The Middle East conflict is expected to weigh more heavily on developing Asia and the Pacific than previously anticipated, moderating regional growth to 4.9% in 2026, a significant drop from the 5.5% recorded in 2025 [8]. While activity remained firm in early 2026 supported by consumption and investment, higher energy costs, supply disruptions, and tighter financial conditions are expected to dampen growth in the coming months [8].
Inflation forecasts for developing Southeast Asia have been revised up from 3.2% in April to 3.9% for 2026, reflecting higher global energy and food prices linked to the Middle East crisis [8]. Exchange rate pressures have further raised import costs across the subregion, forcing governments to deploy fiscal measures such as subsidies and temporary tax relief to cushion consumers against rising prices [8].
The Pacific region faces a similar downward revision, with the 2026 growth projection dropping from 3.4% to 3.3% as conflict-driven costs for essential imports like fuel and food dampen economic activity [8]. Specific economies like the Marshall Islands, Palau, and the FSM face severe growth contractions, with projections ranging from 0.7% to 5.8%, underscoring the vulnerability of smaller island states to global supply shocks [8].
These economic headwinds compound the geopolitical risks driven by US-PRC rivalry, which determines regional security priorities and economic governance in 2026 [7]. The interplay of major power competition, regional political vulnerabilities, and critical economic interdependencies creates a complex environment where systemic escalation is constrained by high costs, yet economic instability remains a persistent threat to regional stability [7].
