IMF Sounds the Alarm: Energy Shocks and Spillover Risks from Rising US Treasury Yields Could Slow Asia's Growth to 4.4% Next Year

The International Monetary Fund (IMF) predicted on Thursday that Asia's economic growth will slow next year, warning that risks are mounting from an energy shock triggered by the Iran war, a possible pullback in the artificial intelligence (AI) boom, and spillover effects from rising global bond yields. In its report on the Asia-Pacific outlook, the IMF also said uncertainty over the path of US monetary policy could keep ASIA FINANCIAL markets volatile. "Exchange rate and capital flow volatility have increased since this year's energy shock," the IMF said in the report released during its annual meetings in Bangkok, noting that several emerging economies are under pressure from currency depreciation. While foreign capital inflows into the region remain strong overall, there have also been some outflows, such as divestment from South Korean tech stocks, the report said. "US monetary policy is expected to continue tightening later this year. The combination of monetary tightening and fiscal pressures in most major advanced economies could keep upward pressure on yields in the Asia-Pacific region." The IMF said it now expects Asia's economy to grow 4.8% in 2026 and 4.4% in 2027, higher than its April forecasts but still slower than the 5.0% growth in 2025. The upgrade largely reflects the boost to Asia's advanced economies from the AI boom, with their growth expected to accelerate to 3.2% in 2026 from 2.5% last year, the report said. Asia's emerging economies remain the region's main growth engine, but their growth in 2026 is expected to slow to 5.1% from 5.6% last year due to the shock from higher energy prices, the report said. "Risks to the outlook remain tilted to the downside," the IMF said, noting that a prolonged standoff in the Middle East conflict could keep commodity prices elevated and deplete oil reserves. A pullback in AI demand could drag down global growth, and given Asia's deep involvement in the AI supply chain, the impact could be particularly pronounced. As global yields rise, market stress in major sovereign debt issuers such as the US, UK, euro area and Japan could spill over into Asian bond markets, pushing up yields and exacerbating already elevated fiscal vulnerabilities, the report said. "With public debt and financing needs still high in most economies in the region, a sudden tightening of financial conditions could raise debt servicing costs and further intensify pressure on public finances," the IMF said. Focus on price stability This week's IMF annual meetings have centered on concerns about rising debt, higher bond yields and risks from the AI boom. These worries come on top of the energy shock, adding to policymakers' headaches. The energy shock, blamed on the Middle East conflict, has driven broad-based inflation higher. Japan's Nikkei index plunged nearly 5% on Thursday, with tech stocks hit hard by concerns over AI industry profitability, while hot US inflation data fueled worries about higher interest rates. Krishna Srinivasan, director of the IMF's Asia-Pacific department, said at a news conference that while long-term inflation expectations in Asia remain broadly anchored, central banks should continue to focus on price stability. "Where expectations are less anchored, where policy frameworks are less credible, or where inflation is more persistent, central banks should communicate clearly and be prepared to tighten policy. To do so, central bank independence must be preserved," he said. Srinivasan said that with public debt still above pre-pandemic levels, the room for further fiscal spending is increasingly limited. Fiscal policy should be targeted and temporary, he said, urging countries in the region to avoid blanket fuel subsidies or price controls, as these measures could prove more costly.