Middle East conflict biggest risk to regional outlook: Experts

Economic growth in developing Asia and the Pacific is expected to remain resilient at 5.1% in 2026 and 2027, but a prolonged conflict in the Middle East stands as the most significant threat to this outlook, according to senior experts at the Asian Development Bank (ADB).

In a detailed analysis of the region's macroeconomic landscape, ADBs Economic Research and Development Impact Department (ERDI) Director Matteo Lanzafame, along with economists Gabriele Ciminelli and John Beirne, warned that while the region is holding up, it remains highly vulnerable to external shocks.

The experts noted that the current growth forecast of 5.1% hinges on an early stabilisation of the Middle East conflict.

However, they characterised the projection as subject to extreme uncertainty.

The conflict is currently driving up energy costs and disrupting vital shipping routes.

This is compounded by trade policy uncertainty and the fading frontloading effect seen last year where exporters rushed shipments ahead of anticipated US tariff hikes.

These shocks are hitting a region that is highly dependent on imported oil and deeply integrated into global trade networks, the experts stated.

Despite these headwinds, they highlighted that robust domestic demand and services activity continue to cushion the impact.

Inflation is showing signs of a resurgence in early 2026, following a brief easing last year.

The ADB economists observed that higher energy and food prices are beginning to feed through to consumer costs across the region.

Financial markets are already signalling heightened risk, with rising bond yields pushing up borrowing costs and currencies in energy-dependent economies coming under pressure. Investors are also shifting toward safer assets, evidenced by a surge in regional demand for gold.

They raised alarms over food prices, which began picking up late in 2025.

The Middle East conflict has not only increased transport costs but also threatens to disrupt the supply of fertilisers.

This is a particular concern as it would have disproportionately negative effects on the region's lower-income households, who spend a larger share of their income on food, the economists warned.

To mitigate these mounting pressures, the ADB experts urged governments to adopt disciplined and targeted policies.

They suggested that support should be time-bound and focused on the most vulnerable, rather than broad-based subsidies that strain budgets.

Governments should also implement demand-side measures such as temperature mandates for air-conditioning and encouraging work-from-home schedules.

Protecting investment in renewable energy and infrastructure was cited as critical to reducing long-term exposure to global shocks.

Despite the global backdrop, the experts identified South Asia, particularly India, as the region's growth leader, driven by strong internal consumption.

Additionally, economies specialised in electronics and Artificial Intelligence (AI) products continue to see export success, defying the broader global trade slowdown, they added.