Asia growth improves but ADB warns of persistent headwinds

MANILA: Economic growth across Asia is expected to remain subdued despite a modest improvement in outlook, as lingering disruptions from the conflict in the Middle East continue to weigh on supply chain and production costs, according to the Asian Development Bank.

The Manila-based bank forecast the region’s economy will expand 4.9% in 2026, up from the 4.7% estimate in a special update issued after the Middle East conflict disrupted global energy markets. The projection remains below the 5.1% estimate in the bank’s regular April Asian Development Outlook.

Inflation is projected at 4.3% in 2026, down from the 5.2% forecast in the bank’s April update as oil prices and supply conditions gradually stabilize. Even so, the figure remains above the 3.6% projection in the bank’s regular April outlook.

Inflation is expected to ease to 3.4% in 2027, though the ADB cautioned the conflict’s effects could spread beyond energy markets and feed through to the broader economy with a lag.

Strong demand for semiconductors tied to AI investment has helped cushion the impact of higher energy prices, particularly in advanced Asian economies such as Taiwan, China, South Korea and Hong Kong, ADB chief economist Albert Park said in a Bloomberg TV interview on Thursday.

The improved outlook reflects lower oil prices and easing supply disruptions since the height of the conflict. Even so, the ADB said risks remain tilted to the downside, including a renewed escalation of the war, prolonged energy market uncertainty, tighter financial conditions and a deeper property downturn in China.

“The Middle East conflict has lasted longer than assumed in April, leading to prolonged disruption to energy and supply chains that has raised production costs and will dampen regional activity more than previously anticipated,” the bank said.

It also flagged risks from disruptions to shipping routes and adverse weather, including El Niño, warning that they could push up food prices by affecting agricultural production and trade flows.

The ADB raised its growth forecast for advanced economies in Asia and the Pacific to 2.6% from 2.2% in April, citing strong external demand for electronics and machinery driven by the AI boom in South Korea, Taiwan, Japan and Singapore.

“We are overall bullish on the AI movement,” Park said. “Eventually we should start to see higher productivity growth for economies that start to adapt AI more broadly.” Still, he warned that the benefits of AI are likely to be uneven across Asia, with countries that lack digital capabilities at risk of falling further behind.

Meanwhile, the bank advised governments against fossil fuel subsidies to improve fiscal resilience while preserving incentives for energy conservation.

“Governments should rely primarily on temporary, well-targeted measures that protect vulnerable households without compromising fiscal sustainability or blunting incentives,” the bank added.