Iran war may impact growth, spur inflation in Asia and Pacific: ADB

A prolonged conflict in the Middle East, particularly involving Iran, could significantly dampen economic growth and drive up inflation across Asia and the Pacific, according to new research by the Asian Development Bank.

In a brief released today (26 March) from Manila, the ADB warned that disruptions in energy markets lasting more than a year could reduce economic growth in developing Asia and the Pacific by up to 1.3 percentage points over 2026–2027, while pushing inflation up by 3.2 percentage points.

The report highlights that the conflict would affect regional economies through multiple channels, including rising energy prices, disruptions to supply chains and trade, and tighter global financial conditions. Tourism and remittance flows could also be adversely impacted.

According to the ADB, the scale of the economic fallout will largely depend on how long the disruptions persist. A short-lived conflict may see energy price pressures ease relatively quickly, while prolonged instability could lead to deeper and more sustained impacts on both growth and inflation.

The adverse effects are expected to be most pronounced in developing Southeast Asia and Pacific economies in terms of growth, while inflationary pressures would be highest in South Asian economies. The bank cautioned that the projections are subject to significant uncertainty, given the evolving nature of the conflict.

"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."

The ADB outlined several policy recommendations, urging governments to prioritise stabilisation rather than suppressing price signals. It noted that allowing energy prices to adjust could encourage conservation, fuel switching, and investment in alternative energy sources, while broad subsidies or price controls could distort markets.

The report also emphasised the need for targeted and time-bound fiscal support to protect vulnerable households and affected industries, alongside careful monetary policy to manage inflation expectations without exacerbating financial volatility.

In addition, governments were advised to adopt practical measures to curb energy demand, such as limiting air-conditioning use, promoting public transport, and encouraging flexible work arrangements to reduce fuel consumption.

Founded in 1966, the ADB is a multilateral development bank owned by 69 members, working to support sustainable and inclusive growth across Asia and the Pacific.