IMF warns of slowing Asian growth, spillover from rising yields

The International Monetary Fund (IMF) has forecasted a slowdown in Asia's economic growth for next year, citing concerns from the Iran war-triggered energy crisis, a potential downturn in the AI sector, and the impact of rising global bond yields. In the IMF's annual report on the Asia-Pacific region, the lender also highlighted uncertainties surrounding the US monetary policy path, which could maintain financial market volatility in Asia.

Exchange rates and capital flows have become more erratic since this year's energy shock, leading to depreciation pressures in several emerging economies. While foreign investment inflows in the region remain generally strong, some have resulted in portfolio outflows, such as from South Korean technology stocks.

The US monetary policy is anticipated to continue tightening later this year, with a combination of monetary policy tightening and fiscal pressures in major advanced economies likely to keep upward pressure on yields across Asia and the Pacific. The IMF now expects Asia's economy to expand by 4.8% in 2026 and 4.4% in 2027, which is higher than the April projections but still a slowdown from the 5.0% growth in 2025.

This projection is mainly due to the AI boom's impact on advanced Asian economies, with growth expected to accelerate to 3.2% in 2026 from 2.5% in the previous year.

However, risks remain tilted to the downside, as a protracted conflict in the Middle East could maintain high commodity prices and deplete oil reserves. A prolonged AI demand correction could also negatively affect global growth, with Asia being particularly vulnerable due to its heavy reliance on the AI production chain. With global yields on the rise, market stress in significant sovereign issuers like the US, the UK, the euro zone, and Japan could spread to Asian bond markets, leading to higher yields and worsening fiscal vulnerabilities.

An abrupt tightening of financial conditions could further strain public finances by increasing debt servicing costs for many countries in the region. Asian central banks should prioritize price stability and respond promptly to persistent inflationary pressures, while fiscal policy should be targeted and temporary, avoiding blanket fuel subsidies or price controls that may prove more costly in the long run.