By Kimberley Kao and Amanda Lee
The International Monetary Fund lowered its 2026 growth outlook for Asia, expecting rising defense spending and an energy shock from the war in the Middle East to keep risks elevated.
The Middle East conflict and its impact on commodity markets, inflation expectations and financial conditions present "a significant counterforce" to growth tailwinds including tech-related investments and supportive monetary policy, the IMF said in its April outlook report.
"Absent the war, global growth would have been revised upward," it said.
Defense outlays are increasing sharply, with 88% of the boom accounted for by emerging and developing economies, the IMF said. It warned that higher military spending could crowd out public investment and tilt growth risks to the downside if not managed properly.
While defense buildups can "boost economic activity in the short term--lifting consumption and investment," they can also "temporarily increase inflation and create significant medium-term challenges," the IMF said.
At the same time, the conflict is pushing up energy prices and disrupting tourism and remittance flows in parts of South and Southeast Asia, weighing on domestic demand.
The IMF trimmed its forecast for emerging and developing Asia, which includes China, India and Southeast Asian economies, to 4.9% from 5.0% in January. Its baseline assumes the conflict will be short-lived, but it warned that prolonged fighting would have a larger impact on growth.
China's gross domestic product growth this year is now projected at 4.4%, down slightly from the previously forecast 4.5%, with the expansion expected to slow to 4.0% in 2027.
Exports remain strong, but weak domestic consumption is becoming a larger drag, said the IMF's chief economist, Pierre-Olivier Gourinchas.
India's fiscal-year growth forecast was raised to 6.5% from 6.4%, thanks to strong momentum and lower additional U.S. tariffs.
The Philippines saw a sharp downgrade, with the IMF slashing its 2026 growth projection to 4.1% from 5.6%, citing the conflict and other factors.
Forecasts for advanced economies were unchanged, with Japan's growth tipped at 0.7% and South Korea's at 1.9%. The IMF said the war's overall impact on advanced economies is modest, though more severe for vulnerable, commodity-importing countries.
Despite the downgrade, the IMF noted that technology investment remains a bright spot. Artificial-intelligence-related spending added 0.5 percentage point to U.S. growth last year, with spillovers benefiting Asia through trade.
Write to Kimberley Kao at kimberley.kao@wsj.com and Amanda Lee at amanda.lee@wsj.com
(END) Dow Jones Newswires
04-15-26 0340ET
