IMF flags slower Asia growth as higher yields and energy shock raise risks

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IMF flags slower Asia growth

Highlights

The IMF now expects Asia's GDP growth to slow from 5.0% in 2025 to 4.8% in 2026 and 4.4% in 2027, mainly due to energy shocks and AI-related demand risks.
Exchange rates and capital flows have become more volatile across Asia since the 2024 energy shock, with depreciation pressures and portfolio outflows, especially from South Korean tech stocks.
The IMF warns that tightening U.S. monetary policy and fiscal pressures could lift yields and heighten debt vulnerabilities in Asia, with spillover risks from stress in major sovereign bond markets.

Updated regional outlook and key risks

As reported by Reuters, citing the International Monetary Fund in its Asia-Pacific outlook report issued during its annual meetings in Bangkok, the lender expects Asia's economy to grow 4.8% in 2026 and 4.4% in 2027. Those forecasts are higher than its April projections but still point to a slowdown from 5.0% growth in 2025.

The IMF says the revisions mainly reflect support from the AI boom in advanced Asian economies, where growth is expected to accelerate to 3.2% in 2026 from 2.5% last year. Emerging Asia, still the region's main growth engine, is expected to slow to 5.1% in 2026 from 5.6% last year because of the impact of higher energy prices.

The fund says risks remain tilted to the downside. A prolonged stalemate in the Middle East conflict could keep commodity prices elevated and deplete oil reserves, while a correction in AI demand could hit global activity and weigh especially heavily on Asia because of its broad exposure to the AI production chain.

Financial market pressure and policy response

The IMF says exchange rates and capital flows have become more volatile since this year's energy shock, with several emerging economies facing depreciation pressure. It adds that foreign investment inflows remain generally robust across the region, even as some portfolio outflows have appeared, including from South Korean technology stocks.

Uncertainty over the U.S. monetary policy path could keep Asian financial markets volatile, the IMF says. It expects the U.S. monetary stance to continue tightening later this year, and says the combination of tighter policy and fiscal pressure in major advanced economies is likely to sustain upward pressure on yields across Asia and the Pacific.

The report warns that market stress in major sovereign issuers including the U.S., 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 in financial conditions could increase debt-servicing costs and strain public finances further.

Asian central banks should stay focused on price stability and respond promptly if inflation pressures become more persistent, the IMF says. It also urges governments to keep fiscal measures targeted and temporary, and to avoid broad fuel subsidies or price controls that could prove more costly.

In our earlier article on the sell-off in Asian technology stocks tied to AI funding worries, we described how hotter-than-expected U.S. inflation revived fears of further Federal Reserve tightening and triggered a tech-led pullback across South Korea and Japan. We noted that higher borrowing costs were forcing investors to rethink the sustainability of debt-funded AI infrastructure spending, adding pressure to major chipmakers and related tech names.

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