According to Moody’s Analytics’ August 2026 Asia-Pacific outlook, regional growth is expected to slow to 4.2% in 2026 and 3.6% in 2027, down from 4.3% in 2025. Higher prices and tighter policy are expected to increasingly weigh on demand, while geopolitical upheaval and trade disruptions are adding to the pressure.
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The AI boom has helped the region avoid a sharper slowdown by driving demand for semiconductors and other technology products. But Moody’s said the strength of exports is masking trouble at home, with domestic demand across much of the region remaining below pre-pandemic trends and global averages.
AI boom drives Asia’s export engine
Strong demand for semiconductors and other technology products has lifted shipments from Taiwan, South Korea, mainland China and parts of Southeast Asia.
In the first half of 2026, nominal goods exports from South Korea and Taiwan exceeded Japan’s for the first time, Moody’s said.
The increase in electronics and machinery exports has offset weakness elsewhere in the regional economy. But the report cautions that the export strength leaves Asia-Pacific exposed if the technology cycle loses momentum.Moody’s expects growth in electronics exports to slow towards the middle of 2027.
There are already signs that the AI-driven surge could be approaching a pause. Prices for a range of electronics have risen sharply, while shortages in several hardware lines have jolted consumer markets. The report refers to these shortages as the “RAMpocalypse”, a reference to shortages of random access memory.
Investor enthusiasm has also pushed equity valuations to record highs, raising concerns about the sustainability of the AI boom and the profitability of AI-related business models.
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The AI boom is therefore doing more than simply supporting the region’s technology sector. It is helping to paper over weakness in domestic economies at a time when household and business demand remains subdued.
Inflation is picking up again
The export boom is taking place against a backdrop of renewed inflationary pressure.
Geopolitical upheaval and trade disruptions have pushed up energy and food prices as well as the cost of doing business. That is reducing real incomes and weighing on consumer and business spending across much of the region.
Higher inflation would normally strengthen the case for central banks to raise interest rates. But policymakers face a difficult trade-off because demand is already weak and rates remain high across much of Asia-Pacific.
Higher rates can contain inflation by cooling demand, but that mechanism is less effective when demand is already soft. Central banks have consequently tightened monetary policy only modestly this year.
Moody’s expects some central banks to tighten further, including the Bank of Japan and Bank of Korea. A longer period of elevated oil prices could put additional rate increases on the table.
Currency weakness adds to the pressure
Exchange-rate movements are making the policy challenge more complicated.
Most Asia-Pacific currencies have weakened against the US dollar, with several exchange rates drifting significantly away from underlying economic fundamentals.
The yen has been a particular concern. It has fallen nearly 60% from early 2021 despite Japan’s current account surplus, which averages around 5% of GDP, and a strong fiscal position.
In late July, Washington and Tokyo intervened jointly in the foreign-exchange market to support the yen, their first joint action since 2011.
The intervention is also seen as useful for Washington because supporting the yen could help sustain demand for US Treasuries, ease pressure on other Asian currencies and allow stretched market positions to unwind more gradually.
US Treasury Secretary Scott Bessent and Japanese Finance Minister Katayama Satsuki have said both countries are prepared to intervene again if necessary.
Moody’s expects the Bank of Japan to add rate hikes to the effort.
Middle East conflict threatens growth and inflation
The conflict in the Middle East is one of the biggest downside risks to the outlook.
A ceasefire announced by the US and Iran in mid-June, together with an agreement that temporarily halted fighting and reopened the Strait of Hormuz, did not last. By mid-July, the fragile peace had collapsed, fighting had resumed and traffic through the waterway had slowed sharply.
Houthi forces have also attacked Saudi tankers and energy sites, widening the conflict and increasing the risks to regional energy supplies.
A renewed escalation or a prolonged blockade of the Strait of Hormuz could send oil prices sharply higher. Countries could be forced to draw down their reserves, while higher energy costs would push up inflation and weaken economic growth.
That would make the task facing central banks even more difficult, forcing policymakers to weigh the need to contain inflation against the damage higher interest rates could do to already weak demand.
The conflict could also threaten the AI boom itself.
Even before the Middle East fighting began, questions had emerged over the long-term profitability and viability of AI business models. Higher energy prices and tighter financial conditions would raise operating costs and interest rates, adding further pressure to the economics of AI investment.
Trade tensions are becoming a lasting risk
Trade tensions between the US and its trading partners are another source of uncertainty for Asia-Pacific.
In July, Washington unveiled fresh tariffs on 60 trading partners under Section 301 of the Trade Act of 1974. The new levies range from 10% to 12.5% and replace tariffs imposed under Section 122.
There are several exemptions, including semiconductor chips and car parts where tariffs could cause significant disruption to the US economy.
For Asia, where many of the world’s largest export surpluses are concentrated, effective tariff rates have generally fallen from the levels seen at the beginning of the year, before the US Supreme Court struck down tariffs imposed by the White House under the International Emergency Economic Powers Act.
China’s effective tariff rate has increased to 23.4% from 21.3% under the stopgap regime. However, it remains below the 29.7% rate China faced before the Supreme Court ruling.
With Chinese President Xi Jinping expected to visit the US in September and both sides discussing possible reciprocal tariff cuts, Moody’s said tariffs increasingly appear to be a fixture of global trade rather than a temporary phenomenon.
Growth is set to slow
Against this backdrop, Moody’s expects Asia-Pacific growth to slow from 4.3% in 2025 to 4.2% in 2026 and 3.6% in 2027.
Developed Asia is expected to buck some of the broader regional slowdown. Taiwan and South Korea, in particular, are expected to see faster growth in 2026 as the AI boom continues to support their economies.
Moody’s expects the inflation shock from the Middle East conflict to eventually prove temporary as the conflict winds down. Even so, several central banks are likely to tighten policy further, with the Bank of Japan and Bank of Korea among those expected to raise rates.
A sustained period of high oil prices would increase the likelihood of further tightening across the region.
Risks are firmly tilted to the downside
The biggest concern is that the AI boom is masking broader weakness just as the risks surrounding the technology cycle are increasing.
A slowdown in electronics demand would remove an important source of export growth at a time when domestic demand remains weak. Moody’s expects electronics export growth to slow towards mid-2027.
At the same time, a prolonged conflict in the Middle East could trigger a major oil-price shock, pushing up inflation and weakening growth. Fresh trade restrictions could further disrupt exports, while stretched equity valuations, volatile bond markets and misaligned exchange rates could amplify financial stress.
Moody’s therefore sees the risks to its baseline forecast as firmly tilted to the downside.
A combination of a prolonged Middle East conflict, a sudden reversal in the AI boom, renewed trade friction or a financial-market correction alongside a global downturn could leave the region particularly exposed.
For now, Asia-Pacific has proved more resilient than expected. But the region’s strength remains uneven: the AI boom continues to power its export engine, while higher prices, tighter policy and weak domestic demand continue to weigh on the economies underneath it.