallocate economic stimulus budget and adjust investment promotion criteria to ease impacts from external pressures.
Government reallocates THB 157 bn from Digital Wallet project to economic stimulus package, aimed at mitigating trade war impact. The package includes: (i) water management projects, (ii) transport infrastructure projects, (iii) tourism development projects, and (iv) community economic development projects. The plan aims to inject funds into the economy in 3Q25 or commit them as carry-over budget before end-FY2025 (or by September).
The budget reallocation from short-term consumption stimulus under the digital wallet scheme to small- and medium-scale investment projects reflects an adjustment to address the current economic pressures stemming from US tariff policies. Infrastructure investments—such as in water management, transportation, and tourism—not only generate short-term economic stimulus through job creation and public spending but also help improve long-term productivity. At the same time, community economic development projects may serve as a mechanism to promote income distribution and strengthen grassroots economic activity. However, the success of these measures depends on project readiness, effective management, and timely budget disbursement that reaches target groups as planned. If the government can inject funds into the economy within this fiscal year, it could generate a multiplier effect greater than one-off cash handouts, which tend to have short-lived and concentrated impacts. A clear monitoring and evaluation mechanism is essential to ensure that the projects achieve both economic recovery objectives and long-term fiscal efficiency.
Outlook for private investment remains weak. BOI revises criteria to encourage greater investment. The Board of Investment (BOI) has introduced a new set of measures to enhance the potential of Thai entrepreneurs, including: (i) promoting efficiency improvements for Thai SMEs; (ii) suspending support for activities at risk from international trade measures; (iii) setting essential production process requirements; and (iv) revising foreign employment conditions. In addition, the BOI has launched new incentives to promote investment in secondary city tourism in 55 provinces. Corporate income tax exemptions have been extended—for example, from 5 to 8 years for tourism site development, and from 3 to 5 years for hotel businesses.
Private investment indicators remain fragile, including: (i) the NESDC reported that private investment contracted for the fourth consecutive quarter by -0.9% YoY in 1Q25; (ii) the value of BOI investment promotion certificates issued in 1Q25 dropped by -7.8% YoY to THB 227 bn; and (iii) the Thai Industrial Sentiment Index (TISI) fell to a six-month low of 89.9 in April. These signs may reflect businesses delaying investment decisions amid uncertainty over US tariff policy. Although the BOI has adjusted criteria for investment incentives in both manufacturing and tourism sectors, such measures may be insufficient to drive a broad-based recovery. Many firms remain cautious, awaiting clearer trade policies in major economies. Timely and targeted economic policies should help restore business confidence. However, private investment outlook still faces risks of contraction, potentially becoming a key constraint on Thailand’s economic growth going forward.
