The Asean+3 economy – the 10 member countries of the Associations of Southeast Asian Nations ( Asean ), plus China, Japan and South Korea – is holding onto its steady expansion trajectory, but households and industries must brace for higher costs as a prolonged Middle East conflict exerts a heavy toll on supply chains, according to a recent outlook report.

The Asean+3 Macroeconomic Research Office ( Amro ), in its interim update of the Asean+3 Regional Economic Outlook released on June 2, maintains its regional growth projection at 4.0% for 2026, unchanged from its early April assessment.

However, reflecting the compounding weight of geopolitical friction, the Singapore-based macroeconomic watchdog hiked its headline inflation forecast for the region to 1.8%, up from the 1.4% previously estimated.

A firm GDP expansion in the first quarter of 2026, the report highlights, has provided a solid cushion for the region. Despite the onset of the Middle East conflict, the Asean+3 area grew firmly by 4.4% in the first quarter, driven by robust domestic demand and an artifical intelligence-led semiconductor export boom.

However, the wider macroeconomic reality, Amro warns, is shifting rapidly. The Middle East crisis has entered its fourth month, completely defying initial market expectations of a swift resolution within two months. As a direct result, shipping lines face major blockages, with around 80% of vessel transit through the crucial Strait of Hormuz remaining severely disrupted, keeping global energy and commodity prices highly elevated.

Crude oil prices, according to Amro’s data, have surged by around 50% since the conflict began late this February, while refined petroleum products and chemical fertilizer inputs like urea have spiked even more sharply by 80%.

The rising upstream costs are creating a direct domino effect on local consumer prices, though the impact is hitting unevenly across regional borders. Energy-related inflation has picked up sharply in recent months, most noticeably within the Asean bloc, particularly across those specific economies that lack robust domestic fuel subsidies or are highly dependent on imported energy and fuel-intensive transport and food networks.

By contrast, price pressures in the plus-3 economies have remained comparatively contained, partially insulated by strategic policy measures and high fuel reserve buffers.

Beyond consumer price lines, early signs of supply stress, the watchdog notes, have emerged for critical industrial inputs, including helium, sulphur and liquefied petroleum gas, which are vital components for regional electronics and petrochemical manufacturing hubs. Broad-based market dislocations have so far been successfully avoided as versatile firms utilize alternative sourcing methods, but a prolonged conflict, Amro emphasizes, could spark material production drops.

The region faces a delicate balance, according to Dong He, Amro’s chief economist. “Asean+3 growth has remained resilient, supported by firm domestic demand and technology exports. But incipient signs of stress are emerging. Higher energy and transport costs are feeding into inflation and adding pressure on industrial supply chains. If the conflict persists, these pressures could broaden and weigh on regional growth.”

This uneven economic landscape has led to significant, mixed changes in individual country growth forecasts across Amro’s official projections. Growth expectations were upgraded for several of the plus-3 economies, such as South Korea and Japan, which are benefiting immensely from a strong, tech-heavy export cycle. For the core Asean nations, the revisions are highly disparate.

The growth forecast for the Philippines was noticeably downgraded to 5.3%, from 5.8% in April, because a strong domestic inflation pass-through is expected to dent local household spending. On the other hand, Vietnam’s growth forecast was actually upgraded to 7.4%, up from 7.1%, showing a high level of resilience amid shifting international manufacturing dynamics.

Looking ahead, the trajectory and severity of the Middle East conflict represent the single most consequential near-term uncertainty for the Asean+3 region, according to Amro, with the threat of a severe stagflationary shock looming large over the baseline outlook.

The report maps out a highly concerning adverse scenario where Brent crude oil averages US$125 per barrel for the remainder of 2026, compared with the current baseline assumption of US$95 per barrel. Should this adverse track materialize, alongside worsening supply-chain blockages, Asean+3 growth could plunge sharply to 2.5%, while headline inflation would increase to 3.5%.

Excluding the unprecedented disruptions of the Covid-19 pandemic years, such an outcome, Amro emphasizes, would officially mark the highest regional inflation seen in more than a decade, alongside the slowest economic expansion recorded since the devastating 1997 Asian financial crisis.

To navigate these compounding risks, the regional watchdog is urging governments to maintain defensive financial postures and deploy highly targeted measures. Tightening global financial conditions have already driven up government bond yields and triggered local currency depreciation pressures for several vulnerable economies, compounding the domestic inflation headache.

Emphasizing the urgent need for a coordinated, forward-looking policy approach across the region, the Amro chief economist concludes the assessment by stating: “Against this backdrop, policy responses need to remain agile as the shock evolves. Near-term support should be targeted and temporary, while longer-term efforts should focus on strengthening energy security, supply-chain resilience and regional integration.”