IMF warns of slowing Asian growth, spillover from rising yields

The International Monetary Fund has forecasted a slowdown in Asia's economic growth for next year, citing risks stemming from the Iran war-induced energy crisis, a potential downturn in the AI boom, and the impact of rising global bond yields. In a report during its annual meetings in Bangkok, the global lender also expressed concerns over the uncertainty surrounding US monetary policy, which could maintain volatility in Asian financial markets.

Exchange rates and capital flows have become more volatile due to the ongoing energy shock, with several emerging economies facing depreciation pressures. Foreign investment flows have remained strong, but some portfolio outflows have occurred, particularly in South Korean technology stocks. The IMF projects Asia's economy to expand by 4.8% in 2026 and 4.4% in 2027, an improvement over April's projections but still a deceleration from the 5.0% growth seen in 2025.

The revisions were largely due to the positive effects of the AI boom on advanced Asian economies, with growth in the sector expected to rise to 3.2% in 2026 from 2.5% in 2025. Despite being the primary growth driver in the region, emerging Asia's growth is projected to moderate to 5.1% in 2026, down from 5.6% in 2025, as higher energy prices take a toll.

The IMF warns that risks are tilted towards the downside, as a protracted Middle East conflict could keep commodity prices high and deplete oil reserves, while a correction in AI demand could also negatively affect global growth, particularly in Asia. With global yields on the rise, Asian bond markets may face stress due to mounting fiscal vulnerabilities, as sovereign issuers like the US, the UK, euro zone, and Japan could be adversely affected.

The IMF advises Asian central banks to prioritize price stability and act swiftly if inflationary pressures become persistent. It also urges governments to adopt targeted and temporary fiscal policies, discouraging blanket fuel subsidies or price controls that could prove more costly in the long run.