IMF Warns Asia Growth to Slow, Flags Energy Shock and AI Correction Risks

The International Monetary Fund on Thursday warned that Asia’s economic growth will moderate next year, citing heightening risks from an Iran war-induced energy shock, a potential correction in the artificial-intelligence boom, and spillovers from rising global bond yields.

In its regional economic outlook for Asia-Pacific, released during the IMF’s annual meetings in Bangkok, the global lender projected Asia’s economy to expand 4.8% in 2026 and 4.4% in 2027. While those figures are above April’s projections, they mark a slowdown from the 5.0% growth recorded in 2025.

The headline numbers mask a sharp divergence within the region. Advanced Asian economies are expected to see growth accelerate to 3.2% in 2026 from 2.5% last year, a revision the IMF attributed largely to the boost from the AI boom. Emerging Asia, the region’s main growth engine, will likely decelerate to 5.1% from 5.6%, hurt by higher energy prices.

The IMF said risks to the outlook “remain tilted to the downside.” A prolonged stalemate in the Middle East conflict could keep commodity prices elevated and deplete oil reserves, it warned. The energy shock has already broadened inflation pressures across the region.

Separately, a correction in AI demand could weigh on global growth, and the effects would be “particularly pronounced in Asia given its extensive exposure to the AI production chain,” the IMF said.

Rising global bond yields add another layer of vulnerability. The fund noted that market stress in major sovereign issuers such as the United States, the United Kingdom, 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,” the IMF said.

Uncertainty over the US monetary policy path is compounding the pressure. “The US monetary stance is expected to continue to tighten later this year,” the IMF noted, adding that the combination of monetary tightening and fiscal pressures in most advanced economies is likely to keep upward pressure on yields across Asia and the Pacific. That uncertainty, it said, could keep Asian financial markets volatile.

Exchange rates and capital flows have become more volatile since the energy shock, with several emerging economies facing depreciation pressures. While foreign investment inflows remain generally robust, the IMF noted that some portfolio outflows have occurred, including from South Korean technology stocks.

Market jitters were visible on Thursday, with Japan’s Nikkei share average tumbling nearly 5% as tech stocks were hit by concern over AI sector profitability, while hot US inflation figures fueled fears of higher interest rates.

Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, told a press conference that central banks should continue to focus on price stability. “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,” he said.

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

The IMF’s warnings come as policymakers grapple with a trio of headwinds: an energy shock blamed on the Middle East conflict, rising bond yields, and the uncertain trajectory of the AI boom. The combined effect, the fund cautioned, could strain public finances and test the resilience of Asia’s growth story.