Asia 2026 Outlook: Growth to Moderate Amid Rising Geopolitical Risks

Despite tariff shocks, regional growth was resilient in 2025, supported by strong exports. The gradual implementation of tariffs, an upturn of the electronic and chip cycles, and loose fiscal policy in developed markets all bolstered Asian exports and, thus, growth. Subdued energy and commodity prices, especially in agriculture, have pushed down inflation. In addition, a softer USD, paved ways for rate cuts across Asia, to offset weak domestic demand. We expect Asia growth to decelerate in 2025 due to softer external demand as US, EU and China growth slows. Trump tariffs will likely bite harder in 2026 given unfulfilled hope of further regionalization to offset tariffs and continued geopolitical tensions with growing trade fragmentation. The good news is that the Fed will help with rate cuts to ease liquidity conditions, but Asian central banks have already front-loaded in 2025, leaving limited space for further easing.The Chinese economy, which has been very resilient in 2025 is in a moderate deceleration path for 2026, thanks to fiscal support and doubling down on the is aggressive export strategy. And yet, the heavy industrial policy and the stubbornly stagnant domestic demand will make deflationary pressures even more entrenched, which means that China’s involution problem will hardly be resolved soon.In Japan, Takaichi has turned to even more accommodative policy buffers to respond to the US tariff shock and, more recently, retaliation from China. This is pushing any hike from the Bank of Japan further out of reach.As for the rest of Asia, lower US rates and the ongoing diversification push away from the US dollar should support more inflows into emerging Asia, especially ASEAN and India. Our base line scenario assumes no major escalation of geopolitical tensions, but risks are clearly on the upside, as the recent China-Japan tensions exemplify. Against such backdrop, the Taiwan risk is bound to increase in 2026 again.