Southeast Asia’s Economy Faces Turning Point Amid Tariff Pressures, Says McKinsey

Southeast Asia’s promising economic momentum from the second quarter of 2025 proved short-lived, with the third quarter delivering a notably softer and highly divergent performance across the region, according to the latest Quarterly Economic Review from McKinsey & Company.

Key takeaways

• Regional growth diverged sharply, with Vietnam and Malaysia leading the pack while the Philippines and Thailand recorded their weakest performance since 2021.
• Central banks across the region adopted a broadly dovish stance, cutting rates to stimulate economies as inflation remained contained.
• External shocks like US tariffs and geopolitical caution softened investment and trade, though E&E exports provided a resilient boost for key nations.

The report, which analyzes the economies of six major nations, highlights that the dissipation of “front-loading effects” and the full implementation of higher US tariffs have begun to reshape the regional landscape, creating clear economic leaders and laggards.

The Great Divergence: Vietnam Leads, Thailand and Philippines Slump

The third quarter saw a pronounced bifurcation in growth trajectories. Vietnam emerged as the region’s top performer, recording an impressive 8.2% GDP growth, fueled by resilient production activity and strong investor confidence. Malaysia also accelerated, posting a 5.2% growth rate, benefiting significantly from sustained global demand for Electrical & Electronics (E&E) products and healthy investment inflows, including in key sectors like data centers.

In stark contrast, the Philippines and Thailand experienced significant slowdowns, recording growth rates of 4.0% and a meager 1.2%, respectively, marking their weakest quarterly performances since 2021. This deceleration was attributed to broad-based underperformance and persistent domestic challenges. Meanwhile, Indonesia sustained a steady 5.0% growth, and Singapore revised its full-year growth targets upward despite a slight deceleration to 4.2% for the quarter.

Central Banks Pivot Dovish as Inflation Remains Benign

In response to moderating domestic activity and external headwinds, central banks across the region adopted a broadly dovish stance. With inflation remaining contained, often at or below national targets, policymakers seized the opportunity to implement accommodative measures to bolster growth.

Bank Indonesia led the way with a bold approach, executing three consecutive policy rate cuts during the quarter, bringing its key rate to the lowest level since October 2022. The central banks of the Philippines, Thailand, and Malaysia also implemented single rate cuts, with Malaysia’s being its first in five years. Singapore and Vietnam were the outliers, holding their rates steady. This dovish pivot signals a widespread priority for economic stimulation over inflation containment in the near term.

Mixed Signals in Trade and Investment

The investment landscape proved equally mixed, underscoring rising geopolitical and macroeconomic caution. While Vietnam and Malaysia continued to attract robust Foreign Direct Investment (FDI), Indonesia and the Philippines faced headwinds. Indonesia, in particular, recorded its largest quarterly fall in FDI since the first quarter of 2020, as global uncertainties dampened investor sentiment.

On the trade front, overall momentum remained steady, primarily propped up by resilient global demand for E&E products, which bolstered exports in Malaysia, the Philippines, and Vietnam. However, the impact of tariffs was evident: Singapore’s non-oil domestic exports (NODX) contracted unexpectedly, largely due to a steep decline in shipments to the United States.

In summary, the third quarter of 2025 has offered a clearer glimpse into a fragmented economic future for Southeast Asia, where structural resilience and strategic industrial positioning, particularly in the E&E supply chain, will increasingly differentiate the top performers from those struggling with domestic fragilities and external shocks.