Asia’s economic outlook remains resilient despite persistent geopolitical tensions and rising energy prices, as a powerful industrial super-cycle continues to underpin growth across the region, according to a mid-year outlook by Morgan Stanley.
The report highlights that the strength of the industrial cycle—driven by capital expenditure (capex), export recovery and structural investment trends—is outweighing the drag caused by the ongoing energy shock. High-frequency indicators suggest that growth momentum in the second quarter of 2026 has held up better than expected, supported by improvements in manufacturing activity, exports and investment flows.
Morgan Stanley forecasts Asia’s GDP growth at 4.8 per cent in 2026, with stability expected into 2027. India is projected to remain one of the fastest-growing major economies at 6.8 per cent in 2026, while China is expected to grow at 4.8 per cent.
At the heart of the region’s resilience is what analysts describe as the most powerful industrial cycle since the mid-2000s, underpinned by four structural drivers: accelerated investment in artificial intelligence (AI) infrastructure, energy transition and security, rising defence spending, and broader industrial spillovers across supply chains.
Asia’s total gross fixed investment is projected to rise from USD 11 trillion in 2025 to USD 16 trillion by 2030, growing at a compound annual growth rate (CAGR) of around 7 per cent. High-growth sectors such as AI, energy and defence are expected to expand even faster at a 16 per cent CAGR, reinforcing a multi-year investment boom.
This surge in capex is already translating into stronger trade dynamics. While initial growth was led by technology exports, recent months have seen a sustained recovery in non-tech exports as well, signalling a broad-based expansion. The strengthening global capex cycle is expected to further boost Asia’s export performance.
Despite being highly exposed to imported energy, Asia has managed the energy shock effectively through a combination of strategic measures, including reduced energy imports by China, increased US oil and gas exports, diversification into alternative energy sources, and drawdowns from reserves.
Inflationary pressures, while rising due to higher energy costs, remain largely contained. Policymakers across the region have absorbed a significant portion of fuel price increases, limiting the pass-through to domestic consumers. As a result, inflation is expected to stay within central bank comfort zones for most economies, with Asia’s headline inflation projected at around 2.1 per cent in 2026.
The growth cycle is also becoming increasingly broad-based. Stronger exports and investment are feeding into job creation, wage growth and consumption, creating a virtuous cycle that supports domestic demand.
Among key economies, Taiwan, South Korea, China and Japan are expected to benefit the most from the industrial upswing due to their strong exposure to high-growth sectors such as semiconductors, AI infrastructure and capital goods exports. India, meanwhile, is likely to gain from both the regional industrial cycle and robust domestic demand supported by government capex and urban consumption.
Looking ahead, Morgan Stanley expects a gradual and modest rate hike cycle across Asia, with fewer increases than currently priced in by markets. Central banks are likely to remain cautious, balancing inflation risks with the need to sustain growth momentum.
However, risks remain. A sharp escalation in geopolitical tensions leading to oil prices exceeding USD 150 per barrel could disrupt growth and potentially trigger a global recession. Analysts estimate that every sustained USD 10 increase in oil prices could reduce Asia’s GDP growth by 20–30 basis points before mitigation measures.
Overall, the report concludes that Asia is entering a structurally stronger growth phase, with the industrial super-cycle providing a powerful counterbalance to external shocks and positioning the region as a key engine of global economic expansion. |
