Asia’s Growth Slows to 5% as Energy Shocks and El Niño Put Regional Recovery at Risk

Developing Southeast Asia’s stronger-than-expected performance in the first half of 2026 lifted its growth forecasts to 4.7% for this year and 4.9% for 2027, up from 4.6% and 4.8%.

Economic growth across developing Asia and the Pacific is expected to slow from 5.5% in 2025 to 5% in 2026, putting pressure on governments to sustain investment and protect households facing higher food and energy costs. The Asian Development Bank's Asian Development Outlook September 2026 projects a modest recovery to 5.1% in 2027, with this year's growth forecast standing 0.1 percentage points above its July estimate. Strong investment, government stimulus and technology exports tied to the global artificial intelligence investment cycle have helped support the region's economy, giving businesses and policymakers some breathing room as geopolitical tensions and a strengthening El Niño threaten to make essential goods more expensive.

Investment supports growth, but household budgets remain under pressure

The strength of AI-related demand has supported technology exports, making the global investment cycle an important source of growth for the region. Public spending and broader investment are helping economies absorb external shocks, though that resilience does not mean families will see a quick return to lower inflation. ADB reduced its regional inflation forecast for 2026 to 4.2%, down from 4.3% in July, because measures to stabilise prices have partly softened the impact of persistently expensive energy. Its 2027 inflation projection rose to 3.5% from 3.4%, leaving both annual forecasts above the 3% recorded in 2025 and pointing to continued pressure on purchasing power.

ADB President Masato Kanda said the region had remained resilient, with growing risks making preparation and support for vulnerable people increasingly important. His warning connects the economic outlook to everyday concerns: drier conditions can damage harvests and reduce hydropower generation, pushing up the cost of food and energy for households with little room to absorb another increase. Kanda said ADB was strongly supporting government efforts to protect those most exposed to the prolonged energy crisis, weather disruptions and renewed financial market risks.

Conflict and El Niño threaten food and energy supplies

The report identifies escalating conflict and a very strong El Niño as the two main threats to growth and inflation. A broadening Middle East conflict or an intensification of Russia's war in Ukraine could keep global energy prices high and unstable, with disruption spreading to other commodities and adding to business and household costs. El Niño is forecast to persist through the first quarter of 2027, potentially increasing energy demand and reducing agricultural production at the same time, creating further pressure on fuel and food prices. A sharp fall in AI-related equity valuations, tighter financial conditions and renewed uncertainty over trade policy could weaken the outlook further, exposing the region to setbacks beyond energy and weather.

South Asia gets an upgrade as the Pacific faces deeper cuts

Developing Southeast Asia's stronger-than-expected performance in the first half of 2026 lifted its growth forecasts to 4.7% for this year and 4.9% for 2027, up from 4.6% and 4.8%. The outlook for developing East Asia, including the People's Republic of China, remains unchanged. South Asia received a larger upgrade for 2026, with projected growth rising to 6.4% from 6% on strong public investment and firm export growth in India. Its 2027 forecast was cut by 0.2 percentage points to 6.5%, reflecting weaker projections for Afghanistan, Bangladesh, India and Nepal amid trade, energy and weather-related shocks.

Growth forecasts for the Caucasus and Central and West Asia were lowered by 0.1 percentage points in both years to 3.7% and 4.1%, mainly because external demand was weaker than expected, particularly in Türkiye. Pacific economies face the largest downward revisions, with forecasts cut by 0.3 percentage points for each year to 3% in 2026 and 2.9% in 2027, reflecting prolonged energy market disruptions and El Niño's expected effects on mining and agriculture.