West Asia conflict triggers energy shock, tests Asia’s growth resilience

Washington: Two months into the West Asia conflict, it's easy to lose sight of the fact that Asia had entered 2026 on a strong footing. That resilience is now being tested by the war and its fallout across global energy markets. For Asia - home to the world's largest energy importers, accounting for 40% of global oil consumption, a quarter of natural gas use, and over a third of refining capacity - this shock has far-reaching implications for inflation, growth, and external and fiscal balances.

Much of the flows disrupted by Iran's blockade of the Hormuz Strait, in response to the US blockade of ships going in or out of Iran, are destined for Asia, including about 55% of India's crude imports and 90% of its imports of LPG.



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Macroeconomic transmission of the shock is multifaceted. Higher energy prices worsen trade balances and erode household purchasing power. Rising input costs squeeze firms' profitability and fuel broader inflation. Tighter financial conditions amplify the impact. The consequences for Asia go well beyond higher energy prices, with spillovers into fertilisers, petrochemicals and other essential inputs.

Many countries in the region are experiencing some of these ripple effects. Rationing energy has forced restaurants and small firms to curtail their business. In the event the energy shock intensifies, leading to further strains in employment and incomes, ripple effects could become disproportionately stronger owing to non-linearities.

If the shock proves temporary, Asia's growth is likely to moderate modestly. In the April World Economic Outlook (WEO) reference forecast, regional growth is projected to ease from 5.0% in 2025 to 4.4% in 2026 and 4.2% in 2027, still leaving Asia as the main engine of global growth. India will remain the fastest-growing major economy, with growth projected at 6.5% in both 2026 and 2027.

Assuming the shock persists or intensifies, growth in Asia could fall by an additional 1-2 percentage points cumulatively through 2027, as illustrated by the forecast's adverse and severe scenarios, respectively. India, too, would be significantly affected, reflecting its heavy dependency on imported energy, despite its reasonably strong macroeconomic fundamentals.

Across Asia, governments have begun to respond. The initial response involves a mix of price-mitigation measures and incentives to curb energy consumption. In India, cuts in fuel excise tax and margin compression by state-owned oil marketing companies have limited pass-through to retail prices, while LPG rationing has prioritised household supply.

While such broad-based measures can provide short-term relief, they come with clear trade-offs. These include potentially sizable fiscal costs, and weaker price signals that dilute the needed adjustment in demand.

A more sustainable approach would be to allow price signals to operate and rely on temporary and targeted support to vulnerable households and viable firms, anchored in credible medium-term fiscal frameworks. Here, India's digital public infrastructure can offer a distinct advantage to deliver targeted transfers quickly and transparently while limiting fiscal leakage.

For central banks, the policy challenge is equally delicate. With inflation expectations still broadly anchored in most Asian economies, there is scope to look through temporary price increases. But monetary policy must remain agile to tighten if inflation expectations show signs of de-anchoring. Exchange-rate flexibility should continue to serve as the first line of defence, with forex intervention limited to addressing disorderly market conditions.

Beyond near-term stabilisation, the energy shock also underscores urgency of structural reforms to secure more balanced and job-rich growth that would lower vulnerabilities to external shocks. Recent reform progress in India - notification of new labour codes, negotiation of key trade agreements, deregulation efforts at the state level, etc - has laid important groundwork. Further efforts are needed to continue enhancing labour market flexibility, promoting trade integration, and improving the business climate through continued infrastructure push and smart deregulation.


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Asia's economies weathered last year's tariff shock better than expected. The current energy shock is a tougher and more complex test. Governments must balance short-term support with longer-term resilience. That means allowing prices to work, protecting the most vulnerable through targeted support, preserving macro policy credibility and pressing ahead with structural reforms.

Energy shocks may be unavoidable. Economic outcomes are not. How policymakers across Asia respond now will shape not only how the region weathers the current shock but also the strength with which it emerges.

The writer is director, Asia and Pacific Department, IMF.