IMF sounds the alarm: Energy shocks and rising US Treasury yields pose spillover risks, Asia’s growth may slow to 4.4% next year

According to Zhihong Finance APP, the International Monetary Fund (IMF) predicted on Thursday that Asia's economic growth will slow next year, warning that risks from energy shocks triggered by the Iran war, possible corrections in the artificial intelligence (AI) boom, and spillover effects from rising global bond yields are intensifying.

In its report on the outlook for the Asia-Pacific region, the IMF also stated that uncertainty about the path of U.S. monetary policy may continue to cause volatility in Asian financial markets.

The IMF’s report, released during its annual meeting in Bangkok, noted, "Since this year's energy shock, exchange rates and capital flows have experienced increased volatility," with several emerging economies facing pressure on their local currencies to devalue.

The report indicated that although foreign capital inflows to the region remain generally robust, there has also been partial capital outflow, such as divestment from Korean technology stocks.

"It is expected that later this year the U.S. monetary policy will continue to tighten. The combination of tighter monetary policies and fiscal pressures in most major developed economies may keep upward pressure on yields in the Asia-Pacific region."

The IMF currently forecasts Asia’s economy will grow by 4.8% in 2026 and 4.4% in 2027, higher than the April projections, but still a slowdown compared to the 5.0% growth rate forecast for 2025.

The report stated that this upward revision largely reflects the boost delivered by the AI boom to developed Asian economies, whose growth rate is estimated to accelerate from 2.5% last year to 3.2% in 2026.

The report highlighted that emerging Asian economies remain the main engine of growth for the region, but due to shocks associated with rising energy prices, their growth for 2026 is expected to slow from last year’s 5.6% to 5.1%.

The IMF stated, "Risks to the outlook remain tilted to the downside," as prolonged conflict in the Middle East may keep commodity prices elevated and deplete oil reserves.

A correction in AI demand could drag global growth, with Asia being particularly vulnerable due to its significant participation in the AI value chain.

The report said that as global yields rise, market pressures from the U.S., United Kingdom, Eurozone, and Japan—large sovereign debt issuers—could spill over into Asia's bond markets, driving up yields and exacerbating already high fiscal vulnerabilities.

The IMF noted, "As most economies in the region still have high levels of public debt and financing needs, a sudden tightening of financial conditions could push up debt-servicing costs, further increasing public fiscal pressure."

Focus on Price Stability

This week’s IMF annual meeting mainly centered on concerns over debt growth, rising bond yields, and risks associated with the AI boom. These worries, compounded by the energy shock, are causing headaches for policymakers. The energy shock—blamed on Middle East conflict—has triggered a broad upswing in inflation.

Japan’s Nikkei index plunged nearly 5% on Thursday, with technology stocks severely hit due to market concerns over AI industry profitability, while robust U.S. inflation data has sparked fears of higher interest rates.

Krishna Srinivasan, Director of the IMF Asia-Pacific Department, said at a press conference that although Asia’s long-term inflation expectations remain generally anchored, central banks should continue to focus on price stability.

He said, "In cases where expectations are weakly anchored, policy frameworks have low credibility, or inflation is more stubborn, central banks should communicate clearly and be prepared to tighten policy. To accomplish this, central bank independence must be maintained."

Srinivasan stated that as public debt remains above pre-pandemic levels, the scope for further fiscal spending is increasingly constrained.

He said fiscal policy should be targeted and temporary in nature, urging countries in the region to avoid broad fuel subsidies or price controls, as such measures may carry higher costs.