IMF warns of Asia's vulnerability to war-induced energy shock

The region's economies entered 2026 on solid footing due to lower-than-expected U.S. tariffs, a strong tech cycle that has boosted exports and loose financial conditions, said Krishna Srinivasan, director of the IMF's Asia-Pacific department.

Such tailwinds are somewhat offsetting headwinds from the energy shock caused by the Middle East conflict, keeping the IMF's Asian growth forecasts broadly unchanged from January, he told Reuters in ⁠an interview on Wednesday.

But Asia's highly energy-intensive economy and its huge reliance on Middle East fuel will keep the region exposed to the fallout from the war, he said.

The use of oil and gas amounts to about 4% of Asia's gross domestic product (GDP), nearly double that of Europe, according to the IMF. Given its limited production capacity, net oil and gas imports amount to about 2.5% of GDP for Asia, it said.

"This is a shock, which is going to affect Asia more than other regions," Srinivasan said. "What we're going to see is higher inflation, weaker growth and weaker current account balances."

Under its more benign "reference" scenario of its World Economic Outlook, the IMF projected Asia's growth to moderate from 5% in 2025 to 4.4% in 2026 and 4.2% in 2027.

But in its "adverse" or "severe" scenarios, growth in Asia could come down by 1 to 2 percentage points cumulatively through 2027, he said.

"This is ‌a shock ⁠which has a price impact and a quantity impact," Srinivasan said.

The conflict, if prolonged, could trigger not just price rises but shortages in oil-related chemicals and gas used to produce various machinery and food, he added.

"If you have a price shock and shortages, that could lead to greater non-linearities, and so the growth impact would be that much more acute, especially if the shock is not transient."

Won't end soon

Thailand's Finance Minister Ekniti Nitithanprapas said the economic impact of the conflict was "quite severe" given ⁠his country's status as a net energy importer.

"I'm quite concerned this will not end soon. Not the war but the (hit to the) economy," with some key Middle East gas and oil infrastructure destroyed, he said in an IMF panel on Thursday.

The IMF expects inflation in Asia to rise from 1.4% in 2025 to 2.6% this year, before ⁠easing to 2.4% in 2027.

Asian central banks should look through the shock until there is more clarity on its impact on the economy, but "be very careful and agile, so that if you see inflation expectations getting unanchored, you can start tightening," Srinivasan said.

Given limited fiscal buffers after huge spending to ⁠combat the pandemic, Asian policymakers must ensure any fiscal support is timely and targeted to people who need it most, he said.

"Let me note that broad fuel subsidies, tax cuts, and general price caps may smooth inflation in the short run, but they are costly, distortionary, often regressive, and hard to unwind," Srinivasan said in a news conference on Thursday.