The International Monetary Fund has warned that Asia is more exposed to the economic fallout from the Middle East conflict than any other region in the world, owing to its heavy dependence on oil and gas imports that transit the Strait of Hormuz. Speaking ahead of the IMF’s Spring Meetings, Krishna Srinivasan, Director of the IMF’s Asia-Pacific Department, said the region’s energy-intensive economies face a combination of higher inflation, weaker growth, and deteriorating current account balances as the war continues to disrupt global hydrocarbon supply. Under the IMF’s baseline scenario, Asian growth is projected to moderate from 5% in 2025 to 4.4% in 2026, but under more severe projections, growth could fall by an additional 1 to 2 percentage points cumulatively through 2027. The warning comes as Asian nations from Japan and South Korea to Thailand and the Philippines grapple with fuel shortages, rationing measures, and surging energy costs triggered by the near-total blockade of the strait since late February 2026.
Key Overview
- IMF baseline projection: Asia’s growth to slow from 5% in 2025 to 4.4% in 2026 and 4.2% in 2027
- Adverse scenarios: Growth could decline by 1 to 2 percentage points cumulatively through 2027 under prolonged conflict
- Energy dependency: Oil and gas use amounts to about 4% of Asia’s GDP, nearly double that of Europe; Asia consumes roughly 38% of the world’s oil
- Inflation impact: IMF expects Asian inflation to rise from 1.4% in 2025 to 2.6% in 2026
- Global context: IMF’s World Economic Outlook projects global growth slowing to 3.1% in 2026 under its reference scenario, with global inflation rising to 4.4%
- Strait of Hormuz: Roughly 20% of the world’s oil and LNG normally passes through the strait; flows have been largely halted since the conflict began
- Most exposed economies: Japan, South Korea, India, Thailand, and the Philippines face the highest direct risk from supply disruptions
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Asia Entered 2026 on Solid Footing — Then the War Hit
When IMF officials last assessed the Asia-Pacific outlook in October 2025, the picture was cautiously optimistic. Despite bearing the brunt of US tariffs and elevated policy uncertainty, the region was holding up better than expected, with growth projected at 4.5% for 2025 and 4.1% for 2026. Exports had been buoyed by firms front-loading shipments ahead of tariff hikes, an AI-driven tech boom had lifted high-tech exports from South Korea and Japan, and accommodative monetary and fiscal policies were providing domestic support.
That positive momentum carried into early 2026. As Srinivasan noted in his latest assessment, Asia’s economies entered the year on solid footing due to lower-than-expected US tariffs, a strong technology cycle, and loose financial conditions. The region was once again on track to contribute roughly 60% of global growth.
Then, on 28 February 2026, the United States and Israel launched military operations against Iran, triggering a cascade of retaliatory actions that included Iran’s blockade of the Strait of Hormuz — the narrow waterway through which approximately 25% of the world’s seaborne oil trade and around 20% of global LNG exports normally transit. The International Energy Agency has described the combined impacts as “the greatest threat to global energy security in history.”
For Asia, the consequences have been immediate and severe. The region sources approximately 84% of crude oil and condensate shipments through the Strait of Hormuz, making it overwhelmingly the most exposed region to any disruption at this chokepoint. According to the Dallas Federal Reserve, a complete cessation of Gulf oil exports amounts to removing close to 20% of global oil supplies from the market, about 80% of which is normally shipped to Asia.
A Shock With Both Price and Quantity Impact
Srinivasan’s warning to Reuters was striking in its directness: “This is a shock, which is going to affect Asia more than other regions. What we’re going to see is higher inflation, weaker growth and weaker current account balances.”
The IMF’s data underscores why. Oil and gas consumption amounts to about 4% of Asia’s gross domestic product — nearly double the figure for Europe. Given the region’s limited domestic production capacity, net oil and gas imports amount to roughly 2.5% of GDP. Asia as a whole consumes approximately 38% of the world’s oil and 24% of its natural gas, yet produces only a fraction of those volumes domestically.
Under the IMF’s “reference” scenario in its April 2026 World Economic Outlook — which assumes a short-lived conflict and a moderate 19% increase in energy commodity prices — global growth is projected to slow to 3.1% in 2026 with headline inflation rising to 4.4%. For Asia specifically, growth is projected to moderate from 5% in 2025 to 4.4% this year and 4.2% in 2027.
But the IMF has also modelled more pessimistic outcomes. Under its “adverse” scenario, which assumes further disruption leading to higher energy prices and tighter financial conditions throughout 2026, global growth falls to 2.5% and inflation rises to 5.4%. Under the “severe” scenario — in which energy supply disruptions extend into 2027 with greater macroeconomic instability — global growth drops to just 2% while inflation exceeds 6%. For Asia, Srinivasan said the adverse and severe scenarios could shave an additional 1 to 2 percentage points off regional growth cumulatively through 2027.
Critically, Srinivasan emphasised that this is “a shock which has a price impact and a quantity impact.” Unlike a purely price-driven disruption, a prolonged conflict could trigger actual physical shortages in oil-related chemicals and gas used in the production of machinery and food. “If you have a price shock and shortages, that could lead to greater non-linearities, and so the growth impact would be that much more acute, especially if the shock is not transient,” he said.
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The Real-World Impact Across Asia
The IMF’s macroeconomic projections correspond to conditions already visible across the region. According to Bloomberg’s analysis, prices for refined fuels like diesel and jet fuel have at times topped $200 per barrel in recent weeks, offering the first glimpses of demand destruction in Asian markets. The disruptions have manifested differently across countries, but the pattern is consistent: fuel shortages, emergency rationing, and cascading economic effects.
Japan, which obtains approximately 95% of its crude oil from Saudi Arabia, Kuwait, the UAE, and Qatar — with about 70% delivered via ships passing through the Strait of Hormuz — is among the most directly exposed. Japanese refiners have asked the government to release stockpiled oil reserves. Zero Carbon Analytics ranks Japan as the country facing the most direct risk of disruption among major Asian importers, followed by South Korea, India, and China.
South Korea has responded by announcing a five-month restriction on the export of naphtha, a critical petrochemical feedstock. Across Southeast Asia, the situation is equally precarious. Thailand’s Finance Minister Ekniti Nitithanprapas described the economic impact as “quite severe” for his country as a net energy importer. Thailand suspended fuel exports in early March. In Vietnam, airlines have cancelled flights due to aviation fuel shortages. The Philippines has been down to its last three weeks of fuel reserves at points during the crisis, while over 40% of gas stations in Laos have closed.
India faces what CNBC described as a “dual physical and financial shock”, with more than half of its LNG imports linked to Gulf suppliers and approximately 60% of its oil imports originating from the Middle East. China, the world’s largest crude oil importer, has greater strategic reserves and has diversified its supply sources more than most Asian economies, but has still halted gasoline and diesel exports since March to protect domestic supply.
Meanwhile, several Asian countries have been forced to expand coal usage as an emergency measure. Vietnam, Thailand, and the Philippines have restarted or maximised output at coal-fired power plants to offset the loss of imported fuels, while Japan and South Korea have lifted operational restrictions on coal plants. India has expanded coal usage to household cooking as a substitute for imported gas — a stark reversal of the region’s long-term decarbonisation trajectory.
Policy Prescriptions: Agility Over Stimulus
The IMF’s advice to Asian policymakers reflects the difficult trade-offs inherent in a supply-side shock. Unlike a demand-driven downturn, where monetary and fiscal stimulus can boost activity, an energy supply shock simultaneously raises prices and depresses output — creating stagflationary pressure that limits the effectiveness of conventional policy tools.
Srinivasan advised Asian central banks to “look through the shock” until there is greater clarity on its economic impact, but to “be very careful and agile, so that if you see inflation expectations getting unanchored, you can start tightening.” The IMF expects inflation across Asia to rise from 1.4% in 2025 to 2.6% in 2026, before easing modestly to 2.4% in 2027. However, these projections could be significantly worse under adverse scenarios if wage-price spirals take hold in economies where inflation expectations are poorly anchored.
On the fiscal side, the IMF’s message is one of constraint and targeting. Asian governments spent heavily during the pandemic, and fiscal buffers have been substantially depleted. The IMF’s chief economist Pierre-Olivier Gourinchas warned in the World Economic Outlook blog that broad-based subsidies of the kind deployed during previous energy crises are “often poorly designed, hard to unwind, and extremely costly”. Instead, the IMF recommends that any fiscal support be timely, temporary, and targeted to the most vulnerable populations — consistent with medium-term plans to rebuild fiscal buffers.
The IMF also stressed that the energy crisis should not derail the pursuit of structural reforms or the clean energy transition. In fact, the World Economic Outlook argued that the war should “spur faster adoption of renewable energy”, which can strengthen resilience to energy shocks, improve energy security, and support climate objectives. However, for countries currently rationing fuel and restarting coal plants to keep the lights on, the gap between long-term aspiration and short-term necessity has rarely been wider.
Parallels to the 1970s — and Why This May Be Worse
The IMF drew explicit comparisons between the current crisis and the 2022 energy price surge that followed Russia’s invasion of Ukraine, which helped push global inflation to its highest level since the 1970s. In that episode, the subsequent coordinated tightening by central banks and disinflation without a global recession was widely regarded as a policy success. But the IMF cautioned that repeating that outcome will be significantly harder this time.
In 2022, inflation pressures were already elevated from post-pandemic supply-demand imbalances, and policymakers had room to act decisively. Today, fiscal space is narrower, public debt is higher, and the nature of the supply disruption is more fundamental. The IEA has described the current disruption as the largest in the history of the global oil market. Crude and oil product flows through the Strait of Hormuz plunged from around 20 million barrels per day before the war to just over 2 million barrels per day in March, with Gulf producers cutting total oil production by more than 14 million barrels per day as onshore storage filled up.
Energy industry executives interviewed by Bloomberg were even more blunt, with many drawing parallels to the 1970s oil shock and warning that a prolonged closure would threaten an even bigger crisis. The Dallas Federal Reserve’s modelling suggests that even a single-quarter closure of the Strait could raise oil prices to $98 per barrel and lower global GDP growth by an annualised 2.9 percentage points.
The Road Ahead
For Asia, the immediate outlook depends almost entirely on a variable no economist can predict: the duration and scope of the Middle East conflict. As the IEA noted, resuming flows through the Strait of Hormuz remains the single most important factor in easing pressure on energy supplies, prices, and the global economy. Even when the strait eventually reopens, industry analysts warn that normalising flows will take months.
In the meantime, Asia’s policymakers face a narrow path. They must protect vulnerable populations from surging energy costs without stoking inflation further, maintain financial stability as risk premia rise and currencies depreciate, and resist the temptation to abandon climate commitments even as short-term survival demands more fossil fuel consumption.
As Srinivasan told Reuters, the tailwinds that carried Asia into 2026 — strong tech exports, lower tariffs, loose financial conditions — are partially offsetting the energy headwinds. But those tailwinds are not guaranteed to persist. The IMF’s message is clear: Asia’s energy vulnerability is structural, not cyclical, and the region will continue to bear disproportionate risk from any disruption to Middle Eastern hydrocarbon supply until it fundamentally diversifies its energy sources.
The question is whether policymakers have the fiscal space, political will, and strategic patience to make that transition before the next shock arrives.
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