Rising tensions in the Middle East increases risks to global economy and energy prices; China’s consumption improves but still lacks growth momentum
US
Fed maintains its projection of two more rate cuts this year, despite rising inflation risks. At its latest meeting, the Fed kept the policy rate unchanged at 4.25–4.50% and downgraded its 2025 GDP growth forecast from 1.7% to 1.4%. Meanwhile, core PCE inflation forecast was revised up to 3.1% from 2.8%, reflecting increased risks of stagflation.
The US economy is expected to slow further in the second half of the year, pressured by tight financial conditions, increasing delinquency rates, and rising inflation risk amid ongoing trade policy uncertainty and escalating conflict in the Middle East. Recently, the US launched strikes on three nuclear facilities in Iran, further raising the risk of war escalation. If tensions intensify to the point of closing the Strait of Hormuz, energy prices could surge, with oil potentially exceeding USD 100 per barrel. The risks are likely to weigh more heavily on economic growth going forward. The Fed’s latest “dot plot” continues to signal two rate cuts of 25bps each, potentially lowering the policy rate to a range of 3.75–4.00% by year-end.
Japan
The BOJ slows QE tapering amid rising bond yields and high inflation. The BOJ kept its policy rate unchanged at 0.50% and announced it would slow pace of bond tapering starting from April 2026. This signals a cautious approach to policy normalization as long-term government bond yields have risen sharply amid concerns over Japan’s fiscal outlook.
Japan’s economic recovery remains fragile, especially in light of US tariff hikes targeting sectors like automobiles, which pose downside risks to manufacturing and exports. However, the services sector—led by tourism—continues to expand robustly. Measures such as electricity and gas subsidies and the release of rice stockpiles should ease inflation and support consumption, reducing the likelihood of a recession. Still, ongoing geopolitical risks in the Middle East remain a key factor to watch, as they could drive energy prices higher. Given this outlook, Krungsri Research expects the BOJ to refrain from raising interest rates in the near future to support the economic recovery, at least until late this year.
China
China’s consumption shows some improvement, thanks to stimulus measures and online shopping festivals. Retail sales growth accelerated from 5.1% YoY in April to 6.4% in May, the highest since December 2023, led by Household Electric and Video Appliance (+53%) and Communication Appliance (+33%). However, fixed asset investment growth slowed from 4% in the first four months of this year to 3.7% in the first five months.
Domestic consumption is mainly driven by the trade-in subsidy and the annual online shopping “618 festival.” However, this support could fade once the stimulus measures end or the festival period passes. Moreover, early use of future demand may lead to a slowdown in consumption in the coming periods (payback effect). Thus, to sustain the economic growth momentum, the government needs to (i) restore business confidence and stimulate investment, which will positively affect employment, and (ii) restore household wealth that has been eroded by the real estate slump. However, these efforts may face limitations due to uncertainties in US trade policy, population decline, and excess supply in the manufacturing and real estate sectors.
Thailand’s exports hit record high, but economic outlook pressured by structural challenges and domestic political uncertainty
May exports hit all-time high, but its growth remains at risk amid mounting pressures. The Ministry of Commerce reported that Thai export value in May reached USD 31.0 bn in May, marking the 11th consecutive month of growth with an 18.4% YoY increase. Excluding oil- and gold-related products, exports rose by 20.4%. Key products driving growth included computers and accessories, hard disk drives, and electronic circuits. Agricultural exports also rebounded, led by cassava and fruits. By the destination, exports to the US and China expanded significantly, while shipments to Japan and the ASEAN-5 saw slight contractions. For the first five months of 2025, total export value stood at USD 138.2 bn, rising by 14.9% YoY.
Although Thai exports have continued to grow at a double-digit rate, the export expansion has yet to translate into domestic manufacturing growth. This is reflected in the Manufacturing Production Index (MPI), which contracted by 0.8% during the first four months of the year. Looking ahead, Thai exports faces several headwinds: (i) The US tariff policy still poses a key risk. While reciprocal tariffs may be constrained by legal challenges, the US could instead expand product coverage and raise tariff rates under Section 232. Based on Krungsri Research’s analysis, if tariff measures under Section 232 are applied, it could reduce Thailand’s long-term exports by -0.76%, similar to the impact of existing tariffs at -0.68%. The negative effects could be more severe for key sectors such as electronics and electrical appliances, with the impacts of three times greater than those of the current tariffs. (ii) Additionally, ongoing trade negotiations with the US may become increasingly uncertain due to rising uncertainty over domestic political stability, further clouding Thailand’s export outlook.
Thailand’s competitiveness ranking drops 5 places to 30th. Domestic political uncertainty put more pressure on Thai economy. According to the IMD World Competitiveness Ranking 2025, Thailand’s overall competitiveness ranking dropped to 30th out of 69 economies, down from 25th in 2024. The decline was broad-based across all four key pillars. Government efficiency fell from 24th to 32nd, business efficiency from 20th to 24th, infrastructure from 43rd to 47th, and economic performance from 5th to 8th.
The decline in Thailand’s competitiveness ranking, particularly the sharp drops in government and business efficiency, reflects unresolved structural constraints. These include delays in public policy implementation, limited adaptability in the private sector, and a lack of investment in manufacturing sector —all of which continue to weigh on the country’s long-term competitive potential. Compounding these challenges is the recent rise in political uncertainty, stemming from a leaked audio clip allegedly involving the Thai Prime Minister and a former Cambodian leader, as well as the withdrawal of the Bhumjaithai Party, which held 69 parliamentary seats, from the governing coalition. These developments risk undermining the stability of the current government and could disrupt the continuity of key economic policies, including: (i) the planned approval of a THB 115 bn portion of the THB 157 bn stimulus package; (ii) public investment projects; and (iii) the drafting of the FY2026 national budget. Such uncertainty may further erode investor confidence—both domestic and foreign—and negatively impact Thailand’s economic growth in the second half of this year.
