Southeast Asia (SEA) stands at a moment of recalibration in 2025. Over the past two decades, the region has been a consistent engine of global growth, fuelled by export-led industrialisation, expanding consumption and rapid integration into global value chains. However, the region is now entering a phase of moderation. Forecasts for 2025 and 2026 have been revised downward, reflecting an increasingly uncertain international environment, cooling demand in major economies and domestic structural challenges that weigh on long-term potential.

Although economic growth in SEA remains above the global average, the downward trajectory suggests that familiar drivers are losing strength. Consumption continues to hold up, supported by relatively benign inflation and labour market stability, yet investment momentum has weakened and export prospects remain subdued. At the same time, governments have limited budgets, giving them less room to increase spending during economic slowdowns. While individual countries display different levels of resilience, the region as a whole must adapt to a shifting global landscape by pursuing structural reforms, strengthening institutions and enhancing regional cooperation.

The Asian Development Outlook [ADO] September 2025 examines the evolving economic dynamics of SEA. It reviews the overall macroeconomic outlook, explores the interplay of domestic demand and external headwinds, analyses inflation and policy responses, and delves into country-specific developments. It then turns to structural challenges, risks and policy imperatives before concluding with reflections on the region’s broader trajectory.

Cautious trajectory of regional growth

The assessment of SEA’s economic growth outlook in September 2025 represents one of the sharpest downward revisions among the subregions in Asia. With the exception of Indonesia, which has maintained steady projections, all major SEA economies have seen their growth figures revised downward. The moderation is linked primarily to external economic weakness. Global trade demand has slowed significantly in 2025, particularly in advanced economies such as the United States and the European Union, as well as in the People’s Republic of China. This shift poses clear challenges for SEA, which relies heavily on exports of manufactured goods, commodities and intermediate products. Export performance was temporarily bolstered in early 2025 by a wave of front-loaded shipments, as firms rushed to fulfil orders before new tariffs took effect in major markets. Yet this proved a short-lived boost, leaving the outlook for the remainder of the year and into 2026 subdued.

Despite weaker exports, domestic demand continues to provide resilience. Household consumption remains the primary driver of growth, supported by stable employment, remittance inflows in economies like the Philippines and government transfers in countries such as Indonesia. Public investment also plays an important role, particularly where governments have accelerated infrastructure spending or introduced targeted subsidies. However, the strength of domestic demand is uneven and, in some economies like Thailand, it has proven insufficient to compensate for external drags.

Inflation and monetary policy dynamics

The inflation environment across SEA has become more favourable in 2025. Falling commodity prices, relatively stable currencies and subdued demand have pushed inflation within or even below central bank target ranges. Malaysia’s inflation is expected to average 2.4 per cent in both 2025 and 2026, that in the Philippines around 2.2 per cent in 2025, rising to 3 per cent in 2026, and in Vietnam, below 4 per cent. Thailand and Singapore report some of the lowest inflation in the region, both hovering below 1 per cent. Indonesia, while facing some upward pressure, remains broadly stable.

This leaves central banks with more room to ease policy. For instance, Bank Indonesia cut its policy rate in July 2025, signalling a willingness to prioritise growth in the face of external weakness. The Philippines and Malaysia also retain room to support domestic demand through monetary easing, if conditions so require. At the same time, central banks remain cautious. The risk of renewed commodity price volatility or sharp exchange rate movements persists, particularly in an environment of global uncertainty and shifting capital flows. Therefore, authorities balance their supportive stance with vigilance, seeking to safeguard financial stability while stimulating growth.

Fiscal policy and the limits of stimulus

Governments across SEA have sought to counterbalance external weakness with fiscal measures. Indonesia introduced a stimulus package that included direct cash transfers, food assistance and transport subsidies, alongside raising its fiscal deficit ceiling to accommodate higher spending. Vietnam accelerated the disbursement of public investment, achieving record levels of budget utilisation in the first half of 2025. Thailand leaned on infrastructure spending as a counterweight to weak household consumption and falling tourist arrivals.

Yet fiscal space remains constrained. Public debt levels have risen across much of the region, reflecting both the lingering impact of pandemic-era measures and ongoing development needs. This leaves little room for expansive, broad-based stimulus without risking debt sustainability. The ADO emphasises the importance of targeting public spending on projects with high economic and social returns, particularly in infrastructure, health and education. For smaller economies with limited fiscal capacity, reliance on concessional finance and development assistance remains significant.

Country narratives: Differentiated paths

Although united by common external challenges, SEA economies display varied domestic dynamics. Indonesia continues to be the region’s anchor of stability. Its growth projections hold at 5 per cent for 2025 and 5.1 per cent for 2026, making it the only major ASEAN economy not subject to downward revision. Strong consumption, government stimulus and stable inflation underpin this resilience. However, industrial output has softened and investment has slowed, revealing vulnerabilities that could weigh on momentum. The government’s fiscal support, while crucial in the short term, must be carefully managed to avoid longer-term fiscal strain.

Malaysia, in contrast, has experienced a notable softening. Growth is projected at 4.3 per cent in 2025 and 4.2 per cent in 2026. Private investment has contracted sharply, reflecting uncertainty among businesses. Although foreign investment approvals rose, domestic firms scaled back spending. A relatively resilient labour market, with unemployment around 3 per cent, sustains household consumption, but this cannot fully offset external weakness. Malaysia’s challenge lies in reviving domestic investment confidence while navigating global trade headwinds.

The Philippines retains a relatively strong outlook but faces downward revisions, with growth now expected at 5.6 per cent in 2025 and 5.8 per cent in 2026. Domestic demand remains robust, buoyed by steady remittances, low unemployment and rising wages. However, net exports remain a drag as imports outpace exports. The economy is thus highly reliant on consumption, with investment and trade performing unevenly. Inflation is subdued, granting the central bank space to manoeuvre, but fiscal policy is constrained by high public spending commitments.

Singapore is projected to grow by just 1.6 per cent in 2025 and 1.5 per cent in 2026, reflecting its vulnerability as a small and highly open economy. The early benefit of front-loaded exports has dissipated, leaving both manufacturing and services struggling. With inflation below 1 per cent, macroeconomic stability is not in question, but external weakness limits growth potential. Singapore’s trajectory underscores the challenges faced by economies deeply dependent on global trade flows.

Thailand has experienced one of the steepest downward revisions, with growth expected at just 1.8 per cent in 2025 and 1.6 per cent in 2026. Weak household spending, sluggish private investment and declining international tourist arrivals compound the drag from exports. The government has turned to infrastructure investment to prop up activity but confidence remains low. Thailand’s growth profile reveals the risks of structural stagnation when domestic and external drivers falter simultaneously.

Vietnam remains the region’s most dynamic performer, even with a modest downward revision. Growth is forecast at 6.3 per cent in 2025 and 6 per cent in 2026. Strong foreign direct investment disbursement, robust public investment and solid trade flows continue to support resilience. Nevertheless, the imposition of tariffs by the United States and the softening of global demand raise risks. Vietnam’s success in accelerating public investment, reaching its highest execution rate since 2018, demonstrates the potential of effective fiscal management in sustaining momentum.

Myanmar continues to face significant difficulties, with growth projected at just 1.1 per cent in 2025. Political instability, structural fragility and limited external engagement constrain prospects. Smaller ASEAN economies such as Cambodia, Lao PDR and Timor-Leste remain highly dependent on external conditions, development assistance and commodity cycles, leaving them vulnerable to shifts in the global environment.

Structural challenges and long-term imperatives

Beyond short-term fluctuations, the ADO stresses the structural issues that weigh on SEA’s long-term trajectory. Productivity growth has slowed in many economies, especially in agriculture and low-value manufacturing. Without significant innovation, digital transformation and skill upgrading, the region risks being caught in a middle-income trap. Labor market dynamics also pose challenges, as some economies face aging populations while others must generate sufficient high-quality jobs for young entrants.

Infrastructure gaps remain evident, particularly in transport, logistics and energy. These deficiencies not only limit domestic productivity but also weaken regional connectivity, which is essential for sustaining value chain integration. Governance and regulatory quality also remain uneven, with weak institutions, cumbersome bureaucracy, and policy uncertainty deterring investment. Environmental and climate-related vulnerabilities are particularly acute. SEA is one of the most disaster-prone regions in the world and climate risks threaten both livelihoods and infrastructure.

To address these constraints, the ADO emphasises the need for reforms in governance, regulatory frameworks, human capital development and environmental resilience. Public-private partnerships can mobilise additional resources, but only if supported by strong institutional capacity and transparent frameworks. Regional co-operation under ASEAN provides an avenue for harmonising standards, expanding trade and pooling resources for climate adaptation.

Risks and policy recommendations

The risks to SEA’s outlook remain significant. Escalating global trade tensions, a deeper-than-expected global slowdown or renewed commodity price volatility could further erode growth. Financial instability, stemming from capital outflows or currency pressures, poses an additional threat. Climate shocks, such as typhoons, floods and droughts, remain ever-present risks for a region with high environmental vulnerability.

In response, the ADO outlines a balanced policy agenda. Fiscal policy must focus on efficiency and sustainability, targeting investments that yield long-term benefits while safeguarding debt stability. Monetary policy should continue to support growth where inflation allows, but remain vigilant to external shocks. Structural reforms to boost productivity, strengthen institutions and promote innovation are essential for medium-term resilience. Regional co-operation should be deepened, particularly in supply chain integration, climate resilience, and financial co-ordination. By aligning short-term stabilisation with long-term transformation, SEA can navigate current headwinds while laying the foundation for renewed dynamism.

In sum

The ADO September 2025 provides a sobering yet constructive assessment of SEA. The region remains resilient, but its growth momentum is clearly moderating under the weight of global trade tensions, weaker external demand and enduring structural challenges. With growth forecasts revised downward, the narrative of an unstoppable Southeast Asian rise is tempered by a recognition of vulnerabilities.

Nevertheless, opportunities remain. Economies such as Indonesia and Vietnam show that robust domestic demand, effective policy and strong investment can sustain relatively high growth even in adverse conditions. Others, such as Singapore and Thailand, highlight the risks of dependence on external cycles without adequate domestic reform.

The overarching message is clear: SEA cannot rely on past growth models alone. To sustain momentum, it must strengthen domestic foundations, invest in productivity and innovation, and deepen regional co-operation. If governments can strike a balance between immediate stabilisation and long-term reform, the region may emerge from this period of uncertainty not diminished, but more resilient and prepared for the challenges ahead.

Extract from a report by the Asian Development Bank on “Asian Development Outlook September 2025: Growth Slows As a New Global Trade Environment Takes Shape”.