Market and product

Asian economies face a mounting threat as Middle East conflict-led energy price spikes fuel strong inflationary pressures that would weaken growth, despite temporary relief from a fragile two-week truce between the US and Iran.

• Surging energy costs now the primary concern of global policy makers
• Energy price spikes, shipping surcharges driving up headline inflation across Asia
• Limited fiscal space leaves some governments unable to shield households

Asia (excluding China) remains the hardest-hit region because most of the oil and gas cargoes passing through the Strait of Hormuz is destined for these markets, Nomura analyst Rob Subbaraman said.

Asian markets face renewed volatility as an imminent US naval blockade of Iranian ports threatens to choke off the remaining flow of regional energy exports through the Strait of Hormuz.

This escalation follows the collapse of negotiations between US and Iran over the weekend to secure a permanent deal after last week’s ceasefire deal.

A further breakdown in negotiations would likely re-intensify the energy shock into a broader commodity crisis, potentially forcing central banks to reverse any near-term policy interest rate hikes before the end of the year, Subbaraman said.

The petrochemicals sector is now enduring a severe margin squeeze as surging energy prices drive up feedstock costs while simultaneously eroding consumer purchasing power and compressing corporate margins across Asia.

Brent crude registered the largest monthly increase on record in March, with the ICIS Dated BFOETM front-month assessment climbing by 80% between 27 February and 31 March.

INFLATIONARY RISKS TOP OF AGENDA

Energy inflation is now clear and present in the minds of consumers, market participants, and policy makers around the world, said Taimur Baig, global chief economist at Singapore bank DBS.

“Stories abound about spikes in pump prices, energy rationing to counter runs on supplies, public sector austerity measures, and curtailment of services,” Baig said.

“A prolonged conflict in the Middle East is the single biggest risk to the region’s outlook, as it could lead to persistently high energy and food prices and tighter financial conditions,” said Asian Development Bank (ADB) chief economist Albert Park.

The ASEAN+3 region – consisting of the 10 ASEAN member states plus China, Japan, and South Korea – entered 2026 from a position of strength, yet the energy shock has sharply raised downside risks, according to Singapore-based ASEAN+3 Macroeconomic Research Office (AMRO).

Economic growth in developing Asia and the Pacific is expected to slow to 5.1% in both 2026 and 2027 from 5.4% last year, weighed down by the conflict and trade uncertainty, according to the ADB.

China’s growth is projected to moderate to 4.6% in 2026 and 4.5% in 2027, while inflation is expected to edge up amid higher global energy prices and external uncertainty, it said.
Inflation in China is forecast to rise to 0.6% in 2026 and 1.0% in 2027, from 0.0% in 2025, reflecting rising food costs and other factors, such as anti-involution efforts and higher global energy prices driven by the Middle East conflict.

Meanwhile, the Reserve Bank of India (RBI) expects higher average inflation in the current fiscal year at 4.6%, which is within the central bank’s target range of 2.0-6.0%.
However, RBI governor Sanjay Malhotra warned that economic conditions have turned adverse with the widening of the conflict.

“Higher input costs associated with increase in energy prices and international freight and insurance costs along with supply-chain disruptions that would constrain availability of key inputs for downstream sectors, would impair growth,” Malhotra said.

While inflation in India remains contained, recent spikes in energy prices due to the conflict have emerged as a risk, he added.

India’s growth is projected to decelerate to 6.6% in fiscal year ending March 2027, as “elevated global energy prices are expected to put upward pressure on prices and constrain households’ disposable income”, the World Bank said in its South Asia Economic Update report on 8 April.

In Japan, the corporate goods price index (CGPI), which measures the prices companies charge each other for their goods and services, rose by 2.6% year on year in March, Bank of Japan (BOJ) data showed on 10 April.

This marks an accelerating from February’s revised 2.1% growth as Japanese firms passed on rising metals, chemical and other raw material costs through price hikes for machinery and food, the central bank data showed.

Asia’s average inflation is projected to rise to 3.6% in 2026 and 3.4% in 2027 from 3.0% last year according to the ADB, reflecting rising food costs and other factors, such as anti-involution efforts in China and higher global energy prices driven by the Middle East conflict.

Thailand, India, Indonesia, and the Philippines are identified as the most vulnerable net energy importers, standing to gain the most relief if the ceasefire evolves into a lasting peace, according to Nomura’s Subbaraman.

DBS’ Baig noted a gradual broadening of the crisis as price pressure moves downstream from raw energy to essential industrial materials.

“As production processes rely heavily on petroleum products and natural gas, prices of chemicals, plastics, and fertiliser have jumped 20-70% already,” Baig said.

Conversely, regional heavyweights China, South Korea, Malaysia, and Singapore are considered more insulated from the immediate crisis, Nomura’s Subbaraman noted.

The energy shock has spilled over into consumer prices, driving a sharp rise in inflation in Vietnam and the Philippines in March. In the Philippines, inflation increased to 4.1% from 2.4%, while in Vietnam it rose to 4.7% from 3.4%. Many countries have resorted to administrative measures such as price controls and are considering fuel tax cuts to curb inflation, while Thailand may shift from deflation to cost-push inflation and South Korea faces the risk of inflation exceeding forecasts.

Inflationary pressures are further intensifying due to rising transport and energy costs, while limited fiscal space makes it difficult for many governments to support households without increasing public debt. As a result, Asian economies face a dual challenge: high inflation alongside the risk of slowing growth.

The regional outlook largely depends on developments in the Strait of Hormuz; even if tensions ease, the impact of high energy prices is likely to persist for several months.