Middle East conflict may cut Asia-Pacific growth, ADB warns

Prolonged conflict in the Middle East could cut economic growth in developing Asia and the Pacific by as much as 1.3 percentage points over 2026 and 2027, while pushing inflation up by 3.2 percentage points if energy market disruptions persist for more than a year, according to new research by the Asian Development Bank (ADB).

The ADB said the conflict is already impacting economies in Asia and the Pacific through higher energy prices, supply chain and trade disruptions, and tighter financial conditions. Tourism and remittances may also come under pressure.

An ADB brief outlined three risk scenarios, noting that the impact on the region's developing economies will depend largely on the duration of disruptions. A short-lived conflict would see energy price pressures ease quickly, while protracted turmoil would lead to more significant and lasting effects on growth and inflation.

The brief stated that growth would be hit hardest in developing Southeast Asia and the Pacific, while inflation would rise most sharply in South Asian economies.

The ADB cautioned that the scenarios involve considerable uncertainty regarding the evolution of the conflict and related disruptions. The analysis also factors in broader supply chain shocks and a global tightening of financial conditions.

"Prolonged energy disruptions could force economies in developing Asia and the Pacific to navigate a difficult trade-off between weaker growth and higher inflation," said ADB Chief Economist Albert Park.

"Governments should focus on containing market stress and protecting the most vulnerable, while adopting policies to improve longer-term resilience," he added.

The brief set out four key policy responses.

First, policies should prioritise stabilisation over suppressing price signals. Allowing higher energy prices to pass through—at least in part—can encourage conservation, fuel switching, and investment in alternative energy sources. Broad price controls or generalised subsidies, by contrast, risk distorting incentives, delaying adjustment, and misallocating resources.

Second, the ADB said fiscal support, where necessary, should be targeted and time-bound, prioritising vulnerable households and the most affected industries. Well-designed measures can help cushion the social impact of higher prices, contain fiscal costs, and preserve incentives to adjust to the shock.

Third, central banks should aim to limit excessive market volatility and monitor inflation expectations closely. The priority is to provide targeted liquidity support to ensure orderly market functioning. Excessively rapid policy tightening, the brief warned, could exacerbate growth pressures and financial volatility. While some tightening may be warranted, clear communication from central banks remains critical to anchoring inflation expectations.

Finally, the ADB advised governments to curb energy demand where possible. Suggested measures include temperature limits to reduce air-conditioning, curbs on non-essential lighting, peak-hour electricity-saving campaigns, and work-from-home or staggered work schedules. Additional steps such as encouraging public transport use and introducing car-free days in urban centres on public holidays could also help reduce fuel consumption.