Asian Economies Not Out of the Woods Yet as Mideast Tensions Flare, ADB Says

By Fabiana Negrin Ochoa

Asian economies aren't out of the woods yet, the Asian Development Bank says, as a flare-up in Middle East tensions threatens to dash hopes that the risk of an energy shock has receded.

The Manila-based multilateral institute has cut its forecast for developing Asia and the Pacific, now expecting regional growth of 4.9% this year versus the 5.1% projected earlier, and well below the 5.5% pace recorded in 2025.

Middle East oil-reliant Asia's economic prospects had appeared brighter when Washington and Tehran hammered out a tentative agreement last month to reopen the Strait of Hormuz--a global energy-shipping artery--and wind down the war. But renewed hostilities show how fragile the situation remains.

President Trump on Wednesday said he believed his ceasefire deal with Iran is over, sending oil prices surging again.

Even if a durable, credible ceasefire materializes, restoring balance to energy markets could be an uphill battle, the ADB said.

Previously trapped vessels have started exiting the Strait of Hormuz, but reopening the waterway requires mine-clearing and a return to prewar risk insurance rates, it said. Tankers that diverted during the lane's closure must reposition to Gulf routes, further delaying the normalization of flows.

Repairing damaged export and refining infrastructure could take several quarters, ADB added. Although halted production could restart relatively quickly, reservoir damage from wells left shut for an extended period could slow the recovery in supply.

In its June oil outlook report, the International Energy Agency estimated that global supply is set to fall by 3.9 million barrels a day in 2026. It noted that while the U.S.‑Iran interim agreement paves the way for a rebound in Middle East exports, operational and political constraints pose downside risks to the outlook.

It's not just energy either. The price shock and supply-chain snarls caused by the conflict have spread beyond oil and gas, driving up transport costs and the prices of commodities such as fertilizers.

Many of those ripple effects take time to materialize, and the ADB warned that the inflation threat is far from defeated.

Despite governments across the region introducing measures to limit the contagion, inflationary pressures have nonetheless broadened beyond energy, it said. That's exactly what central banks didn't want to see, leaving policymakers to navigate an increasingly challenging growth-inflation trade-off.

The ADB expects inflation in developing Asia to rise to 4.3% in 2026 from 3.0% in 2025, driven by elevated oil and gas prices and spillover effects on other commodities.

That is also adding to fiscal pressures, with balance sheets projected to deteriorate across most of the region in 2026.

Higher energy and fertilizer prices worsen trade balances and increase fiscal spending pressures, the ADB said, while currency depreciation raises the burden of foreign-denominated debt. Of the 40 economies in developing Asia, 24 are forecast to record lower revenues in 2026 than in 2025, while 24 are expected to post higher primary expenditure.

Again, the ADB report pointed to artificial intelligence as a saving grace for economies plugged into global technology supply chains.

Strong demand for electronics and machinery, underpinned by the AI investment boom, has buoyed exports in many Asia-Pacific economies, benefiting the likes of Hong Kong, South Korea, Singapore and Taiwan.

The AI halo effect will help buffer those economies against prevailing headwinds, the ADB expects, raising its 2026 growth forecast for Advanced Asia and the Pacific to 2.6%.

The ADB groups member economies into two categories: advanced and developing. The former includes Australia, Hong Kong and Japan, while the latter encompasses 44 members, including India and China.

Still, an abrupt souring of global enthusiasm for AI could turn the tailwind into a headwind, the ADB said, again flagging the two-sided risks of the AI gold rush given stretched valuations in technology- and AI- related stocks.

"Recent market volatility highlights the potential for an abrupt repricing, which could tighten financial conditions further, dampen investor sentiment, and spill over to the region through capital outflows and weaker external demand."

Write to Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com

(END) Dow Jones Newswires

July 08, 2026 11:44 ET (15:44 GMT)