Middle East Conflict to Slash Asia Growth by 1.3%, Spike Inflation: ADB

"The 2026 conflict in the Middle East affects economies in Asia and the Pacific through higher energy prices, supply chain and trade disruptions, tighter financial conditions, and weaker remittance flows," the ADB noted.

According to the report, while the region has limited direct trade exposure to the Middle East, it remains highly vulnerable due to its dependence on imported energy and integration with global trade systems. "Economies in Asia and the Pacific are highly vulnerable to spillovers transmitted through global energy markets, trade and transport networks, and financial conditions," it said.

The ADB warned that the severity of the economic impact will depend on how long the conflict persists. "A prolonged and more severe conflict... reduces growth in developing Asia and the Pacific by 1.3 percentage points and raises inflation by 3.2 percentage points over 2026-2027," the report stated.

A key concern highlighted in the brief is the disruption of energy supply routes, particularly the Strait of Hormuz, a critical artery for global oil and gas shipments. The report noted that "around 20% of global oil and LNG trade passes through the Strait of Hormuz, with Asia being the main destination."

The conflict has already triggered sharp volatility in energy markets. "The collapse in tanker traffic and disruptions to oil production and processing have contributed to a sharp rise in oil prices," the ADB observed, adding that prices surged to nearly USD 120 per barrel at peak tensions.

Beyond energy, the report flagged broader supply chain risks. "Shipping disruptions can quickly raise costs, delay production, and strain supply chains," it said, pointing to the region's reliance on timely imports of critical industrial inputs.

Financial markets have also shown signs of stress following the escalation. "Financial conditions in Asia and the Pacific have tightened since the start of the conflict," the report said, noting declines in equity markets and rising bond yields.

The ADB further cautioned about the impact on remittance-dependent economies. "Weaker economic activity in conflict-affected Gulf economies could reduce labor demand and incomes of migrant workers, leading to lower remittances," it said.

Despite these risks, the report indicated that the impact could remain manageable if the conflict is short-lived. "Under contained scenarios, the impact on Asia and the Pacific is likely to be manageable," it said, while warning that persistent disruptions could "materially weaken growth prospects."

The ADB emphasised the need for calibrated policy responses, stating that "policymakers should safeguard macroeconomic stability, manage energy consumption, and accelerate energy diversification." It also advised that broad-based energy subsidies and price controls should give way to targeted and time-bound fiscal support.

The report underscores that in an increasingly uncertain geopolitical environment, strengthening resilience through energy security, diversified supply chains, and sound macroeconomic policies will be critical for the region.

- ANI