ADB sharply downgrades Asia and Pacific growth outlook as Middle East conflict disruptions deepen

President Masato Kanda

In a special update to its economic forecasts, the Asian Development Bank (ADB) has significantly downgraded its economic growth outlook and raised inflation projections for developing Asia and the Pacific as more severe and prolonged disruptions from the conflict in the Middle East continue to raise energy prices, tighten financial conditions, and weigh on economic activity across the region.

ADB President Masato Kanda said: “Our revised outlook is a significant downward revision for growth and a sharp increase in inflation following a special update to reflect the deepening crisis. We are confronting systemic, long-lasting disruptions to global energy and trade networks, not just temporary volatility. The ADB will remain an agile partner in protecting the region’s economy; tracking fast-moving risks, and moving with urgency to scale up our support.”

The ADB now forecasts regional growth at 4.7% this year and 4.8% next year, down from 5.1% for both years projected in its Asian Development Outlook (ADO) April 2026. Inflation in the region is now projected to accelerate to 5.2% this year from 3% last year, before easing to 4.1% in 2027.

The revised outlook reflects growing evidence that the economic effects of the conflict have lasted longer than initially anticipated. Continued risks to energy production and transport routes, alongside sustained pressure on oil and gas prices, are weakening growth prospects and raising inflation prospects—particularly for economies heavily dependent on imported fuel, remittances, tourism, or external financing.

The new outlook assumes that oil prices average around $ 96 per barrel in 2026—substantially above the pre-conflict average of $ 69 per barrel in January and February—before easing to around $ 80 per barrel in 2027.

Under an even more severe downside scenario of renewed conflict escalation, in which oil prices spike in May 2026 and remain even higher, growth in developing Asia and the Pacific could slow to 4.2% this year and 4% next year, while inflation could reach 7.4% in 2026.

The brief presents four key policy responses:

nPolicies should focus on stabilisation rather than suppression of price signals. Allowing higher energy prices to pass through, at least in part, can encourage energy conservation, fuel switching, and investment in alternative energy sources. Broad price controls or generalised subsidies risk distorting incentives, delaying adjustment, and misallocating resources.

nFiscal support, where needed, should be targeted and time-bound. Priority should be given to supporting vulnerable households and the most affected industries. Well-targeted measures can cushion the social impact of higher prices while containing fiscal costs and preserving incentives to adjust to the shock.

nCentral banks should focus on limiting excessive market volatility while keeping a close watch on inflation expectations. The priority should be to provide targeted liquidity support to preserve orderly market functioning. Tightening policy too aggressively risks amplifying growth headwinds and exacerbating financial volatility. While some tightening may be warranted, anchoring inflation expectations with effective central bank communication will remain key.

nGovernments should curb energy demand where feasible. Practical measures include temperature mandates to limit air-conditioning, cuts to non-essential lighting, peak-hour electricity-saving campaigns, and work-from-home or staggered schedules. Incentivising public transport use and car-free days in urban areas on public holidays can also help reduce transport fuel use.