Growth is expected to slow further to 3.6% in 2027, with risks skewed firmly to the downside, after easing to 4% in 2026, the report said.
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The region entered 2026 on a fragile footing, with weak domestic demand and slowing export momentum, but recent geopolitical and trade developments have significantly worsened prospects. The conflict in the Middle East has triggered a spike in commodity prices, raising the risk of a fresh inflation surge and reviving concerns of supply shocks similar to those seen after the Covid-19 pandemic and Russia’s invasion of Ukraine.
At the same time, U.S. tariff policy remains in flux despite a Supreme Court ruling in February striking down country-specific tariffs. Fresh investigations under Section 301 of the Trade Act signal Washington’s intent to rebuild its earlier tariff regime, keeping uncertainty elevated for export-dependent Asian economies.
Fragile start, worsening external shocks
This year was always expected to be challenging for Asia-Pacific economies after export front-loading ahead of anticipated U.S. tariff hikes boosted 2025 growth. At the same time, the artificial intelligence (AI) boom—which has underpinned much of the region’s recent export strength—was already showing signs of peaking.
Still, easing inflation had offered some room for cautious optimism, allowing several central banks to consider policy easing. A February ruling by the U.S. Supreme Court striking down country-specific tariffs had also briefly raised hopes of relief for exporters.That optimism has since faded. The Middle East conflict has pushed up prices of energy and other commodities, while disruptions to supplies of chemicals and fertilisers are adding to concerns. At the same time, U.S. tariff policy remains uncertain, with fresh investigations under Section 301 of the Trade Act signalling a potential rebuilding of the earlier tariff regime.
Exports resilient, domestic demand lags
Economic conditions across the region remain uneven. Export performance has been surprisingly strong, with real exports running above pre-pandemic trends and global averages. This strength has been driven by front-loading ahead of tariff hikes and strong demand linked to the AI boom, particularly in semiconductors, memory and related electronics.
Taiwan stands out, having recorded GDP growth of 8.7% in 2025, the fastest in the region, largely due to its dominance in advanced semiconductor production. The AI boom has also supported exports and investment across other economies in the region.
In contrast, domestic demand has remained weak across much of Asia-Pacific, sitting below pre-pandemic trends and dragging on price pressures. Inflation has generally remained at or below central bank targets, with some economies such as Thailand and China recently grappling with deflation risks. Even in India, inflation has hovered around 3%, below its typical range.
However, the benign inflation environment may not last. Rising commodity prices linked to the Middle East conflict are increasing the risk of inflation reaccelerating across the region.
Middle East conflict emerges as key risk
The Middle East conflict is now the most immediate threat to the region’s outlook, given Asia-Pacific’s heavy reliance on imported commodities. Northeast Asian economies such as Japan, South Korea and Taiwan are particularly exposed due to their dependence on imported fossil fuels, though strategic reserves provide some buffer.
China, a major buyer of discounted crude, also maintains significant reserves. In contrast, India and Southeast Asian economies are relatively less import-dependent but have smaller reserves, relying instead on subsidies and price controls to manage price volatility.
Energy exporters including Australia, Indonesia and Malaysia may benefit from higher prices through increased export revenues, although gains may be partially offset by reduced demand and limited pass-through to domestic consumers.
Moody’s said that if the conflict remains contained, the overall impact on growth and inflation may be modest. However, a prolonged escalation or sustained rise in energy prices could significantly worsen the outlook. Food inflation is also a concern, given its large share in household consumption across the region.
Tariff uncertainty clouds export outlook
Trade tensions remain another major headwind. While the U.S. Supreme Court’s February ruling struck down country-specific tariffs, the relief proved short-lived. The U.S. administration has since imposed new tariffs and signalled its intention to restore earlier trade restrictions.
A flat global tariff rate and ongoing investigations under Section 301 suggest that effective U.S. import tariffs will remain elevated, leaving Asia-Pacific economies—heavily dependent on exports—exposed to shifts in trade policy.
AI boom: tailwind with rising risks
The AI-driven surge in demand for electronics has been a key growth driver for the region, boosting exports, prices and investment, including in data centres. However, this also creates vulnerability.
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Stretched equity valuations, rising prices and isolated hardware shortages indicate that the AI cycle may be approaching a pause. A slowdown or reversal in AI demand could hit exports, investment and financial markets, particularly in economies such as South Korea, where equity markets have been highly sensitive to global risk sentiment.
China’s export push adds to imbalances
China’s continued reliance on exports amid weak domestic demand is adding another layer of complexity. While recent data has shown some improvement in trade, investment and retail activity, underlying structural challenges such as industrial overcapacity and weak consumption persist.
Policy efforts remain focused on industrial upgrading and technological self-sufficiency, raising the risk of renewed deflationary pressures and excess competition in key sectors over time.
Limited policy support, rising downside risks
With inflation risks resurfacing, central banks across the region are likely to pause rate cuts, and some may even tighten policy. Fiscal support is expected to remain limited and targeted, aimed primarily at cushioning the impact of higher energy prices rather than providing broad-based stimulus.
Moody’s warned that risks to the outlook are firmly skewed to the downside, driven largely by geopolitical developments. In a severe scenario involving a prolonged Middle East conflict, oil prices could surge sharply, leading to GDP losses of up to 3% across the region—greater than those expected in the U.S. or Europe due to Asia-Pacific’s dependence on imported energy.
Financial market volatility is also a concern, with stretched valuations—particularly in equities linked to the AI boom—leaving markets vulnerable to corrections.
A more difficult year ahead
Overall, Moody’s said 2026 is shaping up to be more challenging than previously expected for Asia-Pacific economies. A combination of geopolitical tensions, trade uncertainty and potential cooling in the AI-driven growth cycle is likely to weigh on growth, with limited room for policymakers to offset the impact.