Middle East Conflict Potentially Slows Asia's Economic Growth

Marina Bay, Singapore/ILLUSTRATION UNSPLASH/lastmayday

JAKARTA - The Asian Development Bank (Asian Development Bank /ADB) revealed that conflicts in the Middle East have the potential to reduce economic growth in the developing Asia and Pacific region by 1.3 percentage points during the period 2026-2027.

This conflict can also increase inflation by 3.2 percentage points if the disruption in the energy market lasts more than a year.

"The conflict has an impact on the economy in Asia and the Pacific through rising energy prices, supply chain and trade disruptions, and tightening financial conditions. The tourism and remittances sectors are also potentially affected," said ADB Chief Economist Albert Park in an ADB research report. reported by ANTARA, Saturday, March 28.

ADB outlined three risk scenarios which show the impact on the economies of developing countries in the region will depend heavily on how long the disruption lasts.

In a short conflict scenario, energy price pressures will ease relatively quickly. More prolonged disruptions will cause a larger and persistent impact on growth and inflation.

The adverse impact on growth will be felt most heavily in the economies of the developing Southeast Asia and Pacific regions, while inflation rates will rise the most in South Asian economies.

These scenarios reflect the high level of uncertainty regarding the development of the conflict and the accompanying disruptions, so they need to be approached with caution.

In addition to rising energy prices, these scenarios also take into account broader supply chain disruptions, as well as tightening global financial conditions.

"Prolonged disruptions in energy supply could force economies in the developing Asia and Pacific region to face a difficult dilemma between slowing growth and rising inflation," said ADB Chief Economist Albert Park.

His party assessed that the government must focus on calming market tensions and protecting the most vulnerable groups, while implementing policies to increase long-term resilience.

ADB provides four main policy steps to deal with this issue. First is a policy that focuses on stabilization, not price signal repression.

"Allowing energy price increases to pass, at least in part, can encourage energy savings, a shift to other fuel sources, and investment in alternative energy sources. Extensive price controls or subsidies of a general nature risk distorting incentives, delaying adjustments, and causing inefficient allocation of resources," he said.

The next step is to provide targeted fiscal support with clear time limits in order to support vulnerable households and the most affected sectors.

This can mitigate the social impact of price increases, while reducing fiscal costs and maintaining incentives to adapt to the shock.

Third, the central bank should focus on efforts to limit excessive market volatility while always monitoring inflation expectations with the main priority of providing targeted liquidity support to maintain the smooth functioning of the market.

The tightening of overly aggressive policies is considered risky for exacerbating growth barriers and worsening financial volatility. Although policy tightening to a certain extent may be necessary, he continued, efforts to stabilize inflation expectations through effective communication from the central bank remain the main key.

Finally, the government should limit energy demand. Practical steps that can be taken include setting limits on air conditioning temperatures, turning off non-essential lighting, prioritizing electricity savings during peak hours, and implementing a work-from-home policy or rotating work schedules.

"Providing incentives for the use of public transportation and implementing a day without motor vehicles in urban areas on national holidays can also help reduce the use of transportation fuels," said Albert.