ADB slashes Asia growth outlook as Middle East conflict fuels inflation risks

Masato Kanda

The Asian Development Bank (ADB) has sharply downgraded its growth outlook for developing Asia and the Pacific while raising inflation forecasts, warning that prolonged disruptions from the escalating Middle East conflict are beginning to transmit more forcefully through energy markets, trade flows and financial conditions.

In a special update to its Asian Development Outlook, ADB now expects the region to grow by 4.7 percent in 2026 and 4.8 percent in 2027, down from earlier projections of 5.1 percent for both years. Inflation is forecast to accelerate to 5.2 percent this year from 3.0 percent in 2025, before easing to 4.1 percent in 2027.

“Our revised outlook is a significant downward revision for growth and a sharp increase in inflation following a special update to reflect the deepening crisis,” ADB President Masato Kanda said, cautioning that the region is facing “systemic, long-lasting disruptions to global energy and trade networks, not just temporary volatility.”

The downgrade comes as oil prices are now expected to average around US$ 96 per barrel in 2026, well above the pre-conflict levels of about US$ 69, before moderating to $80 in 2027. 

The sustained spike in energy costs is seen weighing particularly on import-dependent economies, while also straining sectors reliant on tourism, remittances and external financing.ADB warned that risks remain tilted to the downside. Under a more severe escalation scenario, regional growth could slow further to 4.2 percent in 2026 and 4.0 percent in 2027, while inflation could surge as high as 7.4 percent this year.

The lender said the persistence of the shock, rather than a short-lived disruption, is now the key concern, with continued pressure on energy supply routes and global trade networks feeding into domestic price levels and tightening financial conditions across emerging economies.

For policymakers, ADB outlined a calibrated response, urging governments to allow partial pass-through of higher energy prices to encourage efficiency and investment in alternatives, while avoiding broad subsidies that distort market signals. Fiscal support, it said, should be targeted and time-bound, focusing on vulnerable households and the most affected sectors.Central banks, meanwhile, were advised to prioritise financial stability and inflation expectations management over aggressive tightening, warning that overly restrictive policy could deepen growth headwinds. Measures to curb energy demand, from reduced consumption and efficiency campaigns to transport-related interventions, were also highlighted as near-term tools to ease pressure.

The updated outlook reinforces a growing concern among multilaterals that the Middle East conflict is evolving into a structural global shock, with implications extending well beyond energy markets into trade, capital flows and broader economic resilience, particularly for smaller, import-dependent economies such as Sri Lanka.