IMF warns of slowing Asian growth, spillover from rising yields

BANGKOK: The International Monetary Fund on Thursday projected Asia’s economic growth would moderate next year and warned of heightened risks from the Iran war‑induced energy shock, a potential corrective swing in the AI boom and spillovers from rising global bond yields.

In a report on the outlook for the Asia‑Pacific region, the global lender also noted uncertainty about the United States’ monetary policy path could sustain volatility in Asian financial markets.

“Exchange rates and capital flows have become more volatile since the energy shock this year,” the IMF said in the report issued during its annual meetings in Bangkok.

While foreign investment inflows in the region remain broadly robust, those trends have been offset by certain portfolio outflows—such as from South Korean technology stocks—the IMF reported.

“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 pressure on yields across Asia and the Pacific.”

The IMF now anticipates Asia’s economy to expand at 4.8 % in 2026 and 4.4 % in 2027, surpassing April forecasts yet still decelerating from 5.0 % growth recorded in 2025.

The upward revision primarily reflects the surge from the AI boom, which carries growth forward to 3.2 % in 2026 compared with 2.5 % last year, according to the agency.

Emerging Asia remains the primary driver of regional expansion, although it will likely see slower growth to 5.1 % in 2026 from 5.6 % a year earlier due to higher energy‑price impacts.

“Risks to the outlook remain tilted toward the downside,” the IMF cautioned, adding that a prolonged stalemate in the Middle East could keep commodity prices elevated and deplete oil reservoirs.

A possible contraction in AI demand may also weigh on global growth, with the effect especially acute in Asia because of its deep exposure to the AI production chain.

Rising global yields can transmit stress to major sovereign issuers—including the United States, the United Kingdom, the euro zone and Japan—spilling over into Asian bond markets and pushing yields higher while amplifying existing fiscal vulnerabilities.

“Given persistently high public debt and borrowing demands throughout much of the region, an abrupt tightening of financial conditions could further strain public finances by raising debt‑servicing costs,” the IMF warned.

Asian central banks should prioritize price stability and respond promptly if inflationary pressures persist, the organization advised.

Fiscal policy should be targeted and temporary, urging countries in the region to avoid broad fuel subsidies or price controls that could become prohibitively costly.

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