- Banking
- Wealth
- Privileges
- NRI Banking
- Treasures Private Client
- US: Moody’s downgrade, coupled with Trump’s push to extend tax cuts, raises concerns over a worsening debt path and future inflation pressures
- China: Continued policy easing warranted amid weak credit growth, fragile household sentiment, and subdued private investment
- India: India remains well-positioned to benefit from trade diversion flows and shifting global supply chains, supported by bilateral agreements and a stable tariff outlook
- Thailand: While Thai GDP remained resilient in 1Q25, rising trade tensions, weak private demand, and industrial headwinds have prompted a downgrade in the 2025 growth outlook
- The Week Ahead: Keep a lookout for US Change in FOMC Rate Decision; China CPI
Related Insights
US: Macro risks reignite. Moody’s joined its ratings peers on Friday (16 May) to downgrade the US senior unsecured ratings to Aa1 from Aaa. It also changed the US fiscal outlook to stable from negative. Moody’s rationalised its action on the basis of an already large debt (98% of GDP) and deficit (6.4% of GDP) situation, coupled with President Trump’s plans to make the 2017 tax cuts permanent, on top of providing additional tax cuts. Moody’s sees trillions in added deficit and debt ahead, projecting debt/GDP to rise to nearly 135% by 2035. The US seems destined for higher yields.
Globally, outside of the US, inflation risks have been muted. Demand is soft and the investment environment is facing uncertainties around trade wars. Sustained currency appreciation against the USD and a marked decline in commodity prices have added to the fading of inflation concerns. One major exception to that narrative is the US which is facing a striking policy-induced upward risk to the price level.
As noted by Fed Chair Powell at a speech last week, policies undertaken by the Trump administration have led to a fundamental shift in price expectations. Recent favourable developments in the US-China trade talks mask the fact that this year’s trade policy measures have taken US import tariffs to levels not seen since the 1940s. These tariffs—even if settled at 30% on China and 10% on the rest of the world, along with assorted rates on selected sectoral imports—will contribute to margin compression for firms and/or price passthrough at the retail level. Thanks to on-again, off-again tariffs and other trade restrictions, there have been episodes of sudden stop and resumption of orders and shipments. These are bound to affect sentiments and prices.
The University of Michigan’s latest readings are dramatic. The recent jump in inflation expectation and correction in consumer sentiment reflect crisis-type magnitudes. The fact that these shifts have yet to materialise in higher inflation or lower purchases should not be a cause for complacency—it may well be just a matter of time.
A combination of tight labour market and rising money growth would have caused some upside risks to inflation in any case. Combine this with trade war matters and firms have a few excuses to raise prices in the near term.
The fact that weakness in commodity prices has not managed to dent inflation expectations or consumer sentiment is troublesome. Equally concerning is the fact that businesses are already reporting a sharp rise in input prices. The survey readings reflect pressures akin to 2022 which was a time of much higher inflation. Regional manufacturers’ surveys warrant particular attention as they are likely to be at the frontline of the tariff mayhem.
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