Asia Stays the World’s Growth Engine, But the Energy Shock Tests Its Limits
The IMF expects Asia to grow 4.4% in 2026 and stay the world's main growth engine, even as an energy supply shock lifts inflation and narrows policy room.
Asia walked into 2026 in good shape. Growth held at 5 percent last year despite US tariffs imposed in April and a stretch of trade policy uncertainty, and exports stayed strong. Now a war in the Middle East and the energy supply shock that followed are pushing inflation up, eroding external balances, and shrinking the room policymakers have to respond.
The region still leads global growth, according to the International Monetary Fund's latest World Economic Outlook. The IMF projects Asian growth slowing to 4.4 percent this year and 4.2 percent in 2027, down from 5 percent. That forecast assumes the energy shock fades over the year. China and India are expected to deliver 70 percent of the region's expansion.
A strong second half carried into the new year
Many Asian economies grew faster than expected in the second half of 2025. The IMF credits a robust technology cycle, domestic policy support, and broadly accommodative financial conditions.
Demand for semiconductors stayed firm. That benefited Korea, Malaysia, and Singapore, all of which sit deep inside tech supply chains. Trade within the region picked up, and exporters diversified toward markets outside the United States to offset softer American demand for non-tech goods.
Domestic demand was less even. Consumption recovered at different speeds across countries, and investment stayed soft amid uncertainty and country-specific shocks.
Why the energy shock lands hard in Asia
Asia's exposure to oil and gas is unusually large. Net oil and gas imports equal roughly 2.5 percent of the region's output, and total oil and gas use comes to about 4 percent of GDP, nearly twice Europe's share, the IMF said.
The region consumes about 38 percent of the world's oil and 24 percent of its natural gas. It also refines about 35 percent of global crude, with capacity concentrated in China, India, Korea, and Singapore.
For some economies the dependence runs deeper. Oil and gas use tops 10 percent of GDP in Malaysia and Thailand, where transport and industry weigh heavily and gas-fired power plants rely on imported liquefied natural gas.
The Strait of Hormuz adds another pressure point. Asia buys about 80 percent of the LNG shipped through the waterway, which puts the region's refiners, utilities, and factories directly in the path of any disruption. Countries with thin stockpiles face the risk of local shortages of fuel and gas.
How the shock spreads through the economy
The IMF traces several channels. Higher energy prices worsen the terms of trade for importers, shifting income to fossil fuel exporters. Costlier fuel and electricity cut into household real incomes.
Because energy feeds into transport, industry, petrochemicals, and fertilizers, the shock lifts production costs across the board. That squeezes profits and, over time, can seed second-round inflation.
There is also a financial channel. Higher bond yields, a stronger dollar, weaker local currencies, and rising risk premia tend to amplify the hit, especially for fossil fuel importers.
Inflation is already moving. The IMF expects regional inflation to climb to 2.6 percent this year, up from 1.4 percent in 2025 and 0.4 percentage point above its January estimate. In emerging Asia, the forecast rises to 2.6 percent, driven partly by upward revisions for China and India. Japan's price pressures have eased, while Australia's 2026 inflation forecast was revised up sharply.
The downside is uneven
The reference forecast assumes a contained conflict that fades through the year. The IMF also models harsher paths.
Under its adverse scenario, a larger and slower-fading shock would cut growth in the region's major economies by almost 1 percentage point in 2026 against the baseline. The severe scenario, where the shock lasts well into 2027, would carry a cumulative output loss of about 2 percentage points by then, with headline inflation 2.3 percentage points higher.
The losses would not fall evenly. Economies that import energy, hold limited fiscal space, or face heavy exposure to the Middle East through remittances, tourism, or commodities like fertilizers would absorb the most damage. The IMF flags parts of South and Southeast Asia and Pacific island countries as the most vulnerable.
Korea is the standout exception in the baseline, lifted by its links to the technology cycle. Emerging Asia, still the main global growth engine, is set to slow by about half a percentage point to 4.9 percent this year before stabilizing.
The IMF's advice to the region is plain: protect vulnerable households, let prices adjust, keep inflation expectations anchored, and push ahead on structural reforms. The buffers that absorbed last year's tariff hit are thinner now, and a longer war would test them further.
