AI keeps Asia afloat as inflation bites: Moody’s

Asia's economy is experiencing two distinct growth patterns, driven by the artificial intelligence (AI) revolution while grappling with higher inflation, tighter monetary policy, and weak domestic demand. According to Moody's Analytics, regional growth is projected to decelerate to 4.2% in 2026 and 3.6% in 2027, down from 4.3% in 2025. Higher prices, tighter policies, and geopolitical risks are straining demand, which is hindered by weak consumer and business spending.

The AI boom has buoyed the region's exports, particularly in semiconductors and other technology products, as Taiwan, South Korea, mainland China, and Southeast Asian nations have seen increased shipments. However, this export strength obscures stagnant domestic demand across most of the region and below-average growth compared to pre-pandemic trends and global averages.

While the AI-driven export surge has masked domestic weaknesses, it also leaves Asia-Pacific vulnerable if the technology cycle falters. Signs of a potential slowdown include rising electronics and machinery prices, as well as hardware shortages labeled "RAMpocalypse." Equity valuations have also surged, raising concerns about the sustainability of the AI boom and AI-related business models' profitability.

Inflationary pressures are mounting, driven by geopolitical tensions, trade disruptions, and rising energy and food prices. Higher inflation complicates central banks' monetary policy decisions, as demand remains weak and rates are already high across most of Asia-Pacific. Some central banks, including the Bank of Japan and Bank of Korea, are expected to tighten further, though the effectiveness of rate hikes is limited when demand is already subdued.

Currency fluctuations pose an additional challenge, as many Asia-Pacific currencies have weakened against the US dollar, deviating significantly from economic fundamentals. The yen, in particular, has depreciated nearly 60% since early 2021 despite Japan's current account surplus and strong fiscal position. In late July, Washington and Tokyo jointly intervened in the foreign-exchange market to support the yen, their first such action since 2011.

The Middle East conflict adds another layer of uncertainty, as the fragile ceasefire between the US and Iran has unraveled, leading to renewed fighting and reduced Strait of Hormuz traffic. A prolonged blockade could drive oil prices higher, increasing inflation and weakening economic growth, further complicating central banks' efforts to curb inflation and support weak demand.