IMF flags 3 risks to Asia’s growth as Iran war, AI boom and bond yields cloud outlook

The International Monetary Fund has warned that the Iran war and its impact on energy prices, a possible correction in the artificial intelligence boom and rising global bond yields could weigh on Asia’s economic outlook. The lender expects regional growth to slow in 2027, even as it has raised its forecasts for both 2026 and 2027 from its April projections.

In its latest outlook for the Asia-Pacific region, released during the IMF and World Bank annual meetings in Bangkok on Thursday, the fund projected Asia’s economy to grow 4.8 per cent in 2026 and 4.4 per cent in 2027. This compares with growth of 5 per cent in 2025.

The IMF said the risks to the outlook remained tilted to the downside. Uncertainty over the US monetary policy path could also keep Asian financial markets volatile, while higher borrowing costs in major economies could put further pressure on the region’s bond markets and public finances.

Iran war and higher energy prices threaten growth

The conflict in the Middle East remains a key risk for Asia, where many economies depend on imported energy. The IMF warned that a prolonged stalemate could keep commodity prices elevated and deplete oil reserves, increasing pressure on regional economies.

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Higher energy costs could weigh on household spending, raise business expenses and make it harder for central banks to contain inflation. The impact is expected to be more pronounced in emerging Asian economies, which remain the region’s main source of growth.

The IMF expects emerging Asia to grow 5.1 per cent in 2026, down from 5.6 per cent in 2025. The slowdown reflects the pressure from higher energy prices, despite continued economic expansion across the region.

The fund said central banks should remain focused on price stability and respond promptly if inflationary pressures become more persistent. It also advised governments to keep fiscal support targeted and temporary, warning against broad fuel subsidies and price controls that could prove costly.

A possible AI correction could hit Asia hard

The AI boom has supported growth in several advanced Asian economies, helping the IMF raise its regional projections from April. Growth in these economies is now expected to accelerate to 3.2 per cent in 2026, from 2.5 per cent in 2025.

However, the fund warned that a correction in AI demand could weigh on global growth, with Asia particularly exposed because of its extensive role in the AI production chain.

The region is closely linked to the manufacturing and supply of technology products used in AI infrastructure. A sharp reversal in demand could therefore affect businesses and economies that have benefited from rising investment in the sector.

The IMF’s warning comes as the region faces the challenge of sustaining growth while managing its exposure to shifts in global technology demand and financial markets.

Rising bond yields could increase financial pressure

The third major risk comes from rising global bond yields and tighter financial conditions.

The IMF said stress in major sovereign debt markets, including those of the US, the UK, the euro zone and Japan, could spill over into Asian bond markets. This could push yields higher and increase borrowing costs for governments and businesses.

The fund also pointed to uncertainty over the US monetary policy path. It expects the US monetary stance to tighten later in 2026, while a combination of monetary tightening and fiscal pressures across major advanced economies could keep upward pressure on yields across Asia and the Pacific.

Higher yields could be particularly difficult for governments already dealing with high public debt and substantial borrowing needs. An abrupt tightening of financial conditions could raise debt-servicing costs and further strain public finances, the IMF warned.

Exchange rates and capital flows have also become more volatile since this year’s energy shock, with several emerging economies facing currency depreciation pressures.

Although foreign investment inflows into the region remain broadly robust, the IMF noted that portfolio outflows have occurred in some markets, including South Korean technology stocks.

The fund said Asian policymakers would need to manage these risks carefully as the region navigates higher energy costs, uncertainty in technology markets and tighter global financial conditions.

(With inputs from agencies.)