Podcast Summary: "Tariffs Could Drag on Growth in Asia as Well as U.S."

Episode Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
• Episode: Tariffs Could Drag on Growth in Asia as Well as U.S.
• Release Date: April 25, 2025

Overview

In this insightful episode of Thoughts on the Market, Morgan Stanley’s chief U.S. economist, Michael Gapen, and chief Asia economist, Chetan Aya, delve into the significant implications of ongoing tariff tensions between the United States and China. Released on April 25, 2025, the discussion centers on revised growth forecasts for Asia, the potential impact on the U.S. economy, and the broader global trading environment. The hosts provide a detailed analysis of policy responses, investor sentiments, and key economic indicators to watch in the coming months.

1. Introduction and Context

Michael Gapen kicks off the episode by setting the stage for the discussion. He introduces the main topic: the recent adjustments to Asia’s growth forecast in light of escalating tariffs and the subsequent effects on the U.S. economy. Gapen emphasizes the critical nature of current trade tensions and their potential to reshape economic landscapes in both regions.

2. Asia’s Growth Forecast Amid Tariff Adjustments

Chetan Aya explains the initial stance that current U.S.-China tariffs are so prohibitive that they effectively halt trade transactions between the two giants [00:30]. He notes recent discussions on easing tariffs but highlights that even reduced rates remain significantly high, with a weighted average tariff expected to hover around 32%, a stark increase from the approximately 5% in early January [01:07]. Aya underscores the immense uncertainty this creates for regional investment growth, projecting a considerable slowdown.

Notable Quote:

“The weighted average tariff will still be around 32%, and this number was close to 5% in early January. So we're talking about a huge amount of uncertainty related to this tariff path.” — Chetan Aya [01:07]

3. Revisions to Asia's Growth Forecast

Gapen addresses the recent downward revision in Asia’s GDP growth projections. Aya details that Asia’s overall GDP growth is now expected to decline from 4.8% in Q4 last year to 3.6% by Q4 this year. Specifically, China’s growth forecast has been reduced from 5.4% to 3.7%, indicating a significant economic slowdown [02:05].

Notable Quote:

"For China, we think it’ll be the fiscal policy that will do the heavy lifting…" — Chetan Aya [02:45]

4. Policy Responses in Asia to Counteract Tariffs

Aya elaborates on the anticipated policy measures by Asian economies to mitigate the impact of tariffs. He expects a combination of monetary and fiscal policy easing across the region. For China, fiscal measures such as a 2.5% increase in GDP through infrastructure projects and consumer support programs are expected to be pivotal. Other Asian economies may rely more heavily on monetary tools, including rate cuts ranging from 50 to 150 basis points [02:52].

Notable Quote:

"We are expecting 50 to 150 basis points, depending upon the economy in the region in form of rate cuts…" — Chetan Aya [03:41]

5. Impact on the U.S. Economy

Transitioning to the U.S. economy, Gapen describes it as "living on the edge," implying a precarious balance between avoiding a recession and succumbing to economic pressures [04:11]. He emphasizes that while a recession is not imminent, the economy is dangerously close, primarily due to the sustained high tariff rates and the resulting uncertainties.

Notable Quote:

“We’re living on the edge where we’re not projecting a recession, but we’re close enough to one that it’s almost a coin toss.” — Michael Gapen [04:58]

6. Consumer and Business Confidence

Aya raises concerns about declining consumer and corporate confidence amidst ongoing policy uncertainties. Gapen responds by highlighting the dual pressures: lower consumer confidence, especially among lower and middle-income households affected by tariffs, and waning business confidence leading to reduced investments and potential layoffs. These factors could create negative feedback loops, increasing the risk of a recession [05:21].

7. Fed’s Policy Response to Tariff-induced Inflation

The discussion shifts to the Federal Reserve’s potential response to tariff-induced inflation. Aya references Fed Chair Powell’s assertion that tariffs are causing a temporary rise in inflation. Gapen forecasts that the Fed might delay rate cuts until 2026, focusing initially on controlling inflation rather than responding immediately to economic slowdowns. However, he notes that if the economy deteriorates more rapidly than expected, the Fed may adjust its stance accordingly [07:15].

Notable Quote:

"If we were wrong on the economy and it decelerates and moves into a recession more quickly than we would anticipate, then the Fed will ease." — Michael Gapen [07:15]

8. Key Data Points and Future Outlook

Gapen outlines several key indicators to monitor in the near term:

• Inflation Data: Particularly the pass-through of tariffs to consumer prices, starting with April’s data on autos [08:06].
• Trade Volumes: Including shipping container volumes and signs of reduced trade activity [08:15].
• Employment Figures: Watching for signs of hiring slowdowns or increased layoffs, beginning with April’s employment data [08:15].

These indicators will provide critical insights into whether the inflation impulse and economic slowdown forecasts hold true [08:15].

Notable Quote:

"We think there's a tension between how much uncertainty can be reduced on one hand and then on the other hand, how quickly volumes in the economy may slow." — Michael Gapen [04:11]

9. Differentiation Among Asian Economies

Aya differentiates Asian economies based on their trade orientations to assess their vulnerability to the ongoing trade slowdown. He identifies India and Australia as relatively less affected due to lower dependency on trade. In contrast, Korea, Taiwan, Thailand, and Malaysia, being more trade-oriented, are expected to bear a heavier burden. Although China has a slightly lower trade orientation compared to Korea and Taiwan, the high tariffs it faces necessitate a more pronounced growth slowdown [09:56].

Notable Quote:

"India and Australia are the ones we think will be relatively less affected from this trade slowdown and global growth slowdown." — Chetan Aya [10:15]

10. Conclusion

The episode wraps up with Gapen and Aya reiterating the critical nature of current tariff developments and their far-reaching economic implications. They encourage listeners to stay informed and consider the nuanced impacts on different economies. Gapen invites listeners to leave reviews and share the podcast to broaden its reach [10:46].

Key Takeaways:

• Sustained High Tariffs: Despite some easing, U.S.-China tariffs remain high, significantly impacting trade and investment in Asia.
• Revised Growth Forecasts: Asia’s GDP growth projections have been markedly downgraded, with China facing the most substantial slowdown.
• Policy Responses: Asian economies are adopting a mix of monetary and fiscal policies to counteract tariff impacts, though these measures may not fully offset the negative effects.
• U.S. Economic Outlook: The U.S. economy is precariously balanced, with the potential for recession hinging on tariff developments and consumer/business confidence.
• Federal Reserve’s Stance: The Fed is likely to prioritize controlling inflation over immediate rate cuts, potentially delaying monetary easing until 2026.
• Varying Regional Impacts: Trade-oriented Asian economies like Korea and Taiwan are more vulnerable to tariff-induced slowdowns compared to less trade-dependent nations like India and Australia.

Notable Quotes:

• Chetan Aya [01:07]: “The weighted average tariff will still be around 32%, and this number was close to 5% in early January. So we're talking about a huge amount of uncertainty related to this tariff path.”
• Michael Gapen [04:58]: “We’re living on the edge where we’re not projecting a recession, but we’re close enough to one that it’s almost a coin toss.”
• Chetan Aya [10:15]: “India and Australia are the ones we think will be relatively less affected from this trade slowdown and global growth slowdown.”

This comprehensive summary captures the essence of the episode, providing a clear and structured overview of the significant discussions and insights shared by Morgan Stanley's economists. It serves as a valuable resource for those seeking to understand the complex interplay between tariffs, Asian growth prospects, and the U.S. economic outlook without needing to listen to the full podcast.