A Stronger Year for South Asia, a Weaker Outlook for the Pacific

The Asian Development Bank expects developing Asia and the Pacific to grow by 5% in 2026, a slight upgrade from its July forecast but slower than last year. Technology exports, investment and public spending are supporting activity, while high energy prices and a strengthening El Niño threaten to raise costs for households and businesses.

Developing Asia and the Pacific is still growing at a pace many regions would welcome. The Asian Development Bank (ADB) expects its economies to expand by 5% in 2026, slightly faster than it projected in July. However, the headline figure also marks a slowdown from 5.5% in 2025, and the forces supporting growth offer little protection against a simultaneous rise in food and energy costs.

The bank's September 2026 Asian Development Outlook describes an economy pulled in different directions. Investment, public spending and technology exports are sustaining activity, while conflict-related energy disruption and a strengthening El Niño threaten production and prices. The question for the year ahead is whether growth can remain broad enough to withstand those pressures, especially in places where the forecast is already weakening.

A small upgrade with a large qualification

ADB's 0.1 percentage point upgrade to its 2026 regional growth forecast is evidence of continued momentum, not a reversal of the slowdown. Growth is projected to edge up to 5.1% in 2027. Strong investment and government stimulus are helping, alongside exports tied to the global artificial intelligence investment cycle. Together, they have kept the regional outlook firmer than the risks alone might suggest.

Technology demand introduces its own uncertainty. ADB identifies a sharp correction in AI-related equity valuations as a downside risk, alongside tighter financial conditions and renewed trade policy uncertainty. A shift in market sentiment would not automatically erase demand for technology exports, but it would test one of the forces now supporting the bank's forecast.

The regional average hides the strain

Growth revisions show why the regional figure needs careful reading. Stronger performance in the first half of 2026 prompted ADB to lift its forecast for developing Southeast Asia to 4.7% this year and 4.9% next year. South Asia's 2026 forecast rose more sharply, from 6% to 6.4%, on strong public investment and firm export growth in India.

The picture changes further ahead. ADB lowered South Asia's 2027 projection by 0.2 percentage points to 6.5%, reflecting weaker forecasts for Afghanistan, Bangladesh, India and Nepal amid trade, energy and weather-related shocks. Economies in the Pacific received the largest cuts: both annual forecasts fell by 0.3 percentage points, to 3% in 2026 and 2.9% in 2027, as energy disruption and expected El Niño effects weigh on mining and agriculture.

Developing East Asia's outlook was unchanged. For the Caucasus and Central and West Asia, ADB made smaller downward revisions, chiefly because of weaker external demand, particularly in Türkiye. These differences mean the policy challenge will vary across the region. Some economies are managing stronger demand today; others are facing weaker prospects before the full effects of the identified risks are known.

Lower inflation forecast, persistent price risk

ADB trimmed its 2026 inflation forecast from 4.3% to 4.2%, saying price stabilization measures have partly offset persistently high energy costs. The revision is narrow, and the bank raised its 2027 projection from 3.4% to 3.5%. Both figures exceed the 3% inflation recorded in 2025.

Energy and weather could compound each other. ADB warns that an escalation of conflict, particularly in the Middle East or Ukraine, could prolong volatility in global energy prices and affect other commodities. It also forecasts that a very strong El Niño could persist through the first quarter of 2027, raising energy demand while reducing agricultural production.

Drier conditions could bring smaller harvests and less hydropower generation, ADB President Masato Kanda warned. Higher food and energy prices would put the greatest pressure on people least able to absorb them. The forecast does not establish how large those effects will be in each economy, but it makes clear why a modest reduction in the inflation estimate offers limited reassurance.

What will test the forecast?

The outlook now depends on several developments that governments cannot fully control: the course of the conflicts ADB identifies, the strength and duration of El Niño, and whether the global AI investment cycle continues to support exports. Energy prices, harvests and financial conditions will show whether the risks remain contained or begin to change growth forecasts.

A stronger 2026 forecast for South Asia sits beside a weaker 2027 projection; improving prospects in Southeast Asia coexist with substantial cuts for the Pacific. If that divergence grows, the regional average may remain steady even as the economic pressure on particular countries and households becomes harder to ignore.