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Asia to Remain Key Growth Driver Despite Energy Shock, IMF Says

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Asia is expected to remain the main engine of global growth despite rising risks from an energy supply shock tied to conflict in the Middle East, International Monetary Fund economists said Thursday.

IMF officials Andrea Pescatori and Krishna Srinivasan said the region entered 2026 on a strong footing, with resilient growth last year despite US tariffs and persistent trade uncertainty. IMF recently released its Regional Economic Outlook for Asia and the Pacific.

However, escalating conflict has driven up energy prices, lifting inflation, weakening external balances and limiting policy flexibility.

The IMF forecasts Asia's growth will slow from 5% in 2025 to 4.4% in 2026 and 4.2% in 2027, assuming the shock is temporary. China and India are expected to generate about 70% of the region's expansion.

Inflation is projected to rise to 2.6% this year from 1.4% in 2025. A prolonged or intensified shock could cut cumulative growth through 2027 by 1 to 2 percentage points.

Asia is particularly exposed due to its reliance on imported energy, with net oil and gas imports equal to roughly 2.5% of output. The region consumes about 38% of global oil and 24% of natural gas and depends heavily on shipments through the Strait of Hormuz. Supply disruptions could trigger shortages and spill over into supply chains, including fertilizers and petrochemicals.

The shock is expected to hit economies through multiple channels, including weaker trade balances, reduced household purchasing power, higher production costs and tighter financial conditions driven by rising interest rates and a stronger US dollar.

Growth is projected to moderate across most economies, though South Korea is likely to benefit from a strong technology cycle. Emerging Asia is expected to expand by 4.9% this year, while advanced economies also slow. Inflation trends vary, easing in Japan but remaining elevated in Australia and rising in China and India.

Risks remain skewed to the downside. In an adverse scenario, regional growth in 2026 could be nearly one percentage point lower than the baseline, while a more severe shock could result in cumulative output losses of about two percentage points by 2027.

The IMF said governments should focus on targeted, temporary support for vulnerable households while avoiding broad subsidies that distort prices and strain public finances. Central banks should remain flexible as prolonged shocks could fuel currency weakness and persistent inflation.

Asia can best cope by protecting vulnerable people, letting prices adjust, anchoring inflation expectations, and accelerating structural reforms, they said.

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