Economies in the Asia-Pacific region have shown resilience amid external and domestic challenges so far in 2025, posting stronger-than-expected economic growth in the first half of the year, according to the latest Regional Economic Outlook report of the International Monetary Fund (IMF).
However, the IMF warned that higher US tariffs and increasing protectionism will likely reduce demand for Asian exports and eventually weigh on growth in the near term. Domestically, the IMF added, slowing growth trends and social tensions pose additional challenges.
As such, the IMF stressed, reforms to make economic growth more resilient and sustainable will be critical, even after noting that regional economic growth in the first half of this year benefited from strong exports, partly due to frontloading in expectation of higher tariffs and a buoyant tech cycle.
Monetary and fiscal policy easing, the IMF said, further supported domestic demand in the region amid globally accommodative financial conditions and US dollar depreciation.
Despite a stronger-than-expected outcome in the first half of the year, the IMF reported that Asia’s GDP growth is expected to moderate somewhat in the second half, resulting in a modestly lower annual growth of 4.5 percent in 2025 compared with 4.6 percent in 2024.
Regional growth is projected to slow further to 4.1 percent in 2026, given the mounting negative effects of higher US tariffs and headwinds to medium-term potential growth. Risks to the regional outlook are tilted to the downside.
Growth figures for the Philippines were projected at 5.4 percent for this year and 5.7 percent in 2026.
The IMF acknowledged that while tariffs are lower than those announced in April 2025 and tentative new trade deals are emerging, the full negative effect of the tariff increases is uncertain and the intensification of trade tensions continues to be a major downside risk for the region.
Similarly, the IMF report said that while trade policy uncertainty has declined somewhat compared to April, it remains high and could weigh on investment and sentiment more than expected.
It likewise emphasized that tighter financial conditions due to domestic or global developments could amplify trade shocks and compound vulnerabilities, adding that economic vulnerabilities could amplify social tensions.
On the upside, the IMF report said the current AI-driven investment boom could deliver a stronger-than-expected boost to exports, investment and productivity in the region.
Further policy support, it said, could cushion shocks more than expected and lift growth prospects.
Thus, the IMF noted, the evolving global environment underscores the urgent need for policies to make growth more resilient and sustainable.
Domestic demand, particularly consumption, has remained soft, making the region more susceptible to changes in global demand and trade policies. In addition, while trade openness has supported growth in the manufacturing sector, broad-based productivity gains have stalled in recent years, along with a rise in capital misallocation.
Both macroeconomic policy support and structural reforms are needed to help Asian countries navigate the challenging global environment.
Monetary policy easing, the IMF said, is appropriate in countries with inflation below target. Additional easing may be expected in many countries to bring inflation back to target and ensure that inflation expectations are well-anchored.
The weakening US dollar, the IMF said, has helped reduce capital outflow pressures for countries in the region, providing additional room for policy rate cuts where needed.
Exchange rate flexibility, according to the IMF, should be the first line of defense in case of shocks, though judicious use of foreign exchange intervention – if needed to maintain stability – could be pursued in line with the Fund’s Integrated Policy Framework.
In some countries, temporary and targeted fiscal measures could support demand and help vulnerable groups affected by the tariff shock. The near-term fiscal stance should be calibrated to individual country circumstances. China, Korea, and Vietnam, the report pointed out, have introduced sizable fiscal packages to support demand and fund priority programs announced before the tariff shock.
In countries with high public debt, expansionary fiscal policy needs to be balanced with medium-term consolidation efforts to preserve debt sustainability.
Improving the adequacy and coverage of social safety nets in Asia, especially for the population in the bottom 20 percent of the income distribution, who have a high propensity to consume, could help support domestic demand.
A reduction in geopolitical tensions would also help reduce uncertainties and lift investment and productivity.
Even so, the IMF said, external challenges have reinforced recent internal challenges in the region. Domestic demand, particularly consumption, remains below pre-pandemic trends in many countries.
Persistent weaknesses in the service sector, property sector downturns, and sluggish consumer sentiment have contributed to a soft post-pandemic recovery in jobs and income growth, dampening consumption.
Institutional constraints in the region, including limited scope for fiscal support because of high debt, inadequate social safety nets or inefficiencies stemming from financial structures, have hindered a broad-based recovery of domestic demand.
In addition, the IMF added, while trade openness has supported growth in the manufacturing sector, broad-based productivity gains have stalled in recent years, along with a rise in capital misallocation.
These challenges, the IMF stressed, underscore the need for Asian economies to make growth resilient and sustainable by boosting domestic demand, particularly consumption, and reinvigorating productivity growth.
In the near term, the IMF advised that targeted fiscal and monetary policy should be used to smooth the impact of trade shocks and provide temporary support.
At the same time, structural reforms are essential for enhancing medium-term growth potential and rebalancing economies, it added. Such reforms should include measures to support the services sector, strengthen the efficiency of financial intermediation, reduce incentives for capital misallocation and mitigate the impact of population aging.
The IMF urged greater intraregional trade and financial integration to enhance growth resilience and support financial development. Policy tools should also be upgraded, while fiscal reforms would help manage large spending pressures and prepare for future shocks.
Finally, the IMF report said that emerging challenges and opportunities in artificial intelligence will need to be monitored and may call for refinements in regulatory frameworks.