AI boom shields Asia Pacific, but Moody’s warns the cushion is thinning

Asia Pacific's economy is being powered by a robust but gradually narrowing engine: artificial intelligence, according to Moody's Analytics. While the region has managed to avoid a sharper economic slowdown thus far, the cushion of resilience is thinning. Despite the headline resilience, domestic demand remains weak across much of the region, inflation risks are on the rise, and geopolitical shocks are complicating efforts by central banks to support growth without triggering price pressures.

The result is an Asia Pacific economy experiencing "two different speeds," with exporters benefiting from strong global demand for AI-related hardware, while domestic economies struggle with higher costs and cautious consumers. Southeast Asia, in particular, is affected by the split, as the region has become a crucial part of the global electronics and semiconductor supply chain.

However, AI demand alone cannot insulate these economies from weaker household spending, volatile energy prices, currency fluctuations, or renewed trade tensions. Although strong AI-related exports have helped offset weaknesses elsewhere, Moody's warns that this export engine is masking underlying problems. Many economies in the region have domestic demand lagging behind pre-pandemic trends and global averages, making them particularly vulnerable if the export cycle were to slow down.

Additionally, rising inflation due to geopolitical conflicts and trade disruptions is adding to policy challenges for central banks. While developed economies like Taiwan and South Korea may benefit from increased AI demand, import-dependent economies face a more challenging balancing act. Southeast Asian central banks may have to choose between defending their currencies and containing inflation or keeping policy loose enough to support domestic consumption and small businesses.

The AI boom could face a slowdown in 2026 and 2027, with growth expected to decelerate from 4.3 per cent in 2025 to 4.2 per cent in 2026 and 3.6 per cent in 2027. Currency volatility, exemplified by the Japanese yen's nearly 60 per cent depreciation since early 2021, poses another risk. The Bank of Japan may need to implement further rate hikes if necessary to support the currency, impacting other Asian economies that rely on exchange rates for trade decisions.