The World Bank Group’s latest East Asia and Pacific Economic Update says growth across the region is expected to slow in 2026 as external shocks weigh more heavily on economic activity. Regional growth is projected to decline to 4.2% in 2026 from 5.0% in 2025, mainly due to the energy shock linked to the conflict in the Middle East, which is adding to the effects of higher trade barriers, global policy uncertainty, and domestic economic pressures. Although the region is still expected to outperform many others globally, the outlook has become more fragile.
China, the region’s largest economy, is expected to see growth ease from 5.0% in 2025 to 4.2% in 2026, before slightly improving to 4.3% in 2027. The slowdown is being driven by weak domestic demand, ongoing problems in the property sector, and weaker export momentum caused by the broader global slowdown. Outside China, growth in the rest of East Asia and the Pacific is forecast to slow to 4.1% in 2026, with a recovery to 5.0% in 2027 expected if geopolitical tensions ease and uncertainty begins to fade.
The report notes that the severity of the Middle East conflict’s economic impact will vary across countries depending on how dependent they are on energy imports, how exposed they already are to economic vulnerabilities, and how much policy flexibility they have. A prolonged or worsening conflict could intensify economic distress and further weaken regional growth. The World Bank warns that a sustained 50 percent increase in fuel prices could reduce household incomes in the region by 3 to 4 percent, hitting poor and vulnerable families especially hard. In this context, targeted support for vulnerable households and small and medium enterprises is seen as a practical way to protect jobs and livelihoods without placing excessive strain on public finances.
Despite these headwinds, the report highlights some positive developments, particularly the rise in AI-related exports and investment during 2025. Countries such as Malaysia, Thailand, and Viet Nam have benefited from this trend, and artificial intelligence is seen as a potential driver of stronger productivity growth in the future. However, AI adoption across the region remains limited because of weak digital connectivity and skill gaps. The report notes that only 13 to 17 percent of multinational subsidiaries in China and Thailand currently use AI, which is far below the level seen in industrialized economies.
The World Bank also points to industrial policy as a potentially useful tool for boosting growth and creating more productive jobs, but only under the right conditions. It finds that targeted support for specific industries has worked in countries such as the Republic of Korea, Malaysia, and more recently Viet Nam because these economies first strengthened their infrastructure, education systems, regulatory institutions, and openness to trade and investment. In contrast, industrial support in countries with weaker foundations and persistent protectionist barriers—especially in services—has often delivered weaker or less efficient results. The report suggests that combining short-term support with renewed structural reforms will be essential if the region is to preserve resilience and unlock stronger long-term growth.
