Commentary: Iran war has raised inflation risks. Why are Asian economies still growing?

Commentary

For all the attention on inflation, the bigger surprise this year may be how resilient the region has been, says DBS chief economist Taimur Baig.

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08 Jun 2026 06:00AM

SINGAPORE: At the beginning of the Iran war, there was widespread fear that the world was headed for a stagflationary shock - a toxic combination of lower economic growth and high inflation - reminiscent of the 1970s.

Then, a series of oil crises triggered by geopolitical tensions in the Middle East sent energy prices soaring, fuelling inflation and battering growth. Some have warned that the Iran war could trigger a crisis far more severe than 50 years ago, with Asia among the most vulnerable given its heavy reliance on Middle East fuel.

Such concerns are understandable. The Strait of Hormuz, through which nearly a fifth of global energy supply passes, has seen a 90 to 95 per cent decline in traffic over the past three months. The resulting shortage has pushed up the prices of a wide range of petroleum products. From crude oil to refined diesel, inputs for fertiliser, plastics and semiconductors, many things that form the foundation of the modern economy have seen their prices jump 20 to 100 per cent this year.

These dire warnings have thankfully yet to pass. The more surprising development has been the resilience of growth. Despite the inflation shock, Asian economies have generally performed better than expected, with first-quarter GDP data in several economies surprising on the upside and regional growth momentum remaining intact.

EXPORTS LEAD THE WAY

One major reason is an exceptionally strong export cycle.

The market for electronics and green technology has never been more buoyant. The AI-related frenzy has broadened to every aspect of the electronics ecosystem, with substantial price rises having had virtually no impact on the surging demand worldwide.

For South Korea and Taiwan, the two electronics stalwarts of the region, monthly exports have been breaking records with year-on-year growth rates of 40 to 50 per cent. Memory and computer chips are leading the way, boosting companies such as Samsung Electronics and SK Hynix to go past trillion-dollar valuations.

Malaysia, Singapore and Vietnam are also having banner moments, with export growth in the 15 to 35 per cent range. This synchronised rise in exports underscores the integrated nature of the regional supply chain, with the AI cycle lifting all electronics boats.

It’s not just about electronics. Signs of resiliency in overall demand are evident in the first four months of 2026 data, through strong exporter order books, healthy US retail spending and a pick-up in global investment activity. The war has also added further impetus to procuring products around the energy ecosystem from generators to batteries, electric vehicles and defence equipment.

China’s trade data for the first four months of the year is a good case in point. For the largest exporter in the world, mid-teen export growth is striking to say the least. Even exports to the US, after a whole year of intense trade war, were up 11 per cent year-on-year in April.

As a result, regional GDP growth in the first half of 2026 is likely to turn out stronger than many private-sector forecasts had anticipated.

NOT ALL ECONOMIES ARE MOVING IN STEP

Not every economy is benefitting equally from the current export cycle.

India and Indonesia are not touched by the heady momentum in the region as both economies are not part of the region’s extensive electronics supply chains. In both cases, businesses are reporting a steady weakening of sentiments.

Rising energy prices ought to help Indonesia’s export figures from April onward because the country is the world's largest exporter of thermal coal and a major supplier of palm oil. But India’s outlook does not look promising at this moment. With 15 per cent of its exports bound for the Middle East, the lingering uncertainty around the Strait of Hormuz is a considerable headwind for India’s exporters.

THE LONG TAIL OF WAR

As global energy supplies continue to be affected due to the blockade of the Strait of Hormuz, there is no sugar coating the adverse impact the shock is having on Asian energy importers.

Some markets have seen inflation rates soar, hurting the pocketbooks of the poor, in particular. Other governments have tried to shield their consumers with price controls and subsidies, but those steps have resulting pressure on their fiscal and trade deficits, hurting bond yields and currencies.

Asian policymakers, like their counterparts around the world, are acting to deal with the shock. Besides figuring out an optimal energy pricing policy, measures are being taken to conserve usage and find alternative suppliers.

Even a deal to reopen the strait may not mean that global energy supply and prices would normalise readily. Given the lingering uncertainty about the actions of the various armed actors involved and an undetermined number of mines in the water, safe passage through the strait would remain arduous and risky.

Energy infrastructure damaged across the Middle East will take months, if not years, to be back fully online. With persistent risks of renewed conflict, costs related to the moving of gas and oil products - from insurance premiums to shipping charges - will remain elevated.

As energy prices percolate through the system, second-round inflation effects are also in the pipeline. Combine this with the exceptionally strong demand for electronics and plenty of inflation risks remain on the horizon.

WHY HISTORY MAY NOT REPEAT ITSELF

Comparisons with the 1970s, however, should be treated with caution.

Unlike that era, many Asian economies today are benefiting from powerful structural and cyclical tailwinds, including the AI-driven boom, stronger external balances and more credible monetary policy frameworks. Labour markets have remained relatively resilient, reducing the risk of the kind of prolonged unemployment shock seen during past stagflation episodes.

There is no downplaying the energy shock, but we should also take comfort from the fact that there is substantial cyclical strength that could help Asia to ride out the energy shock. For all the attention on inflation, the bigger surprise this year may just be how resilient the region has been.

Dr Taimur Baig is Managing Director and Chief Economist of DBS Bank.

Source: CNA/zw(sk)