Growth in Asia-Pacific region likely to moderate to 4.1% in 2026: Moody's

Moody's in its latest report has said that the growth in the Asia-Pacific (APAC) region is likely to moderate to 4.1% in 2026 from 4.3% in 2025 and further to slow down to 3.6% in 2027, amid high commodity prices, tighter policy settings, and unusually hot and dry weather. However, it is expecting India to remain one of the fastest-growing major economies in the Asia-Pacific region, even as higher oil prices, fresh US tariffs and slowing global growth pose risks to the outlook.

As per the report, the Asia-Pacific economy has dodged the sharp slowdown that many feared the West Asia conflict would provoke. Further, the artificial intelligence boom has driven robust export and investment growth, accelerating overall GDP growth across much of the region. It said the West Asia conflict remains on a knife-edge and the Strait of Hormuz's full reopening looks set to be a long process, punctuated by setbacks.

Moody's said the West Asia conflict has driven up inflation across Asia in the past few months and the resurgence in inflation has put central banks in the hot seat. It further said that another key risk is the developing El Nino weather pattern, which looks set to bring hotter and drier conditions to much of the region in the second half of the year.

Lower rainfall could reduce crop yields and hurt food supplies, particularly if conditions prove more severe than anticipated and countries are underprepared. The report noted that El Nino poses a dual risk of food and energy vulnerability for India.

Earlier this month, S&P Ratings also raised similar concerns; the rating agency, S&P Global Ratings, in its latest report has said that a weak monsoon in India may lead to higher inflation, weaken rural demand and strain fiscal balances.

As per the report, the rural economy in the country faces a dual threat from an unusually dry southwest monsoon and higher agro-input costs driven by geopolitical conflict. The rating agency identifies the agricultural sector as the most exposed segment. It said farmers face lower yields and therefore lower incomes. This will have knock-on effects for food prices and tractor and two-wheeler manufacturers.

S&P Global Ratings further noted that banks could see slower credit growth and modest deterioration in asset quality but limited earnings impact. According to it, microfinance institutions are more exposed due to larger rural exposure and weaker borrower profiles.