ADB Cuts Asia Growth Forecast to 5.1% as Middle East Conflict Raises Energy Costs

ADB Cuts Asia Growth Forecast to 5.1% as Middle East Conflict Raises Energy Costs

The Asian Development Bank on Thursday lowered its economic growth forecast for developing Asia to 5.1% for 2026, down from 5.4% in 2025, citing the ripple effects of the Middle East conflict on energy prices, manufacturing costs, and consumer demand across the region. The downgrade, published in the ADB's Asian Development Outlook April 2026, marks the first time in three years the bank has revised its Asia growth projection downward.

The revised forecast assumes oil prices will gradually normalize toward pre-conflict levels by year-end. The ADB finalized its projections more than a week into the conflict, which began on February 28, 2026.

Inflation Set to Rise Across the Region

The bank projected inflation across developing Asia would climb to 3.6% in 2026, up from more moderate levels in 2025, as higher energy prices feed through to production costs and consumer goods. South Asia, which depends more heavily on imported energy than any other emerging-market region, faces the steepest price pressures.

The World Bank, in a separate report published on April 8, projected South Asia's growth would slow to 6.3% in 2026, down from 7% in 2025. The institution expects a recovery to 6.9% in 2027, underpinned by India's domestic demand, tariff reductions, and new trade agreements including a free trade agreement with the European Union.

China Growth Revised Upward, but Structural Headwinds Persist

The International Monetary Fund, presenting its World Economic Outlook at the Spring Meetings on April 14, revised China's 2026 growth forecast upward by 0.2 percentage points to 4.4%, relative to its October projection. The Chinese economy is expected to decelerate from 5% in 2025 to 4.4% in 2026 and 4% in 2027, reflecting what the IMF described as domestic imbalances between a strong export sector and ongoing challenges in the property market.

The ADB's April outlook noted that investment in high technology and artificial intelligence would provide some support to the region, but a prolonged downturn in China's property sector would continue to weigh on activity.

Gulf-Asia Trade Corridor Strengthens

Amid the shifting economic landscape, trade between the Gulf states and Asia has grown to approximately $516 billion annually, according to data cited by BlackRock senior managing director Mike Pyle at a conference on April 15. China, India, and Japan now account for about 36% of Gulf trade, reflecting a sustained eastward pivot.

"The Gulf is really the linchpin" of a dynamic corridor linking the region with South and Southeast Asia, Pyle said, speaking at an event reported by The National.

Supply Chain Diversification Continues

The ADB report highlighted that export growth across the region is expected to normalize in 2026 following a period of front-loading by manufacturers ahead of U.S. tariff increases last year. Meanwhile, supply chain diversification away from China continues to benefit India, Malaysia, and Vietnam, which are attracting growing shares of foreign direct investment in manufacturing.

Johannes Zutt, World Bank vice president, said countries in the region "need critical reforms to sustain growth, create jobs, and increase resilience to shocks." The bank's chief economist, Franziska Ohnsorge, noted that limited fiscal space and implementation capacity in some South Asian countries were constraining the effectiveness of industrial policies, approximately 50% of which target manufacturing.

Gold demand in the Asia-Pacific region has surged to record levels in early 2026, driven by institutional investors hedging against heightened global uncertainty, a trend that persisted even during the Middle East conflict.