How Asian economies can manage global risks

How are developing Asia and the Pacific’s growth being affected by subdued global trade and the Middle East conflict?

Growth is moderating, but holding up. Assuming an early stabilisation in the Middle East conflict, regional growth is forecast at 5.1 per cent in both 2026 and 2027. However, this projection is subject to extreme uncertainty at present.

The conflict is pushing up energy costs and disrupting shipping routes, while renewed trade policy uncertainty and the fading effects of last year’s export frontloading—shipments brought forward ahead of expected US tariff increases—are weighing on external demand. These shocks are hitting a region that is highly dependent on imported oil and deeply integrated into global trade networks.

Even so, domestic demand remains resilient. Strong consumption and services activity are cushioning the impact, supporting growth.

A prolonged Middle East conflict is the biggest risk for the economic outlook. If disruptions last longer and energy prices stay elevated, the impact would intensify—raising production costs, weakening confidence, and further weighing on trade and investment.

What can governments do to mitigate these pressures?

Policy support should be time-bound and targeted. Governments should focus on shielding the most vulnerable from higher food and energy prices, while avoiding costly, broad-based subsidies that weaken incentives to reduce hydrocarbon consumption.

Maintaining fiscal discipline is key. Higher energy import bills are already straining budgets, so support measures should be temporary and well-targeted.

Stabilisation measures should be complemented with efforts to curb energy demand where feasible, including temperature mandates to limit air-conditioning, cuts to non-essential lighting, peak-hour electricity-saving campaigns, and work-from-home or staggered schedules.

At the same time, governments can support growth by protecting investment, especially in infrastructure and energy. Expanding renewable energy and improving efficiency can reduce exposure to future shocks.

Strengthening regional cooperation and integration, supply chains, and logistics is also critical. Disruptions to shipping routes have shown how quickly costs can rise. Diversification and resilience-building can help limit these spillovers.

Where is growth strong, and why?

Growth is strongest where domestic demand and services are driving activity. South Asia—especially India—continues to lead, supported by robust consumption and investment.

Some economies are also benefiting from global demand for electronics and Artificial Intelligence-related products, which has supported exports despite broader trade weakness.

What are recent moves in exchange rates, bond yields, and portfolio flows telling us about the impact of rising energy prices?

Financial markets are signalling heightened risk and tighter conditions. Rising energy prices have increased inflation expectations, pushing up bond yields and borrowing costs.

Currencies in more vulnerable economies—especially those heavily reliant on energy imports—have come under pressure, reflecting higher demand for foreign exchange to pay for imports.

Portfolio flows have also become more volatile, with investors shifting toward safer assets amid uncertainty. This is consistent with broader signs of risk aversion, including strong demand for gold in the region.

Solid macroeconomic fundamentals and well-developed domestic financial markets can help to mitigate excessive shifts in portfolio flows and other asset markets.

What are the prospects for inflation? How can central banks support growth without stoking price pressures?

Inflation is rising again after easing in 2025. Higher energy and food prices are feeding through to consumer prices, with pressures broadening across economies in early 2026.

Under an early stabilisation scenario for the Middle East conflict, inflation increases moderately. But if energy prices remain elevated, the rise could be much stronger and more persistent.

Central banks face a delicate balance. Premature easing risks fueling inflation, while overly tight policy could weigh on growth. The priority should be to anchor inflation expectations while allowing flexibility where price pressures are clearly supply-driven. Targeted liquidity support by central banks to preserve orderly market functioning may also be appropriate.

Clear communication is essential, along with data-dependent policy. In some cases, macroprudential tools can complement interest rate policy to support financial stability without adding inflationary pressure.

What is the prognosis for food prices in the region?

After easing in 2025, food inflation picked up toward the end of the year and into early 2026. The Middle East conflict has heightened risks of further food price pressures.

Higher energy prices are a key driver of food inflation, raising transport and production costs. At the same time, disruptions to fertilizer supply linked to the conflict could weigh on agricultural output with a lag, pushing food prices higher over time.

This is a particular concern as it would have disproportionately negative effects on the region’s lower-income households, who spend a larger share of their income on food.

So far, however, the increase has been moderate. But if supply disruptions persist, risks to food security in the region could become significant. Adverse weather and strong demand in key markets may add further pressure.

The writers are Asian Development Bank (ADB) economists. The questions and answers are developed on the basis of Asian Development Bank Outlook (ADO) April 2026