Asia macro update: three pressures shaping the outlook

Asia is confronting a more challenging macro backdrop, but the impact is unlikely to be evenly distributed. Three factors stand out. First, the closure of the Strait of Hormuz continues to disrupt energy and chemical supplies.

Second, a more hawkish US Federal Reserve (Fed) threatens to tighten global financial conditions. Third, the artificial intelligence (AI) investment boom is benefiting some Asian economies far more than others.

For investors, the key question is which markets are best positioned to absorb these risks. In our view, economies with stronger external balances and greater exposure to AI-related investment trends remain relatively well placed. By contrast, markets that depend heavily on imported energy, have weaker external accounts or benefit less from the current AI investment cycle may face a more difficult environment.

The renewed disruption around the Strait of Hormuz has reintroduced an energy risk that many investors had hoped was receding. Following the breakdown of a US-Iran memorandum of understanding and a renewed escalation in military tensions, commercial traffic through the strait has been significantly constrained (see Exhibit 1). This has placed renewed pressure on the flow of fossil fuels and critical chemicals into Asia.

So far, some of the impact has been mitigated. Lower Chinese energy imports and increased US energy exports have helped relieve some of the supply strain.

Nevertheless, these offsets may prove temporary if the disruption persists. Strategic reserves can provide a buffer, but they are not an unlimited source of supply. The longer the situation endures, the greater the risk that Asian economies face persistently higher energy costs and inflationary pressures.

Crucially, not all economies face the same degree of vulnerability. Countries with large energy import requirements, weaker external balances and extensive fuel subsidy programmes are likely to be most exposed. In our view, the Philippines, Indonesia, India and Thailand fit this description more closely than many of their regional peers. Higher oil prices would place pressure on trade balances, public finances and domestic inflation, creating a more challenging policy backdrop.

The second risk comes from the US. Under new Chair Kevin Warsh, the Fed has adopted a noticeably more hawkish tone. Recent communications suggest policymakers remain focused on inflation risks, even as some signs of moderation have emerged in consumer prices and labour market conditions. Updated projections show a greater willingness among Fed officials to consider higher policy rates than investors had previously anticipated.

While the exact timing and extent of future rate increases remain uncertain, the implications for Asia are relatively clear. Higher interest rates tend to support the US dollar and tighten global financial conditions. For economies with current account deficits (see Exhibit 2) or significant external funding needs, that can create pressure on currencies, financing conditions and capital flows.

Some Asian central banks may also be forced onto the defensive. If higher energy prices coincide with renewed Fed tightening, policymakers across the region could face difficult trade-offs between supporting growth and maintaining macroeconomic stability. As with energy vulnerability, the burden is unlikely to be shared equally.

Economies with weaker external balances, including Indonesia, the Philippines and India, appear more exposed than markets with stronger current account positions and larger external buffers.

The third and perhaps most important theme is the continuing AI investment boom.

Export performance has diverged sharply between the region’s technology and semiconductor leaders and those with less direct exposure to the AI investment cycle.

South Korea and Taiwan provide perhaps the strongest examples. Both economies have enjoyed a powerful export upswing, driven by demand for semiconductors and other technology components that sit at the heart of the global AI buildout. As Exhibit 3 shows, export growth in these markets has accelerated significantly, reflecting their central role in the AI supply chain.

Global hyperscalers continue to spend aggressively on the infrastructure required to support AI applications, including semiconductors, servers, data centres and power generation. Importantly, there is little evidence that this spending cycle is losing momentum. Instead, AI-related investment is increasingly becoming a major driver of export growth and capital expenditure across parts of Asia.

The benefits, however, are highly concentrated. Economies with strong semiconductor and technology hardware ecosystems are seeing the greatest gains. South Korea, Taiwan, Singapore, Malaysia, Japan and, increasingly, China are all benefiting from rising demand linked to AI infrastructure. Strong export performance and robust investment activity suggest these economies remain closely aligned with one of the most powerful global growth themes of the current cycle.

Other economies have far less direct exposure. The Philippines, Indonesia, Thailand and India participate in the broader regional supply chain, but their export and investment profiles are generally less tied to AI-driven demand. As a result, they are not receiving the same boost from the current investment cycle.

This contrast in fortunes is why we believe the AI boom is becoming an increasingly important source of regional divergence. While some Asian economies benefit from a powerful technology-driven growth tailwind, others remain more dependent on domestic demand, commodity cycles or traditional manufacturing sectors. The result is a more uneven growth picture across the region.