The International Monetary Fund (IMF) has projected that Asia’s economic growth will moderate next year, warning of mounting risks from the Iran war-induced energy shock, a possible correction in the artificial intelligence boom and spillovers from rising global bond yields.
In its Asia-Pacific regional outlook released on Thursday, 15 October, during its annual meetings in Bangkok, the global lender said uncertainty over the path of US monetary policy could keep the region’s financial markets volatile.
Growth forecasts
The IMF now expects Asia’s economy to grow 4.8% in 2026 and 4.4% in 2027. Both figures are higher than its April projections, but still mark a slowdown from the 5.0% expansion recorded in 2025.
The upgrades largely reflect the AI boom’s lift to Asia’s advanced economies, whose growth is expected to accelerate to 3.2% in 2026 from 2.5% last year. Emerging Asia remains the region’s main growth engine, but its expansion is likely to slow to 5.1% in 2026 from 5.6% last year as higher energy prices bite.
Volatile currencies and capital flows
The IMF noted that exchange rates and capital flows have grown more volatile since this year’s energy shock, with several emerging economies facing depreciation pressure. Foreign investment inflows into the region remain generally robust, but have coincided with some portfolio outflows, including from South Korean technology stocks.
The Fund expects the US monetary stance to keep tightening later this year. Combined with fiscal pressures in most major advanced economies, this is likely to keep pushing yields higher across Asia and the Pacific.
Downside risks
The IMF said risks to the outlook remain tilted to the downside. A prolonged stalemate in the Middle East conflict could keep commodity prices high and drain oil reserves.
A correction in AI demand could also weigh on global growth, with the impact likely to be especially pronounced in Asia given its deep exposure to the AI production chain.
Market stress among major sovereign issuers such as the US, the UK, the euro zone and Japan could spill over into Asian bond markets, lifting yields and worsening already-elevated fiscal vulnerabilities. With public debt and borrowing needs still high across much of the region, an abrupt tightening of financial conditions could further strain public finances by raising debt-servicing costs, the IMF said.
Focus on price stability
Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, told a press conference that while long-term inflation expectations in Asia remain broadly anchored, central banks should stay focused on price stability. He said they should communicate clearly and be ready to tighten where expectations are less anchored, frameworks less credible or inflation more persistent, adding that central bank independence must be maintained.
With public debt still above pre-pandemic levels, Srinivasan said room for additional fiscal spending is increasingly limited. He called for fiscal support to be targeted and temporary, and urged governments in the region to avoid blanket fuel subsidies or price controls, which could prove more costly.
The IMF meetings this week have been dominated by concerns over growing debt, rising bond yields and AI-related risks, adding to policymakers’ worries over an energy shock linked to the Middle East conflict that has driven broad-based increases in inflation.
