SCB EIC forecasts robust economic growth in Asia for 2026 fueled by global electronics cycle and AI

SCB EIC anticipates robust economic expansion across Asia in 2026, propelled by the surging global electronics cycle and AI investments. However, the region's growth trajectory is challenged by high energy prices, US trade policy uncertainties, and tighter financial conditions, with varying impacts based on each nation's energy framework, export focus, and role in the global AI supply chain.

An extended Middle East conflict is expected to maintain elevated global oil prices, ultimately raising production costs and inflation in energy-importing Asian countries, potentially leading to interest rate hikes by some central banks. In addition, the threat of further US tariffs poses a risk to Asia's manufacturing and export sectors.

Nonetheless, the rapid advancement of AI investments is bolstering the demand for electronics and digital infrastructure in Asia. Major economies in Asia possess the capacity to capitalize on their strengths in the future by leveraging AI to enhance manufacturing efficiency and bolster competitiveness, despite weak domestic demand.

In China, AI is being rapidly utilized to boost production efficiency and industry competitiveness, resulting in sustained export growth despite U.S. trade pressures. Nevertheless, the residential sector and domestic consumption remain precarious, making economic growth largely dependent on manufacturing and exports. Japan is emerging from deflation, but rising interest rates may impact global financial markets.

Continued growth in corporate profits and wages reflects Japan's economic recovery, while rising inflation and interest rates signal a shift away from prolonged low-inflation periods. However, Japan's policy interest rate hikes to their highest levels in decades could affect capital flows and intensify volatility in global financial markets, given that Japanese investors hold the largest U.S. government bond holdings globally.

India has significant growth potential but must accelerate its manufacturing base and address structural constraints. India is on track to become the world's third-largest economy in the coming years, fueled by domestic consumption and service sector expansion. However, the country must expedite the development of its manufacturing sector to boost long-term growth potential, as its heavy reliance on energy and commodity imports makes it susceptible to global economic fluctuations.

Southeast Asia is benefiting from AI supply chains and manufacturing relocation, but faces increased competition from Chinese goods in the domestic market and potential stricter U.S. scrutiny of goods from China. While ASEAN's economy is projected to outperform the global economy, driven by FDI and the expanding role of electronics and AI supply chains, the region faces simultaneous challenges: heightened competition from Chinese products and the risk of stricter U.S. regulations on goods originating from China.

For Thailand, SCB EIC identifies three key opportunities for growth: expanding markets for goods, services, and tourism in Asian countries with increasing purchasing power; forging new investments and supply chains within the region; and enhancing Thailand's role as a production, transportation, and service hub in Asia. To transform these opportunities into growth, Thailand must accelerate the development of workforce skills, technology, infrastructure, and entrepreneurial capabilities to enter higher value-added activities.