SINGAPORE – Formidable challenges ranging from the US-China trade conflict to geopolitical tensions and market volatility suggest that Singapore’s economy is in for a rockier ride in 2025.

Outcomes may exceed expectations, of course, but with the country’s key trading partners also facing the same issues, slower growth looks to be on the cards.

The Ministry of Trade and Industry (MTI) forecasts that real gross domestic product (GDP) growth will range from 1 per cent to 3 per cent in 2025. This will be less than the 4 per cent 2024 GDP growth estimate given by Prime Minister Lawrence Wong in his Dec 31 New Year speech.

1. Trade war

Much of the uncertainty around the global economic outlook stems from the potential imposition of severe tariffs by the new United States administration on its trading partners.

President-elect Donald Trump, who takes office on Jan 20, has vowed to increase tariffs by as much as 20 per cent on all trading partners, and a 60 per cent increase for China.

Even if Singapore avoids US tariffs, the trade war will elevate import prices globally, diminish demand and reduce trade volumes – an unfavourable situation for an economy reliant on exports and one that imports nearly all it consumes.

Most analysts believe that a full-scale retaliatory tariff escalation among the world’s three major economies – the US, China and the European Union – could reduce Singapore’s GDP growth by at least 1 percentage point from the top end of the MTI projection.

2. Slower China

Asia, including Singapore, is perceived as more susceptible to the economic performance of China, the world’s second-largest economy. The International Monetary Fund predicts that China will grow by 4.5 per cent in 2025, down from an estimated 4.8 per cent in 2024 and 5.2 per cent in 2023.

The anticipated slowdown in Chinese growth is not solely attributed to the heightened trade war with the US. The country has faced insufficient domestic consumption following a government crackdown on the real estate and technology sectors amid the pandemic that has resulted in plummeting property prices and rising unemployment.

This lack of demand has not only decreased China’s imports from its neighbours but has also led to significant manufacturing overcapacity. US tariffs and potential EU restrictions on its exports, may redirect this overcapacity shipments to newer markets, including those in Asia.

Increased exports from China to Asia could have adverse effects across the region, according to Japanese bank Nomura. Asian economies, depending on the extent of their economic ties with China, may face bigger trade deficits, pressure on corporate profits, reduced domestic production and less incentive to invest in capacity expansions.

3. Inflation and interest rates

Inflationary pressures from higher tariffs will complicate the management of monetary policies for Asian central banks, including the Monetary Authority of Singapore (MAS).

Central banks across trade-dependent Asia, where inflation otherwise has been on the decline in the past year, had planned rate cuts in 2025 to support economic growth in a year when the two largest global economies are likely to slow.

The MAS, which uses the currency to guide its monetary policy, was also expected to moderate the pace of the Singapore dollar’s trade-weighted appreciation.

However, the US Federal Reserve’s view on inflation and policy rates outlined on Dec 18 was not reassuring for any central bank looking to ease its policy stance.

The Fed signalled that it may only implement two quarter-point cuts in 2025, down from four as earlier indicated. It also raised its inflation forecast for 2025 from 2.1 per cent to 2.5 per cent – significantly above its 2 per cent target.

A scenario of fewer rate cuts in the US would limit the downside for short-term Singapore rates, such as the Singapore Overnight Rate Average, which influences mortgages.

4. Strong US dollar

The US dollar is perceived by global investors as a reliable store of value, particularly in times of economic turbulence. Consequently, it may become the preferred asset for many investors in 2025 if the outlook grows more uncertain.

A stronger dollar will make US exports pricier, which could hit its exports.

For the rest of the world, a stronger dollar translates to weaker local currencies, which will make everything imported from anywhere more costly. Higher import costs can elevate inflation, or at least slow the rate of price declines that had been the norm in the past year.

As a result, some central banks may halt their monetary easing or even reverse course and begin raising rates.

The MAS may have some flexibility as it uses the Singapore dollar’s trade-weighted value to manage inflation. However, if key regional trade partners – considered vulnerable to a combination of a weaker yuan and a strong greenback – defend their currencies, the MAS may find it challenging to ease the pace of Singapore dollar’s appreciation.

A stronger Singdollar amid declining global demand could hinder exports and economic growth.

5. Financial market volatility

The ongoing US stock bull market, led by technology companies, has rendered the index expensive in terms of valuation, meaning US firms need to post greater earnings growth in coming quarters to justify a buy recommendation.

The risk of financial losses from a possible US stocks sell-off is more global today than ever. The US market has increased its weightage in leading global indexes from 30 per cent in the 1980s to approximately 70 per cent today, indicating that investors worldwide are now heavily invested in it.

There are signs that investors are becoming concerned over the sustainability of the Wall Street rally, with analysts such as Mr Ruchir Sharma, chair of Rockefeller International, describing it as “the mother of all bubbles”.

A sell-off in the US market would send more investors to the safety of the greenback, exacerbating all associated problems, such as higher inflation and interest rates and lower growth in trade-dependent Asia.

6. Geopolitical conflicts

In addition to macroeconomic and policy concerns, an escalation of various global conflicts could hit investor sentiment worldwide. A significant deterioration in the conflicts in the Middle East or the war in Ukraine could disrupt global supply chains and impact trade volumes.

A report in September 2024 from EY-Parthenon noted that around 33 per cent of chief executives anticipated geopolitical disruptions and the shifting economic landscape to be among the most significant disruptive forces in 2025.

7. Commodity prices

While slower growth in China, the largest consumer of metals, energy and food commodities, has capped gains and, in some instances, lowered prices in 2024, escalating geopolitical tensions in 2025 that affect supply chains could lead to a resurgence in international energy and food prices.

A new round of tariff increases may also contribute to rising costs for food and metal commodities.

8. Supply chain rewiring

Since the onset of the US-China trade war in 2018, Singapore has emerged as a premier investment destination for semiconductor companies seeking to diversify their supply chains and avoid involvement in the conflict. Other nations have also played a role in rerouting Chinese exports to the US.

However, under the new Trump administration, shipments from trading partners are likely to undergo thorough inspections to determine whether nations are acting as backdoors for Chinese goods entering the US.

Vietnam, with an import share of 34 per cent from China, is particularly notable in this regard. Other Asean countries – Indonesia, Thailand, the Philippines and Malaysia – have also seen a sharp rise in Chinese imports along with exports to the US.

The response of multinational corporations to new restrictions on trade rerouting remains uncertain.

9. Tech war

The conflict over semiconductors and advanced technologies may become more complex, with major players likely to respond by halting new investments.

Industry experts have indicated that if the ongoing restrictions jeopardise the overall financial stability of chip manufacturers, they could inadvertently threaten investments in Singapore as well.

10. Emerging market risks

As major economies adopt increasingly protectionist policies, emerging markets with significant debt burdens are likely to suffer in terms of GDP growth.

The impact may be modest for most emerging markets outside China if there is only a slight increase in retaliatory tariffs between the US and China in 2025. However, those in Southeast Asia – many of which are crucial trade partners for Singapore – are particularly vulnerable to diminished demand from China.

Nonetheless, the risk of more aggressive trade protectionist measures, and consequently a more substantial impact on growth, remains high.

Trade-related uncertainties will likely lead to a period of heightened volatility in emerging markets assets, potentially tightening financial conditions, especially among those with weaker macroeconomic fundamentals.

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