ADB expresses concern over Mideast conflict

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The conflict in the Middle East could lower economic growth in developing Asia and the Pacific (AsPac), according to new research released by the Asian Development Bank.

According to the ADB brief authored by Matteo Lanzafame, director of Economic Research and Development Impact Department, economist Gabriele Ciminelli, senior economist Jaqueson Galimberti and principal economist John Beirne, the 2026 conflict in the Mideast affects economies in AsPac through higher energy prices, supply chain and trade disruptions, tighter financial conditions and weaker remittance flows. Tourism could also be impacted.

According to their brief, the impacts will be limited under a short-lived conflict. However, a prolonged and more severe conflict – with much larger and more persistent increases in energy prices until the first quarter of next year – will reduce growth in developing AsPac by 1.3 percentage points and raise inflation by 3.2 percentage points this year and next year.

They, thus, recommended that policymakers should safeguard macroeconomic stability, manage energy consumption and accelerate energy diversification. They said that broad?based energy subsidies and price controls should give way to targeted and time-bound fiscal support while monetary policy should focus on targeted liquidity provision rather than aggressive tightening while anchoring inflation expectations through effective communication.

The ADB brief outlines three risk scenarios indicating that effects on the region’s developing economies will depend largely on the duration of disruptions. Under a short-lived conflict, energy price pressures would ease relatively quickly. More prolonged disruptions would lead to larger and more persistent impacts on growth and inflation.

Adverse effects on growth will be most severe for economies in developing Southeast Asia and the Pacific, with inflation rising highest in South Asian economies. The scenarios reflect the high degree of uncertainty around how the conflict and the associated disruptions will evolve, and should be treated with caution. In addition to higher energy prices, the authors said, they account for broader supply chain disruptions and a global tightening of financial conditions.

“Prolonged energy disruptions could force economies in developing AsPac to navigate a difficult trade-off between weaker growth and higher inflation,” said ADB chief economist Albert Park. “Governments should focus on containing market stress and protecting the most vulnerable, while adopting policies to improve longer-term resilience.”

Policies should focus on stabilization rather than suppression of price signals. Allowing higher energy prices to pass through, at least in part, can encourage energy conservation, fuel switching and investment in alternative energy sources. Broad price controls or generalized subsidies risk distorting incentives, delaying adjustment and misallocating resources.

Fiscal support, where needed, should be targeted and time-bound. Priority should be given to supporting vulnerable households and the most affected industries. Well-targeted measures can cushion the social impact of higher prices while containing fiscal costs and preserving incentives to adjust to the shock.

Central banks should focus on limiting excessive market volatility while keeping a close watch on inflation expectations. The priority should be to provide targeted liquidity support to preserve orderly market functioning. Tightening policy too aggressively risks amplifying growth headwinds and exacerbating financial volatility. While some tightening may be warranted, anchoring inflation expectations with effective central bank communication will remain key.

Governments should curb energy demand where feasible. Practical measures include temperature mandates to limit air-conditioning, cuts to non-essential lighting, peak-hour electricity-saving campaigns and work-from-home or staggered schedules. Incentivizing public transport use and car-free days in urban areas on public holidays can also help reduce transport fuel use.

The current conflict in the Mideast, thus, places geopolitical tensions as a central driver of the regional macroeconomic outlook. Although AsPac has limited direct trade exposure to Iran and other countries in the Mideast, economies in the region are highly vulnerable to spillovers transmitted through global energy markets, trade and transport networks and financial conditions.

The risk extends beyond oil production itself to include maritime transport through the Strait of Hormuz; aviation corridors linking AsPac with Europe and already strained global shipping routes.

These transmission channels are particularly relevant for AsPac, which is both the world’s largest energy-importing region and a central hub for global manufacturing and trade. AsPac’s vulnerability to the Mideast conflict stems in large part from its dependence on imported energy.

The region is home to some of the world’s largest oil importers – including China, India, Japan and South Korea. Most regional economies are substantial net importers of crude oil, refined oil products and natural gas relative to their gross domestic product. This implies that even moderate increases in energy prices can generate significant income losses.

Because crude oil is traded in an integrated global market, a disruption in the Strait affects all net oil importers through higher world prices. However, Asia’s heavier reliance on Gulf suppliers also implies greater short-run exposure to shipping disruptions, higher transport and insurance costs and temporary difficulties in replacing disrupted supplies. The exposure is similarly pronounced for LNG, as virtually all LNG transiting the Strait are destined for Asian importers.

Over 50 percent of Asia’s seaborne naphtha imports are sourced from the Mideast, and many manufacturing sectors rely on timely delivery of chemical inputs, fertilizers, pharmaceutical ingredients and semiconductor components. With lean inventories and just-in-time production systems, shipping disruptions can quickly raise costs, delay production and strain supply chains.