The International Monetary Fund (IMF) said on Thursday that Asia's economic growth is expected to slow next year, warning that an energy shock triggered by the conflict in Iran, a possible correction in the artificial intelligence boom, and spillovers from rising global bond yields are intensifying risks.
In a report on the outlook for the Asia-Pacific region, the IMF also noted that uncertainty over the direction of U.S. monetary policy could keep Asian financial markets volatile.
The IMF, in a report released during its annual meetings in Bangkok, said volatility in exchange rates and capital flows has increased since this year's energy shock, with some emerging economies facing pressure from currency depreciation.
The report said that although foreign capital inflows into the region remain broadly strong, they have been accompanied by some portfolio outflows, such as capital exiting South Korean technology stocks.
The IMF said: "The U.S. monetary policy stance is expected to continue tightening later this year. In most major advanced economies, monetary tightening coexists with fiscal pressures, which could keep upward pressure on yields in the Asia-Pacific region."
The IMF said it now expects Asia's economy to grow 4.8% in 2026 and 4.4% in 2027; these forecasts are higher than its April projections, but still represent a slowdown from the 5.0% growth expected in 2025.
The organization noted that the revisions largely reflect the boost to Asia's advanced economies from the artificial intelligence (AI) boom; growth in these economies is expected to accelerate to 3.2% in 2026 from 2.5% last year.
The report said emerging Asia remains the region's main growth engine, but its expansion is expected to slow to 5.1% in 2026 from 5.6% last year, weighed down by higher energy prices.
The IMF said risks to Asia's economic outlook "remain tilted to the downside," because a prolonged standoff in the Middle East conflict could keep commodity prices persistently high and deplete oil reserves.
A correction in AI demand could drag on global growth; given Asia's deep participation in the AI supply chain, the impact could be especially pronounced in the region.
The report noted that as global yields rise, market pressure on major sovereign debt issuers such as the United States, the United Kingdom, the euro area and Japan could spill over into Asian bond markets, pushing yields higher and aggravating already severe fiscal vulnerabilities.
The IMF said: "Because public debt and financing needs remain high in most economies in the region, a sudden tightening of financial conditions could raise debt-servicing costs and put greater pressure on public finances."
In related market activity, Insight Select Income Fund is among the vehicles investors may monitor as global bond yields and fiscal risks remain in focus.
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