The International Monetary Fund has issued a stark warning that Asia's economic growth may slow to 4.4% in 2027, down from the region's 5% growth in 2025, as multiple risks converge to challenge the region's outlook. According to Reuters, the IMF's latest Asia-Pacific regional economic outlook, released during the IMF's annual meetings in Bangkok, highlights that energy price shocks triggered by the Iran war, a potential correction in the artificial intelligence boom and rising global bond yields pose growing risks to the region's growth trajectory. The projections indicate a slowdown from the region's 5% growth in 2025, with the 2026 forecast at 4.8% growth, representing upward revisions from April but still reflecting moderating momentum. Middle East conflict, AI boom pose downside risks to the region's economic outlook, with Asian economies deeply integrated into the manufacturing and supply networks supporting the AI boom, making them vulnerable to any sharp reversal in technology investment or demand for AI-related products.
The IMF has flagged artificial intelligence-driven market correction as a key risk to global financial stability, with a correction in AI-related demand potentially weighing on global economic growth, with the impact potentially more pronounced in Asia due to the region's extensive exposure to the artificial intelligence production chain. According to The Economic Times, faltering AI investment and profitability could challenge optimistic expectations and trigger a correction in asset prices linked to the AI industry, with growing leverage potentially serving as a catalyst for such a correction. While soaring bond yields are already exerting pressure on equity markets due to rising crude oil prices and fiscal concerns, the IMF highlighted that higher yields can further raise discount rates and depress valuations across other assets, including those that are AI-related, while reducing the value of bonds used as collateral. This represents a significant shift from the previous narrative where AI investment was driving growth momentum.
Growth in emerging Asia is projected to ease to 5.1% in 2026 from 5.6% in 2025, as higher energy prices weigh on economic activity, according to the IMF's latest outlook. However, advanced Asian economies are expected to accelerate to 3.2% growth in 2026 from 2.5% last year, largely reflecting the boost from the artificial intelligence boom. The upward revisions largely reflect the boost from the artificial intelligence boom to advanced Asian economies, with the AI boom expected to accelerate growth to 3.2% in 2026 from 2.5% last year. The IMF projected Asia's economy to grow 4.8% in 2026 and 4.4% in 2027, with emerging Asia expected to remain the region's primary growth engine while expansion moderates. Financial market volatility presents another challenge, with currency depreciation pressures and portfolio outflows emerging in some markets, including South Korean technology stocks.
Krishna Srinivasan, director of the IMF's Asia and Pacific Department, said central banks across the region should continue to prioritise price stability even as inflation expectations remain broadly anchored. According to Reuters, monetary authorities should communicate their policy intentions clearly and remain prepared to raise interest rates where inflation expectations are less firmly anchored, policy frameworks lack credibility or price pressures prove persistent. The increase in energy prices has contributed to broader inflationary pressures, while stronger-than-expected US inflation data has fuelled concerns that interest rates could remain higher for longer. Market concerns over inflation and interest rates were reflected in Thursday's trading, when Japan's Nikkei share average tumbled nearly 5%, with technology stocks coming under pressure amid concerns about the profitability of AI-related investments. The surging bond yields are intensifying the selloff in India's stock market, adding to existing market pressures across the region.
With public debt across much of Asia still above pre-pandemic levels, the scope for further fiscal expansion has become increasingly constrained, according to the IMF's latest outlook. The lender urged governments to keep fiscal support targeted and temporary, cautioning against blanket fuel subsidies and broad price controls that could impose significant costs on public finances. The IMF warned that financial stress among major sovereign borrowers, including the United States, the United Kingdom, the euro zone and Japan, could spill over into Asian bond markets as global yields rise. Higher yields could increase borrowing costs across the region and aggravate existing fiscal vulnerabilities, with the effective average cost of government borrowing projected to rise to 3.7% by 2031, up from 2.3% in 2021. With public debt and financing requirements still elevated across much of Asia, an abrupt tightening of financial conditions could further strain government finances by increasing debt-servicing costs, the IMF noted.
