A drone view shows a container ship at a port in Zhoushan, Zhejiang province, China October 10, 2025. cnsphoto via REUTERS

By Leika Kihara

WASHINGTON (Reuters) -The International Monetary Fund revised up Asia's economic growth forecast on Thursday, but warned that renewed escalation in U.S.-China tensions could deal a heavy blow to a region heavily integrated in global supply chains.

Economic activity in the Asia-Pacific was holding up better than expected in April, despite the region bearing the brunt of U.S. tariffs, said Krishna Srinivasan, director of the IMF's Asia and Pacific Department.

But he warned that there were significant downside risks to the region's outlook, as the "dust on tariffs has not settled yet" and could still increase.

"When risks to the world materialize, Asia will lose a lot more. This is a region which is highly integrated in global supply chains, so when there are tensions between large economies like the U.S. and China, it will have a greater impact on Asia," he told a news conference.

Trade tensions between U.S. and China have intensified after Beijing expanded its rare earth export controls, prompting a threat from U.S. President Donald Trump to raise tariffs on Chinese goods by an additional 100% starting November 1.

The potential impact from the bilateral spat is not reflected in the IMF's latest projection for Asia's economy to expand 4.5% in 2025, slowing from 4.6% last year but up 0.6 percentage point from its estimate made in April. It projects growth to slow to 4.1% in 2026.

"The region is once again set to contribute the lion's share of global growth - about 60%, both this year and in 2026," Srinivasan said.

Exports were supported by firms front-loading shipments ahead of the tariff hikes and a surge in intra-regional trade, he said. A technology boom driven by artificial intelligence also lifted exports, especially from South Korea and Japan.

Booming equity markets, lower long-term borrowing costs and a weak dollar have also helped, Srinivasan said, though warning that risks to the outlook were skewed to the downside.

Interest rates could rise again especially if trade policy uncertainty or geopolitical tensions intensify, while tightening financial conditions could increase the debt burden for some countries and stifle growth, Srinivasan said.

Concerted efforts to pursue reforms to boost trade and investment will help fuel durable growth for years to come, he added.

To mitigate the hit from external shocks, Asian countries can pivot their economies away from their reliance on exports toward greater domestic demand, Srinivasan said.

Greater regional integration would also increase gross domestic product as much as 1.4% over the medium term for all of Asia, he added.

(Reporting by Leika Kihara; Editing by Andrea Ricci)