Pacific Money | Economy | Southeast Asia

Southeast Asian Economies’ Growth to Slow in 2026, World Bank Says

The disruption of oil and gas supplies from the Middle East is compounding the impacts of the Trump administration’s tariffs.

An aerial view of the city of Danang in central Vietnam.

Southeast Asia is set to experience a broad slowing of economic growth in 2026, as the impact of the Iran war compounds the uncertainty caused by the Trump administration’s tariffs, according to the World Bank.

In its latest East Asia and Pacific Economic Update, released yesterday, the Bank predicted that growth in the region will slow to 4.2 percent in 2026, down from 5.0 percent in 2025. This was due in large part to the deceleration of growth in China, and from the “the negative growth effect of higher energy prices” stemming from the conflict in the Middle East.

In launching the report, Aaditya Mattoo, the World Bank’s director of development research, said the combination of tariff uncertainty and the disruptions in the supply of Middle Eastern oil and gas due to Iran’s effective closure of the Strait of Hormuz is expected to do the greatest harm to those Asian nations most dependent on exports, Nikkei Asia reported.

According to the report, “a prolonged and more intense conflict could significantly reduce global growth.” It added that for the region, “a sustained 50 percent increase in fuel prices could lead to a 3–4 percent loss in income for households in the region through both direct and indirect effects,” as well as potentially impacting food security.

All of this is set to compound the depressive effect of U.S. tariffs, which have contributed to “elevated economic policy uncertainty,” inhibiting investment and inducing “a shift toward short-term and informal employment,” the report states.

The exact impact of the Middle Eastern conflict depends on each country’s degree of “exposure, vulnerability, and policy space.” All of Southeast Asia’s major economies are likely to be impacted. Of these, Vietnam is set to suffer the biggest drop in 2026, with its growth forecast to slow to 6.3 percent, down from just over 8 percent last year.

Thailand, struggling with high levels of household debt and chronic political instability, is forecast to slow from 2.4 percent last year to just 1.3 percent growth in 2026. Of the remaining major economies of developing Southeast Asia, Indonesia is projected to grow by 4.7 percent in 2026, down from 5.1 percent last year, while Malaysia will grow by 4.4 percent, down from 5.2 percent.

According to the World Bank, projected growth in Cambodia will fall from 4.8 to 3.9 percent, while Laos will see a slowdown from 4.5 percent last year to 3.5 percent in 2026. Meanwhile, ASEAN’s newest member state, Timor-Leste, will see a slight drop in growth from 4.5 to 4.1 percent. In a sign of the generally challenging economic outlook, the only ASEAN nation likely to improve in 2025 is conflict-torn Myanmar, whose economy the World Bank predicts will grow by around 2 percent this year, after experiencing negative growth of 1.3 percent last year.

All of these projections represented slight downgrades on the projections included in the World Bank’s last regional economic update in October.

On the upside, the report stated that Southeast Asian economies, including Malaysia, Thailand, and Vietnam, had been among the greatest beneficiaries of growing AI-related exports and investment. It also flags the potential for AI to spur productivity growth, but noted that the adoption of these technologies in the region falls short of their potential, due to “gaps in connectivity, skills, and startup ecosystems.”

While the World Bank expects growth in most nations to regain momentum in 2027, Mattoo said that the disruption of Middle Eastern oil and gas is “not a temporary shock,” and that the two-week ceasefire announced by U.S. President Donald Trump earlier this week “doesn’t dispel the climate of uncertainty.”

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Southeast Asia is set to experience a broad slowing of economic growth in 2026, as the impact of the Iran war compounds the uncertainty caused by the Trump administration’s tariffs, according to the World Bank.

In its latest East Asia and Pacific Economic Update, released yesterday, the Bank predicted that growth in the region will slow to 4.2 percent in 2026, down from 5.0 percent in 2025. This was due in large part to the deceleration of growth in China, and from the “the negative growth effect of higher energy prices” stemming from the conflict in the Middle East.

In launching the report, Aaditya Mattoo, the World Bank’s director of development research, said the combination of tariff uncertainty and the disruptions in the supply of Middle Eastern oil and gas due to Iran’s effective closure of the Strait of Hormuz is expected to do the greatest harm to those Asian nations most dependent on exports, Nikkei Asia reported.

According to the report, “a prolonged and more intense conflict could significantly reduce global growth.” It added that for the region, “a sustained 50 percent increase in fuel prices could lead to a 3–4 percent loss in income for households in the region through both direct and indirect effects,” as well as potentially impacting food security.

All of this is set to compound the depressive effect of U.S. tariffs, which have contributed to “elevated economic policy uncertainty,” inhibiting investment and inducing “a shift toward short-term and informal employment,” the report states.

The exact impact of the Middle Eastern conflict depends on each country’s degree of “exposure, vulnerability, and policy space.” All of Southeast Asia’s major economies are likely to be impacted. Of these, Vietnam is set to suffer the biggest drop in 2026, with its growth forecast to slow to 6.3 percent, down from just over 8 percent last year.

Thailand, struggling with high levels of household debt and chronic political instability, is forecast to slow from 2.4 percent last year to just 1.3 percent growth in 2026. Of the remaining major economies of developing Southeast Asia, Indonesia is projected to grow by 4.7 percent in 2026, down from 5.1 percent last year, while Malaysia will grow by 4.4 percent, down from 5.2 percent.

According to the World Bank, projected growth in Cambodia will fall from 4.8 to 3.9 percent, while Laos will see a slowdown from 4.5 percent last year to 3.5 percent in 2026. Meanwhile, ASEAN’s newest member state, Timor-Leste, will see a slight drop in growth from 4.5 to 4.1 percent. In a sign of the generally challenging economic outlook, the only ASEAN nation likely to improve in 2025 is conflict-torn Myanmar, whose economy the World Bank predicts will grow by around 2 percent this year, after experiencing negative growth of 1.3 percent last year.

All of these projections represented slight downgrades on the projections included in the World Bank’s last regional economic update in October.

On the upside, the report stated that Southeast Asian economies, including Malaysia, Thailand, and Vietnam, had been among the greatest beneficiaries of growing AI-related exports and investment. It also flags the potential for AI to spur productivity growth, but noted that the adoption of these technologies in the region falls short of their potential, due to “gaps in connectivity, skills, and startup ecosystems.”

While the World Bank expects growth in most nations to regain momentum in 2027, Mattoo said that the disruption of Middle Eastern oil and gas is “not a temporary shock,” and that the two-week ceasefire announced by U.S. President Donald Trump earlier this week “doesn’t dispel the climate of uncertainty.”

Sebastian Strangio is Southeast Asia editor at The Diplomat. 

Southeast Asia economies

U.S.-Israel war on Iran

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