ADB: Middle East Conflict Could Reduce Economic Growth in Asia
Prolonged energy supply disruptions could force developing economies in Asia and the Pacific to confront a difficult dilemma between slowing growth and rising inflation.
Jakarta (ANTARA) - The Asian Development Bank (ADB) has revealed that conflict in the Middle East could potentially reduce economic growth in developing Asia and the Pacific by up to 1.3 percentage points over the 2026-2027 period.
This conflict could also increase inflation by 3.2 percentage points if disruptions in the energy market last more than a year.
“The conflict impacts economies in Asia and the Pacific through rising energy prices, supply chain and trade disruptions, and tightening financial conditions. The tourism sector and remittances are also at risk,” said ADB Chief Economist Albert Park in the ADB research report, Jakarta, Saturday.
The ADB outlines three risk scenarios showing that the impact on developing countries’ economies in the region will depend heavily on how long the disruption lasts.
The adverse effects on growth will be most severely felt by economies in developing Southeast Asia and the Pacific, while inflation rates will rise highest in South Asian economies.
These scenarios reflect high uncertainty regarding the conflict’s developments and accompanying disruptions, so they should be treated with caution.
In addition to rising energy prices, the scenarios also account for broader supply chain disruptions and global financial tightening.
The ADB assesses that governments should focus on easing market tensions and protecting the most vulnerable groups, while implementing policies to enhance long-term resilience.
The ADB provides four main policy steps to address the issue. The first is policies focused on stabilisation, not repressing price signals.
“Allowing energy price increases to pass through, at least partially, can encourage energy conservation, switching to alternative fuels, and investment in alternative energy sources. Broad price controls or general subsidies risk distorting incentives, delaying adjustment, and causing inefficient resource allocation,” he explained.
This can mitigate the social impact of price rises, while curbing fiscal costs and maintaining incentives to adapt to the shock.
The third is that central banks should focus on limiting excessive market volatility while always monitoring inflation expectations, with the primary priority of providing targeted liquidity support to ensure smooth market functioning.
Overly aggressive policy tightening is seen as risking exacerbating growth barriers and worsening financial volatility. While some policy tightening may be necessary within limits, he continued, efforts to stabilise inflation expectations through effective central bank communication remain the key.
“Providing incentives for public transport use and implementing car-free days in urban areas on national holidays can also help reduce transportation fuel consumption,” said Albert.