IMF Sees Asia Growth Slowing Next Year, Warns on AI Correction and Rising Bond Yields

BANGKOK — The International Monetary Fund on Thursday projected Asia's economic growth will 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," with several emerging economies experiencing depreciation pressures, the IMF said. Foreign investment inflows to the region remain generally robust, but such moves have coincided with some portfolio outflows, including from South Korean technology stocks.

The IMF now expects Asia's economy to grow 4.8 per cent in 2026 and 4.4 per cent in 2027 — above its April projections but still slowing from a 5 per cent expansion in 2025. The 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 will likely see growth moderate to 5.1 per cent in 2026 from 5.6 per cent in 2025, hit by higher energy prices, the report said.

"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.

The lender flagged two additional fault lines. 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. And with global yields rising, market stress in major sovereign issuers — the US, the UK, the euro zone and Japan — could spill over to 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," it said.

"The US monetary stance is expected to continue to tighten later this year. 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," the IMF said.

The meetings have been dominated by worries about growing debt, rising bond yields and risks from the AI boom, Business Times reported — concerns that add to policymakers' headaches over an energy shock, blamed on the Middle East conflict, that has driven broad-based rises in inflation. Japan's Nikkei share average tumbled nearly 5 per cent on Thursday as tech stocks were hit hard by concern over the AI sector's profitability, while hot US inflation figures sparked fears of higher interest rates, the outlet reported.

On policy, the IMF said Asian central banks should remain focused on price stability and respond promptly if inflationary pressures become more persistent, according to The Star. Long-term inflation expectations remain broadly anchored across the region, Business Times reported, citing Krishna Srinivasan, director of the IMF's Asia and Pacific Department.

"Central banks should communicate clearly and be ready to tighten where expectations are less anchored, frameworks are less credible, or inflation is more persistent. To support this, the independence of central banks must be maintained," Srinivasan told a press conference, as reported by Business Times. With public debt still above pre-pandemic levels, the scope for additional fiscal spending is increasingly constrained, he added.

Fiscal policy should be targeted and temporary, the IMF said, urging countries in the region to avoid blanket fuel subsidies or price controls that could prove more costly.