The Middle East conflict is expected to weigh more heavily on developing Asia and the Pacific than earlier anticipated, with growth moderating to 4.9% in 2026, down from 5.5% in 2025. The Asian Development Outlook July 2026 attributes this slowdown to higher energy costs, supply disruptions, and tighter financial conditions that are dampening growth in the coming months.
Inflation forecasts for developing Southeast Asia have been revised up from 3.2% in April to 3.9% in 2026, reflecting global energy and food price spikes linked to the Middle East crisis. Exchange rate pressures have further raised import costs across the subregion, straining household budgets and business investment. The Pacific region faces a similar drag, with its 2026 growth projection revised down from 3.4% to 3.3% as conflict-driven import costs for fuel, food, and production inputs curb economic activity.
Specific economies are hit harder: the Marshall Islands' growth is projected at 3.0%, Palau at 5.8%, and the FSM at a precarious 0.7%. Inflation in the Pacific remains steady at 4.2% for 2026, though fiscal measures like subsidies and tax relief have been deployed to cushion consumers against rising prices.
The economic outlook underscores the Asia-Pacific region's vulnerability to external shocks, with the Middle East conflict serving as a clear stressor on trade and investment flows. As growth unwinds only gradually, policymakers face the challenge of balancing inflation control with the need to sustain consumption and investment in an increasingly volatile global environment.
