IMF Warns Asian Growth to Slow on Energy Shock, AI Correction, Rising Bond Yields

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

Japan’s Nikkei share average tumbled nearly 5% on Thursday as technology stocks were hit hard by concern over the AI sector’s profitability, while hot U.S. inflation figures sparked fears of higher interest rates.

In its regional outlook report released during annual meetings in Bangkok, the global lender said uncertainty over the U.S. monetary policy path could keep Asian financial markets volatile.

The IMF now expects Asia’s economy to grow 4.8% in 2026 and 4.4% in 2027, higher than projections made in April but still slowing from a 5.0% expansion in 2025. The revisions largely reflected the boost from the AI boom for advanced Asian economies, with their growth expected to accelerate to 3.2% in 2026 from 2.5% last year.

Emerging Asia remains the region’s main growth engine but will likely see growth moderate to 5.1% in 2026 from 5.6% last year due to the hit from higher energy prices, the report said.

**Three downside risks**

“Risks to the outlook remain tilted to the downside,” the IMF said, citing three main threats.

First, a prolonged stalemate in the Middle East conflict could keep commodity prices high and deplete oil reserves. The IMF explicitly linked the energy shock to the Iran war, which has led to broad-based rises in inflation.

Second, a correction in AI demand could weigh on global growth, with the effects likely to be particularly pronounced in Asia given its extensive exposure to the AI production chain.

Third, with global yields rising, market stress in major sovereign issuers like the U.S., the UK, the euro zone and Japan could spill over to Asian bond markets, pushing up yields and exacerbating already-elevated fiscal vulnerabilities.

The IMF noted that “exchange rates and capital flows have become more volatile since the energy shock this year,” with several emerging economies experiencing depreciation pressures. While foreign investment inflows remain generally robust, such moves have coincided with some portfolio outflows such as from South Korean technology stocks.

“The U.S. 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.

**Fiscal and monetary policy constraints**

“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.

This week’s IMF meetings have been dominated by worries about growing debt, rising bond yields and risks from the AI boom. Those concerns add to policymakers’ headaches over the energy shock that has pushed up inflation.

Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, told a press conference that while long-term inflation expectations remain broadly anchored in Asia, 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 noted that with public debt remaining above pre-pandemic levels, the scope for additional fiscal spending is increasingly constrained. He urged countries in the region to avoid blanket fuel subsidies or price controls that could be more costly, saying fiscal policy should be targeted and temporary.

In a separate interview with Bloomberg Television, Srinivasan raised concerns that overlapping market risks could spill over into Asian economies, underscoring the heightened uncertainty facing policymakers across the region.