AI DEMAND BUOYS OUTLOOK
The global AI boom remains an important pillar of Asia’s economic outlook, with the region well placed to benefit as much of the semiconductor production needed to supply AI demand is concentrated there.
South Korea and Taiwan are major producers of high-end chips, while economies including Malaysia, the Philippines and Thailand are linked to semiconductor supply chains and are attracting more AI-related investment.
While concerns are growing over how long the current pace of investment can be sustained, ADB chief economist Albert Park said the latest data suggests momentum in AI activity remains strong.
“There’re lots of risks associated with the AI boom and how sustainable it is, especially equity valuations. (But) we think that even if there’s a correction, it’s going to be short-term,” he said.
“It’ll be a bumpy road, but the direction of travel is clear: AI is here to stay and will become increasingly important, and eventually start producing productivity gains as more economies adopt AI in their firms and businesses.”
ENERGY DISRUPTIONS WEIGH
The wars in Ukraine and Iran, along with the widening conflict in Yemen, have disrupted key shipping routes and choked supplies of crude oil, refined products and other critical goods.
Higher energy prices are raising costs for businesses and consumers, while weighing on consumer sentiment and economic activity.
“(This) is one reason why the growth projection is still much lower than last year’s and is expected to continue to next year … despite the AI boom,” Park told CNA’s Asia First programme.
How long the disruptions persist will be crucial to the region’s outlook, he added.
“Right now, markets are still pricing in that the conflicts will reduce in intensity and resolve sometime next year,” he said, adding that if that happens, oil prices should moderate in 2027.
But prolonged or escalating conflicts would pose a significant downside risk and could force the bank to cut its forecasts.
“We did a simulation of an extreme scenario of escalation and found that this could lower our growth projection by 0.3 percentage points next year,” Park said.
EL NINO ADDS PRESSURE
Another source of uncertainty is an intensifying El Nino, which could bring more extreme weather patterns across the region.
Agriculture is expected to bear the brunt of the phenomenon, with reduced rainfall likely to weigh on crop production.
This comes on top of earlier surges in oil, gas and fertiliser prices driven by geopolitical tensions, which have already weakened crop yields.
Livestock production could also be affected by heat stress and poorer availability of animal feed, while warmer oceans could weigh on aquaculture.
There could also be an impact on energy supply, said the ADB. Lower rainfall reduces water availability for hydropower generation, disrupting a source of electricity used across parts of the region.
Even so, Park expects the overall macroeconomic impact to remain relatively contained.
He said: “Even with a more severe El Nino, the effects both on growth and inflation would be fairly moderate. Maybe just another 0.1 to 0.2 percentage points to inflation next year if it was much worse than we currently expect.”
FISCAL PRESSURES BUILD
Higher energy prices and government efforts to shield households from rising costs are also putting pressure on public finances, said the multilateral lender.
Many governments have relied on subsidies or price controls to limit the impact on consumers, widening budget deficits and reducing the fiscal space available to respond to future shocks.
Park said governments should increasingly direct assistance towards vulnerable households rather than rely on economy-wide subsidies.
The region nevertheless enters the period from a relatively manageable position. Park estimates government debt at about 45 per cent of GDP on average, although levels differ considerably between economies.
“Governments should try to preserve their fiscal space by using more targeted subsidies, not across-the-board price subsidies,” he said.
“Once things get back to normal, try to rebuild the fiscal space and get debt levels to sustainable levels.”
