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The Asian Development Bank (ADB) has warned that prolonged energy disruptions, renewed geopolitical tensions and a potentially very strong El Nino could increasingly weigh on economic growth and push inflation higher across developing Asia and the Pacific.

In its Asian Development Outlook (ADO) September 2026, the ADB said the region’s economic growth slowed in the second quarter of 2026 as higher energy costs weakened domestic demand, while inflation eased temporarily in July because lower energy prices offset firmer food inflation.

The ADB now projects developing Asia and the Pacific to grow 5.0% in 2026, a 0.1 percentage-point upgrade from its July forecast. Growth is projected at 5.1% in 2027, unchanged from the previous forecast.

However, both forecasts remain below the region’s 5.5% growth recorded in 2025, highlighting the growing drag from energy-market disruptions and other external risks.

The outlook has also become more vulnerable to renewed energy shocks. The ADB’s oil-price assumptions, finalized on September 4, have been raised to an average of $90 per barrel in 2026 and $78 per barrel in 2027, reflecting renewed geopolitical tensions.

The report warns that a very strong El Nino could add another layer of inflationary pressure, particularly through food prices.

Major takeaways from the ADB outlook

1. Asia’s growth remains resilient, but the pace is slowing

The region continues to expand despite a difficult external environment, but growth momentum has weakened.

After a resilient first quarter, developing Asia’s growth slowed in the second quarter as higher energy prices affected domestic demand. Manufacturing activity has subsequently shown signs of improvement in several economies, although the recovery remains uneven.

The ADB said purchasing managers’ indexes showed manufacturing improving in most economies in August, while services continued to expand in China and India.

The growth outlook is therefore not one of a broad regional downturn, but rather of slower and increasingly uneven expansion.

2. Energy disruption is emerging as the biggest immediate threat

The Strait of Hormuz disruption continues to reverberate through global commodity markets.

The ADB said tanker traffic through the strategic waterway remained depressed and that broadening energy disruptions pushed Brent crude above $100 per barrel in September.

The shock has extended beyond crude oil. Other commodity prices, particularly natural gas, have also risen.

The impact is particularly severe for refined petroleum products.

Jet fuel and diesel have borne much of the pressure, with refining margins remaining substantially above pre-conflict levels. This means consumers and businesses can face much higher fuel costs even when the increase in crude prices is comparatively smaller.

For Asian economies, this creates a double risk: higher energy costs can reduce household purchasing power while simultaneously raising production and transportation costs for businesses.

3. A very strong El Nino could push food prices higher

The ADB’s other major warning concerns climate.

The bank expects El Nino to reach very strong intensity by late 2026 and persist into 2027.

Historically, the ADB notes, food prices have tended to rise in the year following very strong El Nino episodes. The report specifically examines risks to palm oil, sugar and rice prices.

This creates a potentially difficult combination for policymakers: energy prices could push inflation higher at the same time that weather-related disruptions reduce agricultural output and raise food prices.

4. Oil prices have been revised sharply upward

The ADB has raised its oil-price assumptions compared with its previous outlook.

Its September baseline assumes Brent prices averaging:

- $90 per barrel in 2026

- $78 per barrel in 2027

The July outlook had assumed lower prices.

The bank’s scenario analysis shows that a renewed escalation in energy-market disruptions could push the assumed oil price to around $98 per barrel in 2026 and $90 in 2027, while a stronger El Nino scenario could lift the assumptions further.

5. Inflation is easing—but the improvement may not last

The ADB trimmed its regional inflation forecast for 2026 to 4.2%, down 0.1 percentage point from its July forecast.

But it raised the 2027 forecast to 3.5%.

Both remain above the 3.0% inflation recorded in 2025.

The July moderation in inflation was helped by lower energy prices and broad subsidies. But the ADB warns that import costs have jumped and remain elevated, meaning higher costs could continue to pass through into consumer prices.

This means the recent easing in inflation should not necessarily be interpreted as the end of the inflation shock.

6. India is one of the region’s strongest growth engines

South Asia received a significant upgrade in the ADB’s September outlook.

The region’s growth forecast for 2026 has been raised to 6.4% from 6.0% in July, while the 2027 forecast has been lowered slightly to 6.5%.

India’s 2026 growth forecast has been raised to 7.0% from 6.6%, while its 2027 forecast is maintained at 7.3%.

The ADB attributes the broader regional resilience partly to strong investment in India.

India therefore remains a major support for Asia’s growth at a time when energy shocks and geopolitical uncertainty are weakening momentum elsewhere.

7. AI exports are becoming an important growth driver

One of the more positive elements of the outlook is the continued strength of technology and artificial-intelligence-related exports.

The ADB said AI-related exports continued to grow strongly, led by China and the Republic of Korea, although momentum was more uneven across other economies.

Strong technology exports in developing Southeast Asia are also helping support the regional growth outlook.

This creates an important contrast within the Asian economy: energy-intensive traditional sectors are facing rising costs, while AI-related technology exports are providing a new source of external demand.

8. China sharply reduced Middle East oil imports

The energy shock is also changing the structure of crude-oil trade.

The ADB said China reduced its imports of Middle Eastern crude by two-thirds and also reduced purchases from other suppliers, bringing its overall crude imports down by nearly half during the period examined.

Outside China, total imports continued to rise as other suppliers replaced some of the lost Middle Eastern volumes.

The shift highlights how geopolitical disruptions are forcing Asian economies to reconsider their energy-supply routes.

9. Central banks remain cautious

Asian monetary policy remains divided.

Most central banks held interest rates during 2026. Rate increases accelerated in the second quarter as energy prices surged, but many central banks paused hikes between July and early September as inflation eased.

The ADB expects monetary-policy paths to remain mixed through the end of 2026, with broader easing anticipated in 2027.

The challenge is that central banks must balance weakening growth against renewed inflationary pressure from energy and food.

10. High debt is making monetary policy less effective

The ADB’s analytical chapter adds another layer of concern: high public and private debt is constraining monetary policy.

The analysis, based on three decades of data covering up to 85 advanced and emerging economies, finds that fiscal dominance plays a significant role in policy-rate decisions, particularly in emerging economies.

High debt also weakens the impact of changes in interest rates on economic output and financial conditions.

The ADB concludes that central-bank independence can help but cannot fully offset the effects of high indebtedness.

This is particularly important because the region is confronting an inflationary shock while fiscal space is already limited.

The downside risks dominate

The ADB says the balance of risks remains tilted firmly to the downside.

The principal threats are:

Worsening geopolitical tensions: More persistent energy-market disruptions could increase oil-price volatility, inflation and risk premiums while tightening global financial conditions.

A stronger El Nino: A more severe climate event could reduce agricultural production, constrain food supplies and push food prices higher, particularly when fertilizer costs are already elevated.

Tighter financial conditions: Higher long-term interest rates could put additional pressure on economies and amplify risks associated with elevated AI-related equity valuations.

Trade policy uncertainty: New tariffs and prolonged uncertainty could weaken business investment, disrupt global trade and reduce regional export growth.

The ADB identifies faster normalization of energy markets and a milder El Nino as the principal upside risks.

Worst-case scenario: energy shock plus El Nino

The most important warning in the report comes from the ADB’s scenario analysis.

The bank estimates that renewed energy-market escalation combined with a very strong El Nino could reduce 2027 growth by 0.44 percentage points and increase inflation by 0.91 percentage points relative to its September baseline.

Energy shocks remain the dominant factor, while El Nino adds approximately 0.1 percentage point to the growth impact and 0.2 percentage point to the inflation impact.

In other words, Asia could face the classic policy dilemma of slower growth and higher inflation at the same time.

What the ADB outlook means for Asia

The September outlook does not predict a regional recession. Instead, it describes an Asian economy that remains relatively resilient but is becoming increasingly exposed to external shocks.

The region has several strengths: strong investment in India, continued AI-related exports, improving manufacturing activity in several economies and resilient domestic demand.

But those strengths are being tested by a combination of geopolitical conflict, energy-market disruption, climate risks, elevated debt, tight financial conditions and trade-policy uncertainty.

The ADB’s baseline forecast of 5.0% growth in 2026 and 5.1% in 2027 therefore masks a more complicated picture: growth remains strong by global standards, but the region is moving into an environment where energy security, food security, climate conditions and financial stability are becoming increasingly interconnected.

Key numbers at a glance