IMF Warns Asian Growth to Moderate as Energy Shock, AI Risks and Rising Yields Cloud Outlook

BANGKOK — The International Monetary Fund on Thursday projected Asia's economic growth would moderate next year, warning of heightening risks from the Iran war-induced energy shock, a potential correction in the AI boom and spillovers from rising global bond yields.

In a report on the Asia-Pacific outlook issued during its annual meetings in Bangkok, the lender said uncertainty over the US monetary policy path could keep Asian financial markets volatile. "Exchange rates and capital flows have become more volatile since the energy shock this year," the IMF said, with several emerging economies experiencing depreciation pressures.

The IMF now expects Asia's economy to grow 4.8 per cent in 2026 and 4.4 per cent in 2027, higher than its April projections but still slowing from a 5.0 per cent expansion in 2025. The upward revisions largely reflected the boost from the AI boom for advanced Asian economies, whose growth is expected to accelerate to 3.2 per cent in 2026 from 2.5 per cent last year.

Emerging Asia remains the region's main growth engine, but growth there is expected to moderate to 5.1 per cent in 2026 from 5.6 per cent in 2025, hit by higher energy prices.

Risks tilted to the downside

"Risks to the outlook remain tilted to the downside," the IMF said, warning that a prolonged stalemate in the Middle East conflict could keep commodity prices high and deplete oil reserves.

A correction in AI demand could weigh on global growth, with effects likely to be particularly pronounced in Asia given its extensive exposure to the AI production chain. With global yields rising, market stress in major sovereign issuers such as the US, the UK, the euro zone and Japan could spill over into Asian bond markets, pushing up yields and exacerbating already-elevated fiscal vulnerabilities.

"With public debt and borrowing needs remaining 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.

The warning comes as this week's IMF meetings have been dominated by worries about growing debt, rising bond yields and risks from the AI boom, concerns that add to policy headaches from an energy shock that has driven broad-based rises in inflation. Markets reflected those fears on Thursday: Japan's Nikkei share average tumbled nearly 5 per cent, with tech stocks hit hard by concern over the AI sector's profitability, while hot US inflation figures sparked fears of higher interest rates, Reuters reported.

While foreign investment inflows to the region remain generally robust, they have coincided with some portfolio outflows, such as from South Korean technology stocks, the IMF said.

Central banks urged to stay focused on price stability

With long-term inflation expectations in Asia broadly anchored, central banks should continue to focus on price stability, Krishna Srinivasan, director of the IMF's Asia and Pacific Department, told a press conference.

"Central banks should communicate clearly and be ready to tighten where expectations are less anchored, frameworks are less credible, or inflation is more persistent," he said. "To support this, the independence of central banks must be maintained."

With public debt still above pre-pandemic levels, the scope for additional fiscal spending is increasingly constrained, Srinivasan said. Fiscal policy should be targeted and temporary, he said, urging countries in the region to avoid blanket fuel subsidies or price controls that could be more costly.

The US monetary stance is expected to continue to tighten later this year, the IMF noted. "The combination of monetary policy tightening and fiscal pressures in most major advanced economies is likely to keep upward pressures on yields across Asia and the Pacific."