## Asia Economic Outlook: Energy Shock Tests Resilience 📈

The Middle East conflict and subsequent energy supply shock are testing Asia's economic stability in 2026, primarily through rising inflation and weakened external balances. While Asia remains a global growth driver, the region’s high dependence on imported oil and gas (2.5% of GDP) poses significant risks. • Growth Forecasts Regional growth projected to moderate to 4.4% in 2026 (down from 5.0% in 2025). China and India expected to contribute 70% of total regional growth. Adverse Scenario: If shocks persist, cumulative GDP could drop by 1-2% through 2027. • Inflation & Energy Pressure Regional inflation revised up to 2.6% for 2026. Asia consumes 38% of global oil and 24% of natural gas. The region buys 80% of LNG shipped through the Strait of Hormuz, leaving refiners and factories vulnerable to supply chain disruptions. • Impact on Sri Lanka & South Asia Sri Lanka noted as particularly vulnerable due to heavy reliance on imported oil, remittances, and tourism flows originating from or transiting through the Gulf. Agriculture-heavy economies face rising food prices due to higher costs for fertilizers. • Strategic Recommendations Maintain exchange-rate flexibility as the primary defense against external shocks. Fiscal support should be temporary and strictly targeted at vulnerable groups rather than broad subsidies. Accelerate structural reforms in energy efficiency, power grids, and alternative energy to reduce long-term import dependence.