Subsidies, tech boom cushion Asia oil shock

Nearly six months after the United States and Israel began military strikes on Iran, Asia-Pacific economies have largely weathered the resulting oil shock, with government spending, domestic energy supplies and a boom in AI and semiconductors helping contain inflation and sustain growth, although the impact has varied significantly across the region, analysts said.

With the Asia-Pacific being a "central part of the global AI supply chain", AI products and semiconductor exports have become the "dominant driver" of regional growth, according to Joshua Lewin, head of investment strategy, Asia at JP Morgan Private Bank.

But the benefits from the AI export boom are "far from evenly distributed", Lewin said, noting that China, Singapore and South Korea — economies that have "stronger positions" in the AI supply chain — are primary beneficiaries. But countries like India, Indonesia and the Philippines have captured fewer gains due to their limited integration into the hardware and semiconductor supply chain.

China's economy expanded 4.7 percent in the first half of 2026, while Singapore's economy rose 6.1 percent in the same period and South Korea's GDP increased 1.8 percent in the first quarter.

Jason Chang, chairman of the Australian Chamber of Commerce in Hong Kong, said Asian economies that are net energy exporters can offset the shock brought by the Middle East crisis, but those that rely heavily on imported oil and gas have to deal with higher domestic inflation rates. He cited Australia, which has managed to cushion the impact of steep oil prices as the Pacific country is one of the world's largest exporters of liquefied natural gas.

In India, Asia's third-biggest economy and one of the world's biggest crude oil importers, rating agency ICRA forecast GDP growth would slow to 7.0 percent in the three months to June from 7.8 percent in the preceding quarter.

In Indonesia, Southeast Asia's biggest economy and a net energy importer, domestic fuel subsidies have reined in inflation, analysts said. The economy grew 5.45 percent in the first half of the year on increased government spending and expanded accommodation and food service activities. The inflation rate slowed to 2.88 percent in July — the lowest in three months.

Harry Baskoro, a former senior deputy director at Bank Indonesia, the central bank, said, "Fiscal policy is being used as an economic shock absorber, but the absorber has a price."

He said part of the cost migrates to the government budget through higher subsidies and compensation, and a prolonged increase in oil prices will also raise Indonesia's foreign exchange requirement for energy imports. If that coincides with global risk aversion and capital outflows, pressure on the rupiah could amplify imported inflation, Baskoro said.

Arsjad Rasjid, chairman of the Board of Trustees at the Indonesian Business Council, said, "Over time, support needs to become better targeted, so protection can remain where it is most needed while preserving fiscal space for productive investment and other national priorities."

Country-specific factors

Lewin of JP Morgan said the economic outlook for the region in the next few months will depend on "country-specific factors". In some South and Southeast Asian countries, for example, Lewin said balance-of-payments pressures may persist even if oil prices stabilize as the energy shock exposes deeper structural vulnerabilities.

Rasjid said the more serious downside would be a combination of shocks — another sustained rise in energy prices, renewed disruption to major shipping routes and tighter global financing conditions.

Baskoro said the Middle East crisis could also accelerate diversification among Asia-Pacific economies. He said this would push governments and companies to reduce dependence on one supplier, one shipping route or even one type of energy source.

"That potentially raises Southeast Asia's strategic value as an alternative production, processing and logistics base," Baskoro said.

Leonardus Jegho in Jakarta contributed to this story.

prime@chinadailyapac.com