Prolonged Middle East war risks higher inflation, slower growth in Asia

Prolonged disruptions from the Middle East conflict could cut growth and push inflation higher across much of Asia and the Pacific, new research by the Asian Development Bank (ADB) warns. If energy market disruptions last more than a year, economic growth in the region’s developing economies could fall by up to 1.3 percentage points over 2026–2027, while inflation could rise by 3.2 percentage points, according to an ADB brief on the macroeconomic risks of the war.

The conflict is already affecting the region through higher energy prices, supply‑chain and trade disruptions, and tighter financial conditions. Tourism and remittances could also be hit, with economies that rely heavily on Gulf trade, oil imports, or remittance flows facing the steepest adjustment. The ADB maps out three scenarios, underscoring that the size of the shock will depend largely on how long disruptions last. A short‑lived conflict would ease price pressures relatively quickly, while a prolonged one would leave countries grappling with weaker growth and higher inflation for longer.

The hardest growth hits are likely in developing Southeast Asia and the Pacific, while inflation would rise most sharply in South Asia. The ADB stresses that the outlook is highly uncertain and that scenarios should be treated cautiously. Beyond higher energy prices, the analysis factors in broader supply‑chain disruptions and a global tightening of financial conditions, which can squeeze credit and dampen investment.

ADB Chief Economist Albert Park said that prolonged energy disruptions could force economies in developing Asia and the Pacific to navigate a difficult trade‑off between slower growth and higher inflation. He urged governments to focus on containing market stress and protecting the most vulnerable, while putting in place policies that strengthen longer‑term resilience. The brief highlights four core policy responses: allowing at least part of higher energy prices to pass through to encourage conservation and investment in alternatives; keeping any price controls or subsidies limited and targeted; designing fiscal support that is time‑bound and focused on poor households and hardest‑hit sectors; and using central bank tools to curb excessive volatility without over‑tightening.

The ADB also calls on governments to curb energy demand where feasible, for example through temperature limits on air‑conditioning, off‑peak lighting cuts, energy‑saving campaigns, and measures that reduce transport fuel use, such as promoting public transport and staggered work hours. The bank says it will continue to support its borrowers through innovative financing and partnerships aimed at strengthening infrastructure, growth, and resilience in the face of mounting external shocks.