Despite easing trade tensions, Trump’s tariff policy continues to weigh on global growth; China’s economy remains fragile
US
Trade tensions eased temporarily while US Fed is expected to maintain interest rates this month. Nonfarm payrolls rose by 139,000 in May, down from 147,000 in April. The unemployment rate help steady at 4.2%. Meanwhile, the US government is preparing to meet with Chinese representatives this week to discuss a trade deal.
Solid labor market data, combined with impacts of tariff policy uncertainty on economic growth and inflation would prompt the Fed to keep its policy rate unchanged at 4.50–4.75% at the June 17–18 meeting. However, the overall US economy shows clearer signs of a slowdown. This is reflected in services PMI, which contracted for the first time in 11 months, and consumer confidence, which dropped to its lowest level since July 2022. Furthermore, risks surrounding the tariff policy could put pressure on the economy in the coming period. Although a trade court recently ruled that Trump’s tariff hikes in early April were unlawful, the decision is currently under appeal and may be taken to the Supreme Court. Importantly, the administration still has the authority to impose tariffs on specific goods or countries through other legal frameworks. Against this backdrop, Krungsri Research expects the Fed to cut interest rates in 2H25 to mitigate risks of an economic recession.
Eurozone
ECB cuts rates as expected and signals nearing end of monetary easing cycle. Preliminary data showed headline inflation eased to 1.9% YoY in May, below the 2.0% target for the first time since September 2024. Meanwhile, the ECB voted to cut its policy rate by 25bps to 2.00%. The ECB also revised down its inflation forecasts for both 2025 and 2026 by 30bps to 2.0% and 1.6%, respectively. The 2026 GDP growth forecast was trimmed by 0.1% to 1.1%, compared to 0.9% projected for 2025. ECB president noted that the monetary easing cycle is nearing its end.
Eurozone growth momentum appears to be losing steam, as reflected by a decline in services PMI and weak economic sentiment. The positive impact from earlier front-loaded exports is also fading, and rising risks from US tariff hikes are expected to weigh on manufacturing and export sectors going forward. Despite these headwinds, the likelihood of a recession remains low, underpinned by a still-resilient labor market, easing inflation and lowering interest rates. With inflation now below the official 2% target, Krungsri Research expects the ECB to deliver 1–2 additional rate cuts, bringing the policy rate down to 1.50-1.75% by the end of the year.
China
China's manufacturing shows some improvement but remains vulnerable to trade war pressures. The NBS reported that the manufacturing PMI, new orders index, and new export orders index all rose in May after sharp contractions in April. The non-manufacturing PMI edged down slightly (see figure). Meanwhile, new home sales by the top 100 property developers continued to decline by -8.6% YoY.
The official PMI figures reflect a recovery among large manufacturing firms, following the US-China temporary deal to reduce tariffs starting in mid-May. However, small- and medium-sized firms remain sluggish, as shown by the Caixin PMI, which contracted for the first time in eight months. Moreover, the impact of the trade war risks intensifying if China and the US fail to reach a trade agreement or if the US opts to impose tariffs under alternative laws instead of the International Emergency Economic Powers Act (IEEPA), which is currently under legal dispute. Looking ahead, the US may expand tariffs, both in terms of rates and coverage across product groups. Therefore, fiscal measures will be essential to support the economy amid ongoing pressures from the trade war.
Despite signs of recovery in some sectors, underlying fragilities persist and inflation remains low, which may prompt BOT to cut rates this year.
Thai economy showed partial recovery in April, driven by industrial production and investment, while consumption weakened. The Bank of Thailand (BOT) reported that overall economic activity improved in April compared to the previous month. This was supported by an increase in industrial production across several categories (+2.9% MoM sa), particularly in the automotive sector. Private investment also rose (+2.9%), driven by growth in machinery and equipment. Tourism showed a slight improvement, with the number of foreign tourist arrivals rising (+2.5%), though still lower than the same period last year. Meanwhile, exports excluding gold declined slightly (-2.1%), and private consumption fell (-1.5%), mainly due to a contraction in services sector, particularly in hotels and restaurants.
Despite signs of recovery in some sectors in early Q2, Krungsri Research assesses that the rebound remains fragile, as (i) the growth of industrial production in April was partly driven by inventory restocking following front-loaded exports to avoid the US tariff impact; (ii) export prospects remain at risk due to heightened uncertainty surrounding US trade policy; (iii) a decline in private consumption, particularly in services, may signal weakening purchasing power after the end of recent stimulus measures; and (iv) support from tourism weakens, as the number of international visitors—especially from China—recovers at a slow pace. Amid ongoing domestic and external pressures, Krungsri Research projects Thailand’s GDP growth at 2.1% for 2025, assuming the US maintains a 10% tariff on Thai exports.
Headline inflation remained negative for the second straight month in May. BOT is expected to cut policy rate in 2H25. In May, headline inflation stood at -0.57% YoY, marking a continued decline from -0.22% in April. The negative inflation rate was primarily driven by: (i) a drop in fresh food prices, especially vegetables and fruits, due to increased outputs; (ii) lower energy prices in line with global crude oil trends; and (iii) a high base last year. Core inflation (excluding raw food and energy prices) rose to 1.09% in May from 0.98% in April. For the first five months of 2025, average headline and core inflation stood at 0.48% and 0.95%, respectively.
Krungsri Research expects inflation to remain low for the rest of the year, due to low energy prices compared to the previous year, coupled with government measures to cap electricity and cooking gas prices. Favorable weather conditions would also boost agricultural outputs. In addition, demand-pull pressure remains weak, as reflected by slowing consumption growth and deteriorated consumer confidence. Headline inflation for 2025 is expected to average 0.6%, below the BOT’s target range for the second consecutive year.
Regarding the policy rate outlook, growing risks from trade policies of major economies would affect Thai exports more visibly in the second half of the year and could further worsen the already-fragile domestic activity. These factors coupled with the still-low inflation point to the possibility of additional monetary easing to support the economic recovery. We expect the policy rate to be cut one to two more times this year.
