WASHINGTON - Asia stands out as more exposed than other regions to an energy shock stemming from an extended Middle East conflict, the International Monetary Fund said, flagging risks to growth, inflation and external balances if supply disruptions persist.
Krishna Srinivasan, director of the IMF’s Asia-Pacific department, told Reuters that the region began 2026 on relatively solid footing. He attributed that resilience to three main factors: lower-than-expected U.S. tariffs, a robust technology cycle that has helped lift exports, and generally loose financial conditions. Those forces, Srinivasan said, have helped keep the IMF’s Asian growth forecasts broadly unchanged since January despite the energy-driven headwinds from the Middle East war.
Still, the IMF director emphasized that Asia’s energy profile makes it particularly vulnerable. The IMF estimates that the use of oil and gas accounts for about 4% of Asia’s gross domestic product - almost double the share seen in Europe - and that net oil and gas imports amount to roughly 2.5% of GDP, reflecting the region’s limited domestic production capacity.
"This is a shock, which is going to affect Asia more than other regions," Srinivasan said, warning of the economic consequences.
He outlined the likely channels of impact: higher inflation, slower economic growth and deteriorating current account balances. Under the IMF’s reference scenario in its World Economic Outlook, the fund projects Asian growth to slow from 5% in 2025 to 4.4% in 2026 and 4.2% in 2027. However, under the IMF’s adverse and severe scenarios, Srinivasan said the region’s growth could be lower by 1 to 2 percentage points cumulatively through 2027.
Srinivasan described the shock as carrying both a price and a quantity dimension. Beyond upward pressure on energy prices, a prolonged conflict could produce shortages - not only of crude oil and gas but also of oil-related chemicals and certain gases used in manufacturing processes and food production. He warned that if shortages emerge alongside price increases, the resulting non-linear effects would deepen the negative impact on growth, especially if the shock is not short-lived.
The IMF’s inflation outlook for the region reflects the expected near-term impact of the conflict. Inflation in Asia is forecast to rise from 1.4% in 2025 to 2.6% in the current year, before easing slightly to 2.4% in 2027.
On policy responses, Srinivasan advised central banks in Asia to try to look through the episodic effects of an energy shock until more evidence accumulates on how it feeds through to the broader economy. He added that authorities need to remain "very careful and agile," prepared to tighten policy promptly if inflation expectations start to become unanchored.
Fiscal policy, he noted, faces constraints. After substantial spending to counter the pandemic, many Asian governments have limited fiscal buffers. Given that constraint, Srinivasan recommended that any fiscal support be timely and targeted to those most in need rather than broad-based measures.
In sum, the IMF’s assessment underscores a tension for Asia policymakers: current macroeconomic tailwinds, including a strong tech-driven export cycle and easier financial conditions, are helping to offset the energy-related headwinds, but the region’s reliance on Middle East fuel and limited domestic production mean a prolonged conflict could produce significantly worse economic outcomes than other regions might face.