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May 2025
Slowdown imminent for Singapore’s economy
The Singapore economy expanded by 3.8% YoY in 1Q25 but contracted 0.8% QoQ sa (seasonally adjusted), with the latter marking the first QoQ decline since 1Q23.
This 1Q25 advance estimate came in better than our forecast of 3.5% YoY (-1.1% QoQ sa) but was below the Bloomberg consensus forecast of 4.5% YoY (-0.4% QoQ sa). This is a moderation from the 5.0% YoY growth seen in 4Q24, but in line with the 3.2% YoY (0.3% QoQ) seen in the same period last year.
Manufacturing led the pack in 1Q25
Among the sectors, manufacturing led the pack with a 5.0% YoY growth, likely attributable to some frontloading ahead of the US tariffs announcements. This was followed by construction at 4.6% YoY and services at 3.4% YoY.
The manufacturing sector saw output expand YoY across all the clusters except for chemicals and general manufacturing activities, but still contracted 4.9% QoQ sa in 1Q25 (marking the first sequential decline since 2Q24), following flat growth in in 4Q24.
The construction sector was supported by both public and private sector construction activities, but also eased 2.3% QoQ sa in 1Q25, marking the first sequential decline since 1Q24.
The services sector was led by the wholesale & retail trade and transportation & storage (4.2% YoY), infocomms, finance & insurance and professional services (3.0%), as well as the accommodation & food services, real estate, administrative & support services and other services (2.5% YoY). Within the services sector, retail trade was the notable weak link, as the machinery, equipment & supplies segment supported the wholesale trade segment. Sustained strong demand for IT and digital solutions bolstered the infocomms segment, while HQ and business representative offices and management consultancy also lifted the professional services industry. The banking and payments services also contributed to the finance & insurance sector. The real estate sector also saw improved private residential property transactions.
Official 2025 GDP growth forecast trimmed
The official 2025 GDP growth forecast was trimmed from 1-3% previously to 0-2% YoY as expected. This is a sharp slowdown from the 4.4% seen in 2024. Given the state of the world which is fraught with tariff uncertainties, especially the escalation of tit-for-tat between the US and China, and the looming threat of sectoral tariffs, especially on semiconductors and pharmaceuticals, global trade and growth prospects have seen a downshift in recent weeks with no clear sign of bottoming yet.
Couple with the risks of global/supply chain disruptions, dented business and consumer sentiments and an expected pullback in capex and hiring intentions, the risk is for a significantly weaker external demand outlook.
The manufacturing, wholesale trade, transportation & storage industries will face vulnerabilities from a trade slowdown, while the finance & insurance industries will also face heightened volatilty amid risk-off sentiments, tepid credit intermediation and consumer credit card spending. MTI said that given the significant downside risks, they will continue to closely monitor global and domestic developments and make further adjustments to the forecast if necessary. MAS also cited that the aggregate level of output will come in below the potential this year, given Singapore’s high trade dependency and deep integration with global supply chains.
Technical recession possible
A technical recession is possible as the brunt of the initial US tariff announcements has wrecked significant havoc on financial markets in April and a real economic fallout is anticipated in the coming months.
GDP in 2Q25 could contract again sequentially QoQ sa, bringing the Singapore economy into a technical recession, assuming that there is no near-term improvement in the global trade and growth prospects arising from the negotiations on the tariff front that leads to a more sustained lifting of reciprocal tariffs.
For 2H25, GDP growth is likely to sink further due to the high base last year (3Q24: 5.7% YoY and 4Q24: 5.0% YoY), possibly to near stalling speed in YoY terms. This would bring our full-year 2025 growth forecast closer to 1.6% YoY (if the 10% tariff on Singapore remains intact), down from our previous 2.1% forecast prior to the rapid escalation of the US-China tariffs from 54% to the current 145% levels since Liberation Day on 2nd April.
Notably, the manufacturing sector is forecast to shrink, again due to the high base in 2H24, under the weight of tariffs for our major trading partners, although the construction and services sector should still expand YoY this year.
MAS eases policy
The MAS eased its monetary policy settings recently for the second straight meeting by reducing slightly the rate of appreciation, with no change to the band width or the level at which it is centered. This is in line with our house view for a 50 basis points flattening of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) slope.
MAS also cut the 2025 headline and core inflation forecasts to 0.5-1.5% YoY, from 1.5-2.5% and 1-2% previously. MAS cited the significant easing in January-February inflation rates, the modest imported inflation outlook amid slowing global demand and lower energy & commodity prices, as well as the cooling domestic labour market with implications for nominal wage growth amid improving labour productivity.
MAS also noted that the re-basing of CPI in January only accounted for a small part of the inflation step-down. MAS will closely monitor global and domestic developments and remain vigilant to inflation and growth risks. In our view, there is room for a further monetary policy easing if economic conditions deteriorate further. The rhetoric is clearly dovish with reference to the output gap turning negative and the downside inflation risks.
The reciprocal tariffs are likely deflationary for the Singapore economy as China diverts exports to the rest of the world, including ASEAN, and the dampening effects on business and consumer demand are likely to play out in the coming months. We shade down our 2025 headline and core inflation forecasts to 1.2% YoY, from 1.5% YoY previously, given the escalating US-China trade war, the widening financial market volatility and the economic implications on trade and growth prospects of our major trading partners (especially those of China and ASEAN).
That said, monetary policy will only complement the fiscal policy accommodation that is likely to follow. A taskforce chaired by Deputy Prime Minister Gan Kim Yong has already been set up to help businesses and workers address the immediate uncertainties, strengthen their resilience, and better adapt to the new economic environment. Notably, the policy stance is one of standing ready to do more, if and when necessary. Singapore is well-positioned to do so as it has the financial resources to do so. More fiscal support, possibly in the form of an off-budget package, could be forthcoming later this year if economic conditions continue to soften from here. In the near-term, the broad US Dollar and US Treasury bond market direction may exert greater influence on Singapore Dollar and short-term Singapore Dollar interest rates.
President Donald Trump finally unveiled on 3 April 2025 a blanket tariff on 10% on all imports into the US as well as reciprocal tariffs on several countries. We believe this is not the end of road for tariffs. There is still room for negotiation, retaliation and further potential escalation.
Our analysis of tariffs has spanned from blanket tariffs, like what we got on 3 April 2025, to reciprocal tariffs, to sector specific tariffs. The ASEAN economies we cover were hard hit by tariffs as we had expected but the magnitude of the hit is much larger than we anticipated. This is partly based on the US computation of the tariffs imposed on it by trading nations resulting in hefty tariff rates and subsequently discounted differential tariffs.
Both are dramatic in their magnitude. These will have implications for growth, inflation, and fiscal and monetary policies. Admittedly, there are still some uncertainties. This pertains to the room to retaliate and/or negotiate. Although US Treasury Secretary Scott Bessent warned against retaliation, the strategy adopted by trading partners remains to be seen.
Significant downside risks to growth
Within ASEAN, Cambodia, Laos, Vietnam and Myanmar bear the bigger brunt of tariff increases, in terms of the magnitude of higher differential tariffs. This is followed by Thailand, Indonesia, Malaysia and the Philippines. India’s differential tariffs of 27% seems marginal compared to the long list of trade restrictions mentioned in the 2025 National Trade Estimate (NTE).
The blanket tariffs will come into effect on 5 April 2025, while reciprocal tariffs will come into effect on 9 April 2025. There are still some exemptions under the reciprocal tariff arrangements, including those items that are already under investigation including copper, pharmaceuticals, semiconductors, lumber articles, certain critical minerals, energy and energy products. There is a risk of tariffs on these products or higher blanket tariffs down the road.
The sharp escalation of tariffs rates, if realised, will have a hard-hitting impact on economic growth through the export channels. Based on import elasticities and our back of the envelope calculations, Vietnam will be hardest hit with GDP growth, followed by Thailand and Malaysia while Indonesia and India could be more insulated. Philippines, by our estimates, will be least impacted.
Central banks more inclined to support growth
We now expect regional central banks to become more supportive of growth, particularly in 2H25. We are adding rate cuts to our Vietnam, Thailand, Indonesia and India forecasts. We expect the State Bank of Vietnam and Bank of Thailand to cut by an additional 50 basis points (bps) in 2H25, while Bank Indonesia and Reserve Bank of India will likely cut by an additional 25bps on top our current forecast of 25bps. This implies an additional 50bps in rate cuts by end-2025. Although the growth impact is limited for Philippines, we expect that the country’s central bank, Bangko Sentral ng Pilipinas (BSP), will take the opportunity to lower rates further to mitigate downside risks. We, therefore, expect a cumulative 50bps in rate cuts in 2025.
Singapore: Still cautious
The silver lining is that 10% is relatively mild compared to China, Vietnam and many of the other ASEAN countries. Singapore’s resilience will depend on how well it adapts to shifting trade flows, potentially benefiting from companies diversifying away from the more heavily tariffed countries, while managing broader economic uncertainties and financial market volatility. But the indirect impact is through knock on effects through our role as trading, logistics and financial hubs. For Singapore, the top three NODX (non-oil domestic export) markets in 2024 are China (17%), US (15.8%) and Malaysia (8.7%). Moreover, there was no specific sectoral tariffs on semiconductors or pharmaceutical industries for instance. But the caveat is we have to wait and see what happens in the coming days and weeks.
For now, it is too early to say what the tariffs mean for Singapore. But the odds may be slightly skewed towards an easing of policy by Monetary Authority of Singapore.
Vietnam: Hardest hit
We reduce our 2025 GDP growth forecast to 5.0% YoY versus our previous forecast of 6.2%. Vietnam’s exports to the US totalled US$119.4bn in 2024, which can be reduced by as much as 35-40%, by our estimates. The impact on economic growth, however, is not straightforward particularly for 2025 considering that 1Q25 GDP growth was already relatively resilient at 6.6% YoY, by our estimates. Moreover, with semiconductors exports still exempted from the reciprocal tariffs’ announcements, the hit to exports will likely be reduced.
The authorities have been negotiating with the US in terms of trying to reduce tariffs and raising imports from the US. While the outcomes are still uncertain, we expect the authorities to remain focussed on expediting infrastructure spending and diversifying trade partners. The higher reciprocal tariffs on most goods, and likely impending tariffs on semiconductors, suggests that fiscal and monetary policies will have to be nimble. We now expect the State Bank of Vietnam to reduce its policy rate by 50bps this year compared to our previous forecast of no change.
Thailand: Next in line
The reciprocal tariff rates imposed on Thailand is 37%. Vuttikrai Leewiraphan, permanent secretary at the Ministry of Commerce, estimated that exports could be hit by US$7-8bn if tariffs on Thailand’s exports to the US were raised by 11%. This suggests a significant impact. However, with certain key items still exempt from tariffs (for the moment), we expect the hit to growth to remain significant at 0.8 percentage points (pp). We, therefore, reduce our 2025 GDP growth forecast to 2.0% from 2.8%.
While the authorities have been transparent about their intent to negotiate with the US, and the Thai authorities have agreed to import certain goods from the US, the outcome of further negotiations and the fate of the semiconductor tariffs remain uncertain. We now expect the Bank of Thailand (BoT) to reduce its policy rate by 50bps in 2025 to further bolster downside risks to growth, with the government continuing to pursue supportive fiscal policies.
Malaysia: Waiting for semiconductor tariffs
We reduce our 2025 GDP growth forecast to 4.3% YoY from 4.5% given the impact of weaker external demand as most of Malaysia’s trading partners are hit by tariffs. The relief for Malaysia’s exports, for the moment, is that semiconductor exports are still exempt from the reciprocal tariffs. This accounts for approximately a third of total exports to the US. Given the nature of the reciprocal tariff announcements, it seems like only a matter of time before semiconductor exports are slapped with tariffs. This will have a more significant impact on Malaysia’s GDP growth. The authorities have said that they will not pursue retaliatory tariffs and opt for negotiations.
While the stance of fiscal and monetary policy may not make dramatic shifts, it will likely lean towards becoming more growth supportive. The government plans to rationalise RON95 prices in a bid to reduce fuel subsidy expenditures. The government has stated that low-income groups will not be impacted. We see rising risks that this implementation could be delayed particularly if tariffs on semiconductor exports to the US are announced before 2H25.
If this price change materialises, Bank Negara Malaysia will be more inclined to look through supply-side shocks, but this will impact the timing of potential rate cuts to mitigate downside risks to growth. BNM could open the door to rate cuts in late 2025 or early 2026. If the price change is delayed, BNM could ease sooner.
Indonesia: Surprisingly hard hit
The reciprocal tariff rate of 32% is substantial and one of the most surprising, by our estimates. The economy is already hard hit by perceived uncertainties around domestic policy direction and cloudy fiscal policy outlook given weaker-than-expected revenue collections and budget reallocations. The higher-than-expected tariff rate will exacerbate these risks. We reduce our 2025 GDP growth forecast to 4.7% from 4.9% and expect that the worsening of current account deficit (1.4% of GDP in 2025 versus 0.6% in 2024) will put further pressure on the economy to maintain strong capital inflows even as the outlook for the latter remains uncertain.
The government and central bank will need to be nimble in their policy approach to prevent a further backsliding of sentiment. The government will have to ramp up communications and improve its perceived image on policy making.
Bank Indonesia (BI) has tied further rate cuts to the stability of the Indonesian Rupiah as the downside risks to growth becoming increasingly obvious. It is worth noting that the anecdotal activity data during the Eid holidays have been lower compared to 2024. We expect BI to now cut by a cumulative 50bps in 2025, compared to 25bps previously. However, the timing for BI rate cuts needs to become more proactive and less tied to currency outcomes to enable more timely growth support.
Philippines: Better by comparison
The reciprocal tariffs at 18% is the lowest in the region and the impact on GDP growth will also be concomitantly lower. Like Malaysia, Philippines exports to the US is biased towards semiconductors, which are still exempt from tariffs at the moment.
We expect GDP growth to be slightly lower at 5.9% YoY in 2025 versus 6.0%, previously. We expect BSP to follow on with two 25bps rate cuts for the rest of 2025, particularly as headline inflation remains well within BSP’s 2-4% target range.
India: In the middle but limited impact
India’s tariff rate of 27% looks more manageable compared to regional peers. However, there will be a modest hit to growth of 0.2pp considering weaker external demand. As a predominantly domestic demand driven economy, the impact of higher tariffs from the US will likely have sector specific impacts.
From a policy perspective, further simplification of non-tariff trade measures and continued negotiations with the US will likely keep the Indian economy in good stead. The Reserve Bank of India (RBI) has increased banking sector liquidity to allow for further rate cuts, in our view. We expect the RBI to reduce its policy rate by two 25bps rate cuts for the rest of 2025.
FDI investment flows could change
The reciprocal tariffs on ASEAN and India will hurt the ‘China+1’ strategy that has benefited the region for some years now. Although China’s tariff rate is still higher at 54% (reciprocal 34% plus previously imposed 20%), the elevated tariffs on Cambodia and Vietnam suggest that the allure of shifting production to these economies is reduced compared prior to the tariffs. It will, however, take time for global supply chains to adjust and in the interim, firms will either need to bear the brunt of the tariffs or pass it onto the consumer, complicating the picture for price pressures.
In the interim, the ASEAN markets will remain vigilant of lower goods coming in from China. China’s surplus with the ASEAN markets increased significantly in 2024 and we do not rule out further measures from these economies to protect against the inflows of goods at reduced prices from China.
