Fragile footing: How India, China face sizeable economic damage from US-Iran war

Asia-Pacific economies person entered 2026 connected a fragile footing, and the US-Israel-Iran warfare has exacerbated the risks to GDP maturation for economies similar China, India, and different large countries successful the region, says Moody’s Analytics successful its latest report.The planetary system has been undergoing a play of turmoil since the commencement of this decennary - archetypal it was the Covid pandemic, past the Russia-Ukraine war, past the Donald Trump administration's tariff policies, and yet 2026 has added the Middle East struggle to the increasing list.What does this latest disruption mean for the maturation prospects of Asian economies that are successful ample portion babelike connected lipid and vigor imports.

Since the commencement of the Middle East conflict, transition of ships done the Strait of Hormuz has been curtailed, large vigor infrastructure crossed the Gulf has been hit, and lipid prices person risen past $100 per barrel, stoking ostentation fears.

Fragile Economic Scenario

According to Moody’s Analytics, 2026 was ever going to beryllium a pugnacious twelvemonth for Asia-Pacific countries. Now the uncertainty of the Middle East struggle has added different spanner successful the maturation instrumentality of large economies similar China, India, Japan, and South Korea.

As Moody’s says: Asia-Pacific economies entered 2026 connected a fragile footing. Domestic request was weak, and export maturation looked acceptable to slow.“Growth was acceptable to dilatory aft export front-loading up of US tariff hikes flattered the numbers past year. And the artificial quality roar looked ripe for a pause. Still, cooling ostentation allowed immoderate cardinal banks to easiness policy, providing crushed for cautious optimism.

Added to that, the US Supreme Court's determination successful February to onslaught down country-specific tariffs brought immoderate alleviation to immoderate of the region's exporters,” Moody’s Analytics says successful its latest study titled ‘Asia-Pacific Outlook: Buckling Up’.

But now, caller events person analyzable the maturation outlook considerably.The study notes the pursuing for large Asian economies:

“All of this creates an uncomfortable echo of the ostentation and proviso shocks that followed the COVID-19 pandemic and Russia's penetration of Ukraine,” it warns.

Three Risks For Asia-Pacific Economies - Where Does India Fit In?

Moody’s has a large informing for Asia-Pacific economies: They are faced with a ‘troublesome premix of outer threats’!Threat 1: Middle East ConflictThe study says that the Middle East struggle sits astatine the apical of the list. This is due to the fact that of the region's dense dependence connected imported commodities. This is particularly existent since the root of vigor needs is the precise acceptable of countries that are presently progressive successful the conflict.

While India imports a large percent of its crude lipid requirements, Moody’s Analytics is of the presumption that compared to different countries successful the portion its dependency is somewhat less.Northeast Asia's high-income economies specified arsenic Japan, South Korea and Taiwan are peculiarly babelike connected imported fossil fuels. However it notes that these countries support sizeable strategical lipid reserves. The typically constricted pass-through from short-lived terms spikes to home user prices provides a meaningful buffer, it says.

China, which is 1 of the largest buyers of Iranian discounted crude, likewise maintains immense reserves.

“India and Southeast Asian economies are somewhat little import-dependent but clasp acold smaller reserves; their governments alternatively thin connected nonstop oregon indirect terms caps and substance subsidy schemes to shield consumers from volatility,” Moody’s Analytics says its report.In a script wherever the US-Iran warfare does not persist for a longer duration, the ostentation daze to South Asian economies would beryllium contained, but a longer breakout of struggle has meaningful implications that cannot beryllium ignored.“A prolonged struggle oregon a further sustained emergence successful vigor prices would materially change the appraisal of constricted impact. In summation to vigor prices, nutrient ostentation is different interest fixed its ample value successful determination depletion baskets,” the study says.

Threat 2: Trump Tariff RisksMiddle East struggle is not the lone hazard that threatens the maturation communicative of Asian economies this year. Uncertainty related to tariffs is simply a large concern.“The Asia-Pacific portion has ever grown done exports, and that dependence has lone deepened since the pandemic. With entree to the US marketplace becoming much difficult, the imbalance leaves the portion exposed,” says the Moody’s report.The study acknowledges that the US Supreme Court has struck down the Donald Trump administration's reciprocal tariffs, but rapidly points to the 10% planetary tariff that was announced, with the imaginable of it being raised to 15%.

“Trump's consequent announcement of a level planetary 15% tariff complaint means the mean effectual US import tariff would beryllium broadly unchanged - and considerably higher than this clip past year,” it says.The Moody’s study besides cautions that the caller investigations nether Section 301 of the Trade Act awesome that the Trump medication is looking to rebuild the tariff authorities that existed earlier the apex court's decision. Moody’s baseline presumption is that US import tariffs volition enactment astatine existent levels done 2028.Threat 2: End of the AI Boom?AI has been driving the quality for months present - disruptive models are taking the satellite by a storm, but is the rally acceptable for a intermission According to the Moody’s report, a cardinal root of uncertainty astir its forecast is the AI boom.“Asia produces astir of the world's electronics, truthful the surge successful AI-related request has been a almighty tailwind - archetypal successful Taiwan, which produces astir of the world's bleeding-edge semiconductors, and since precocious 2025, successful representation chips, retention and related products,” the study notes.

What this has meant is simply a emergence successful electronics exports crossed the region, and an summation successful prices and immoderate isolated shortages arsenic well. “Data centre concern has been an added benefit, complementing the export-led maturation boost. But this besides means the portion is heavy exposed should AI momentum falter,” Moody’s says. Exports and investments are astatine the hazard of being deed successful lawsuit the AI-led roar were to either extremity oregon worst inactive spot a large downturn.“Financial markets would respond sharply. Nowhere is this dynamic much disposable than successful South Korea, whose equity marketplace astir tripled implicit 18 months earlier selling disconnected sharply erstwhile the Middle East struggle exposed macro vulnerabilities that worsened the risk-off move,” Moody’s explains.

China’s New Economic Normal

China has been flooding markets with exports, a argumentation which is driven by its ain anemic home demand. Earlier this month, China projected a GDP maturation complaint of 4.5% to 5% for 2026 - which is the archetypal clip successful implicit 3 decades that officials successful Beijing person projected a sub 5% maturation number.Domestic weakness and concern overcapacity received rhetorical acknowledgement, but the argumentation absorption remains firmly connected concern upgrading and technological self-sufficiency, says Moody’s.

At home, argumentation efforts to code involution, the excess contention that compresses returns and drives prices ever lower, whitethorn beryllium bearing immoderate fruit. But we wouldn't beryllium amazed if caller concern into strategical sectors volition spot involution and deflation instrumentality earlier long, the study says.

South Asia Growth Projections For 2026

With this concern successful mind, Moody’s Analytics projects that the maturation crossed the Asia-Pacific portion volition dilatory down from 4.3% successful 2025 to conscionable 4$ successful 2026. The fig volition travel down further to 3.6% successful 2027, it estimates.Individual system omniscient projections are:

In its study Moody’s Analytics simulates a much ‘severe and protracted’ struggle which sees Brent crude rising substantially.“Results amusement GDP losses crossed the APAC portion peaking astatine 3%, a larger deed than either Europe oregon the US would absorb, reflecting the region's dense dependence connected Middle Eastern commodities,” it says.

“Developed Asia sustains a peculiarly ample blow; its pronounced vulnerability to commodity terms spikes weakens commercialized balances and currencies, pushing up inflation. India and China look sizeable harm fixed their dependence connected lipid and state imports from Gulf economies caught up successful the conflict,” it adds.As Moody’s Analytics concludes: This twelvemonth is shaping up to beryllium an adjacent much hard twelvemonth for the Asia Pacific portion than primitively envisaged.“A much terrible and prolonged struggle successful the Middle East would compound existing tariff pain. And portion the AI roar is powering ahead, stretched equity valuations, alongside terms spikes and isolated hardware shortages, suggest it is progressively ripe for a pause. With constricted enactment from fiscal and monetary policymakers, maturation volition slow,” it says.