The Asia-Pacific region’s already fragile recovery is facing new headwinds as escalating geopolitical tensions threaten to disrupt global supply chains and energy markets, Moody’s Analytics said in its weekly economic briefing.
In the wake of the United States’ bombing of Iranian nuclear facilities and Iran’s retaliatory closure of the Strait of Hormuz—a chokepoint for nearly 20% of the world’s oil shipments—markets are bracing for renewed volatility and economic pressure.
Philippines delivers another rate cut
In an effort to bolster domestic growth, the Bangko Sentral ng Pilipinas (BSP) trimmed its benchmark interest rate by 25 basis points to 5.25% during its June policy meeting. This marks the second cut in 2025, following a sustained decline in inflation.
While local conditions have justified easing, external threats now loom larger. “The geopolitical shock in the Middle East will inevitably put upward pressure on global energy prices,” Moody’s Analytics noted in its latest preview. “This may complicate BSP’s disinflation trajectory if oil supply disruptions persist.”
China’s investment slows, stimulus still on hold
China continues to battle weak investment sentiment. Fixed asset investment (FAI) grew just 3.7% year-on-year through May, decelerating for the third consecutive month. Notably, real estate investment plunged 10.7%, as the sector remains mired in a deep structural downturn.
Despite these challenges and the threat of external demand shocks, China’s panel banks held their benchmark one- and five-year loan prime rates steady at 3% and 3.5%, respectively. Analysts expect further easing only if indicators weaken more significantly, especially as deflationary risks persist.
Japan inflation steady, but risks loom
Japanese inflation showed little movement in May, with headline inflation slipping slightly to 3.5% while core inflation rose to 3.7%. Super-core inflation—excluding all food and energy—remained muted at 1.6%, signaling weak domestic demand.
Though the Bank of Japan remains cautious, rising oil prices could complicate its outlook. Japan, a net energy importer, is particularly vulnerable to Middle East tensions. Any prolonged disruption in oil shipments through the Strait of Hormuz could stoke headline inflation and weigh on real consumption.
South Korea and Thailand turn to policy support
South Korea’s consumer sentiment index, due Tuesday, is projected to rise to 102.5 from 101.8 as newly elected President Lee Jae-myung’s policy agenda stabilizes investor confidence. A supplementary budget and a more dovish monetary stance are expected to support growth.
Thailand, however, is bracing for deeper economic woes. The Bank of Thailand is widely expected to lower its policy rate by 25 basis points to 1.5% amid falling tourist arrivals and weakening global trade. The surge in oil prices following the Hormuz closure could further erode consumer purchasing power and dampen investment appetite.
Australia eyes disinflation, but Middle East adds uncertainty
Australia’s May inflation data, due Wednesday, is forecast to show headline inflation easing to 2.3% year-on-year. However, energy-linked volatility stemming from Middle East tensions may delay the Reserve Bank of Australia’s next move. Should inflation dip unexpectedly to 2.2%, an 8 July rate cut remains on the table, but a spike in global oil prices could upend that scenario.
India’s output to slow as exports falter
India is expected to report a mild deceleration in industrial production growth for May, with a projected increase of just 2.5% compared to April’s 2.7%. Pharmaceutical and chemical exports—sensitive to global demand—are likely to face renewed strain due to slowing Western economies and rising input costs from surging oil prices.
Hong Kong trade recovers—for now
Hong Kong’s merchandise trade data, out Thursday, is expected to show double-digit growth in exports and imports, reflecting stronger electronics demand and progress in U.S.-China trade talks. However, the recent Middle East escalation could yet threaten global shipping lanes and delay supply chains, posing downside risks to future trade performance.
Outlook: A test of resilience
The Asia-Pacific region had been poised for a cautious rebound entering the second half of 2025. However, the sudden geopolitical shock from the U.S.-Iran conflict has injected a new layer of uncertainty. While central banks across the region continue to prioritize monetary support, surging oil prices and potential disruptions to trade routes may force policymakers to walk a finer line between stimulus and inflation control.
Moody’s Analytics warns, “The path forward will depend heavily on how long the Strait of Hormuz remains closed and how global energy markets respond. Central banks may find themselves juggling competing pressures—stimulating growth while guarding against imported inflation.”