Asia’s resilience masks a growing jobs challenge as AI reshapes work

The Asia-Pacific region remains resilient despite the energy shock, tariffs and trade restrictions that disrupted supply chains last year. This is notable for a region that has a high intensity of energy use, large dependence on imported fuel supplies, a relatively greater share of which comes from West Asia.

IMF has upgraded its regional growth projection for this year to 4.8%, from 4.4% 6 mths ago, while also raising the forecast for next year. In India, stronger-than-expected domestic demand and services activity are driving upward revision. Although Asia's overall growth rate is likely to slow from 5% last year, the region will remain the engine of global economy, providing 2/3rd of global growth.

But resilience isn't uniform. Projections for low-income and Pacific Island economies have been revised down, substantially in some cases. Fuel prices have surged, including diesel and jet fuel, exacerbating cost of living pressures that had already been accumulating before the oil shocks. Resilience is not always uniform within countries. Many show signs of 'K-shaped' growth, with some groups or sectors prospering while others fall behind.

One key reason for resilience is that many economies have adapted better than anticipated to oil shocks. China has been able to draw on oil reserves and reduce demand, including due to greater use of renewables. India and Japan have been able to find alternative sources of supply. Across Asia, governments have deployed policy measures to protect households and firms, such as fuel price caps and subsidies.

Also, there's significant AI-related boost in global demand for tech goods and services. This is seen most prominently in demand for high-end semiconductors and other components, as well as massive investments in data centres.

Trade has also held up better than feared. Exports, even of non-tech products, have grown, and intra-Asia trade has surged even as commerce with the US fell. Asia-Pacific governments have resisted the temptation to engage in restrictive practices. They have forged ahead with deeper regional trade agreements. One recent example is the bilateral FTA between India and New Zealand, which enters into force today.

There's reason for cautious optimism. But policymakers still face significant challenges. Oil prices are likely to stay high and volatile for longer than previously expected. There are limits to adaptation, like how far crude inventories can stretch. Fiscal support in many economies is broad-based and often untargeted, adding to pressure on public finances.

In India, measures to shield consumers from global energy prices have helped contain inflation and supported consumption, while passing much of the fiscal burden onto state-owned oil and gas companies. Global markets are increasingly concerned about the sustainability of public finances. India, however, has remained largely insulated, thanks, in part, to fiscal consolidation ahead of the West Asia conflict.

Other challenges are more structural. Many Asian economies still have young populations. The region will need to create nearly 150 mn jobs over the next decade. In many countries, including India, we already see substantial underemployment among college graduates. Across South Asia, more than 40% of them are in jobs that don't require their level of education.

Previously, manufacturing generated employment. But that sector is increasingly capital-intensive, putting emphasis on the need to create good knowledge jobs in services sectors. India stands out with a world-leading digital services sector that has generated high-productivity jobs and sizeable exports (about 8% of GDP), but its employment footprint remains relatively small.

AI adds another powerful force reshaping the region's labour markets. IMF's latest Regional Economic Outlook report provides some evidence on how AI is affecting labour markets across Asia. It suggests that demand from employers fell with the onset of AI in jobs where AI can be used more extensively than in occupations with less exposure, by as much as 10%. But that decline has stabilised, even while AI has become more capable over time.

Also, employers increasingly want workers who can use AI to do more, from sharpening prompts to connecting AI with data and expertise in workplaces. This shift is particularly evident in India, where demand for AI skills is strong relative to Asian peers, and IT services and GCCs - both highly exposed to AI - are upgrading their operations and reshaping skills and experience employers seek.

What does that imply? It suggests that AI is reshaping work more than eliminating it. Employers still want people for knowledge-based work, even as AI has become much more capable at tasks previously thought to only be possible by humans.