The US-Israeli campaign against Iran that began in late February has set off an energy shock that is rewriting Asia’s economic outlook for 2026. What once looked like a year of steady growth is now at risk as rising fuel and fertilizer prices, potential food-cost increases and narrowing policy room for governments and central banks squeeze the region.
The International Monetary Fund says the conflict and the supply disruptions it has caused are lifting inflation, worsening external positions and constraining policy options — a reminder of how dependent many Asian economies remain on imported oil and gas. If fighting continues, and with reports the US may sustain naval operations around the Strait of Hormuz, oil prices are likely to stay high. The World Bank estimates energy prices could rise roughly 24% this year, the biggest jump since the 2022 Russia-Ukraine shock, with knock-on effects for food costs, inflation and borrowing rates.
Japan highlights the dilemma facing advanced Asian economies. The Bank of Japan held interest rates steady even though headline inflation is now projected near 2.8% for the year, above its 2% target, because growth is slowing — producing a stagflation-like tradeoff. Wage gains have softened, labor indicators have slipped and the yen has fallen to multidecade lows, making it harder to manage rising import bills without choking off fragile growth.
China is also mobilizing policy tools. The Politburo has prioritized stabilizing supply chains and restoring confidence, with officials leaning on monetary measures to cushion the fallout. First-quarter growth outpaced expectations at around 5% year-on-year, but analysts caution those numbers don’t yet capture the full effect of higher oil costs and weaker external demand. Exports are cooling, leaving China’s growth more exposed to a slowdown in global trade.
Across East and Southeast Asia, governments have rushed to blunt the shock. South Korea unveiled about $7.1 billion in stimulus after the crisis escalated, but its economy remains vulnerable: roughly 70% of its oil imports transit the Middle East and the Strait of Hormuz, and the won has dropped to 17-year lows. The Philippines declared a national energy emergency after gasoline prices more than doubled. Indonesia and Vietnam have adopted energy rationing in places, while Thailand’s fishing and tourism sectors face higher operating costs and disruption.
Many ASEAN countries are particularly exposed because a large share of regional crude and gas imports passes through the Strait. Financial firms note the immediate effects: sharp spikes in fuel and fertilizer costs, rationing, temporary shutdowns in some sectors and rising food-price pressures. With food accounting for 25–35% of consumer baskets in several Southeast Asian nations, sustained oil above $100 a barrel would quickly erode household purchasing power and depress consumption.
Some countries have sought short-term alternatives, increasing purchases of fuel and fertilizer from Russia, a move that forces ASEAN diplomats to weigh urgent domestic needs against broader geopolitical concerns about enabling Moscow’s war in Ukraine.
Central banks in the region face a classic stagflation choice: hike rates to rein in inflation and risk choking already fragile growth, or hold rates and let inflation become entrenched while weaker currencies make imports costlier. Fiscal space is limited in many developing economies, reducing their ability to shield households. Nations with low crude stockpiles, such as the Philippines, are particularly exposed to prolonged supply shocks; Indonesia’s mounting fuel subsidy bill is squeezing budgets.
Not everyone is uniformly pessimistic. Some asset managers point to corporate resilience and pockets of high-quality companies that may weather macro shocks. Yet the overriding uncertainty is geopolitical: markets react to each new development around the Strait of Hormuz, and a lasting recovery will require a reliable resumption of oil flows rather than a temporary ceasefire.
Economists warn the poorest households will be hardest hit as food and energy inflation bite and borrowing costs rise. Policymakers are urged to prioritize immediate market stability and protect vulnerable groups while accelerating measures to strengthen resilience — diversifying energy supplies, shoring up supply chains and building fiscal buffers.
For now, Asia is adapting to a trickle of oil and a volatile price environment. Until shipping through the Strait of Hormuz is reliably restored, policymakers, businesses and consumers across the region will contend with higher costs, weaker growth prospects and sustained uncertainty.
