Asia-Pacific Economies Face Triple Threat in 2026, Says Moody's Analytics
Asia-Pacific economies have embarked on 2026 with a fragile foundation, and the escalating US-Israel-Iran war has significantly heightened risks to GDP growth for major players like China, India, Japan, and South Korea, according to a recent report by Moody's Analytics. The global economy has endured a tumultuous decade, starting with the Covid-19 pandemic, followed by the Russia-Ukraine war, Donald Trump's tariff policies, and now the Middle East conflict, adding to the growing list of disruptions.
Fragile Economic Scenario and Growth Slowdown
Moody's Analytics indicates that 2026 was already anticipated to be a challenging year for the Asia-Pacific region. Domestic demand has been weak, and export growth was poised to decelerate after a surge last year driven by front-loading ahead of US tariff increases. The artificial intelligence boom, while a tailwind, appears ready for a pause. Although cooling inflation allowed some central banks to ease monetary policy, offering cautious optimism, recent events have complicated the outlook considerably.
The report, titled 'Asia-Pacific Outlook: Buckling Up', notes that external and domestic shocks have scrambled economic fortunes over the past 18 months. Exports have shown surprising strength, partly due to AI-driven demand for semiconductors and related products, benefiting economies like Taiwan, which saw GDP growth jump to 8.7% in 2025. However, domestic demand remains subdued across much of the region, with consumer price inflation averaging below central bank targets. For instance, India's CPI hovers around 3%, below the RBI's 4% target, while China battles deflationary pressures.
Three Major Risks to Asia-Pacific Economies
Moody's Analytics highlights a troublesome mix of external threats facing the region, with India positioned uniquely among its peers.
Threat 1: Middle East Conflict and Inflation Fears
The Middle East conflict tops the list of risks due to the region's heavy reliance on imported commodities. Since the conflict began, ship passage through the Strait of Hormuz has been curtailed, energy infrastructure in the Gulf has been hit, and oil prices have surged past $100 per barrel, stoking inflation fears. This creates an uncomfortable echo of the supply shocks following the Covid-19 pandemic and Russia's invasion of Ukraine.
Northeast Asia's high-income economies, such as Japan, South Korea, and Taiwan, are particularly dependent on imported fossil fuels but maintain sizeable strategic oil reserves. China, a major buyer of Iranian discounted crude, also holds huge reserves. In contrast, India and Southeast Asian economies are somewhat less import-dependent but possess far smaller reserves; their governments rely on price caps and fuel subsidies to shield consumers from volatility. A prolonged conflict could lead to significant GDP losses, with simulations showing peaks of up to 3% across the APAC region.
Threat 2: Trump Tariff Risks and Export Dependence
Beyond the Middle East, uncertainty surrounding tariffs poses a significant concern. The Asia-Pacific region has historically grown through exports, and this dependence has deepened since the pandemic. While the US Supreme Court struck down country-specific tariffs, Trump's announcement of a flat global 15% tariff rate means average effective US import tariffs remain high. New investigations under Section 301 of the Trade Act suggest the administration aims to rebuild the tariff regime, with Moody's baseline assuming tariffs will stay at current levels through 2028.
Threat 3: Potential End of the AI Boom
The AI boom has been a powerful driver, boosting electronics exports and data centre investment across the region. However, this also means the region is heavily exposed should AI momentum falter. Exports and investments are at risk if the boom ends or experiences a downturn, with financial markets likely to react sharply. South Korea's equity market, for example, nearly tripled over 18 months before selling off when the Middle East conflict exposed macro vulnerabilities.
Growth Projections and Regional Impact
With these risks in mind, Moody's Analytics projects that growth across the Asia-Pacific region will slow from 4.3% in 2025 to 4% in 2026, further declining to 3.6% in 2027. Key individual projections include:
- India: 7.8% in 2025, 7.5% in 2026, 6.2% in 2027, and 6% in 2028
- China: 5% in 2025, 4.4% in 2026, 4.3% in 2027, and 4% in 2028
- Japan: 1.1% in 2025, 0.5% in 2026, 0.7% in 2027, and 0.9% in 2028
- South Korea: 0.9% in 2025, 1.9% in 2026
- Taiwan: 8.7% in 2025, 6.6% in 2026
China's new economic normal involves flooding markets with exports due to weak domestic demand, with officials projecting sub-5% growth for the first time in decades. Policy efforts focus on industrial upgrading and technological self-sufficiency, but risks of deflation and overcapacity persist.
Conclusion: A Difficult Year Ahead
Moody's Analytics concludes that 2026 is shaping up to be even more challenging than originally envisaged for the Asia-Pacific region. A severe and prolonged Middle East conflict would compound existing tariff pain, and while the AI boom continues, stretched valuations and supply issues suggest a potential pause. With limited support from fiscal and monetary policymakers, growth is expected to slow, underscoring the need for resilience in the face of multiple headwinds.
