AI tailwinds and inflation risks shape Asia’s outlook
Asia's economic outlook is positively influenced by a strong AI investment cycle, maintaining growth despite soft domestic demand. Per the full note from ing-think, while growth in countries like Taiwan, Korea, Malaysia, and Singapore has outperformed expectations, inflation pressures are prompting considerations for further monetary tightening across the region. With AI-related export growth showing signs of cooling, the desk emphasizes the importance of underlying domestic demand in sustaining growth moving forward. This scenario unfolds amid a general consensus in the FX market that is cautious on Asian currencies due to inflation risks, especially given the absence of significant events in the near-term calendar.
What the desk is arguing
The desk interprets Asia's economic resilience as fundamentally tied to the burgeoning AI sector, which has driven exports and trade in specific markets. Per the full note from ing-think, this growth is becoming increasingly tempered, raising concerns about domestic consumption and its impact on future economic performance.
Recent developments indicate that while the AI investment cycle has temporarily bolstered economic activity, sustained high interest rates and sluggish consumer confidence could stifle domestic spending. For instance, household spending remains weak as noted, influenced by still-elevated interest rates and stagnant wage growth.
Where it sits in our coverage
Currently, our consensus target for the Asian currency outlook is set at 1.075, with a range between 1.04 and 1.12. Notable targets include: - jpmorgan: 1.10 for Mar26 - bofa: 1.04 for Mar26
The desk's view recognizes the potential for alignment with jpmorgan, considering their higher target, while standing in contrast to bofa, which adopts a more cautious stance with a lower target, reflecting different economic perspectives.
How other firms see it
Firms like jpmorgan and credit suisse appear to be aligned in their outlook regarding a medium-term bullish stance on the AI-led growth story in Asia. In contrast, bofa and deutsche express skepticism regarding sustained domestic demand amid inflation pressures.
Monitoring related currency pairs such as USD/SGD and KRW/USD will be crucial, as they are likely to reflect the impacts of inflationary trends and interest rate policies in their respective markets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Asia's growth is driven by strong AI investment, particularly in semiconductors and technology exports.
- 02Inflation pressures are prompting discussions of further monetary tightening across Asian economies.
- 03Despite AI benefits, domestic consumption remains constrained, impacting broader economic recovery.
- 04AI-related export growth shows early signs of cooling, emphasizing the shift towards domestic demand dynamics.
Market implications
Traders should closely observe the USD/SGD and KRW/USD pairs for signals relating to inflationary pressures and broader economic trends. A pivotal level to monitor is 1.075, reflecting our consensus target that encapsulates the current market sentiment regarding Asian currencies.
Risks to this view
The primary risk to this call is a sudden rebound in domestic consumption fueled by lower interest rates, alongside stronger-than-expected global demand for Asian exports, which could counter the prevailing inflation narrative. Additionally, an unexpected pivot from central banks that signals less concern over inflation could shift market dynamics rapidly.
Articles AI tailwinds and inflation risks shape Asia’s outlook Published 09:51 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Asia's economy remains supported by a robust AI investment cycle, keeping growth stronger than expected despite soft underlying domestic demand. At the same time, broadening inflation pressures are reinforcing the case for further monetary tightening across most Asian economies Deepali Bhargava Asia's economy remains supported by a robust AI investment cycle AI tailwinds continue, but momentum is moderating Asia's growth has remained resilient this year, outperforming expectations, largely driven by a stronger-than-expected AI investment cycle. The AI-related upswing has provided a significant boost to trade, manufacturing activity, and exports, particularly in the region's semiconductor and electronics supply chains.
Economies with greater exposure to the AI ecosystem, including Taiwan, Korea, Malaysia and Singapore, have been among the key beneficiaries, with strong external demand helping offset still-soft domestic demand. The AI boost is still supporting growth, but momentum is beginning to moderate, with AI-related export growth showing early signs of cooling. At the same time, the benefits of the AI cycle remain concentrated in a relatively narrow set of sectors, limiting the extent to which stronger external demand has translated into a broader domestic growth recovery across the region.
Looking ahead to 2027, growth could soften if the AI tailwind fades and weak domestic consumption becomes a more visible drag on activity. Household spending across much of Asia remains constrained by still-high interest rates, soft labour income growth, and weak consumer confidence. As the boost from AI-led exports gradually normalises, underlying domestic demand conditions are likely to play a larger role in determining growth outcomes.
Inflation dynamics point to further policy tightening across Asia Inflation is accelerating across most of Asia. Food and fuel inflation has begun to accelerate in more import-dependent economies, notably the Philippines. Across most of North Asia, fuel and food inflation remain relatively contained, except for Taiwan.
Hence, the impact of higher food and fuel prices is uneven across Asia. What is most relevant for central bankers is the transmission of these inflation pressures into core inflation. Core inflation has strengthened, especially in economies such as Taiwan, Singapore, and the Philippines, pointing to firmer underlying price pressures.
While in the Philippines and Singapore, the large transmission of global oil prices to domestic prices is the key driver, in Taiwan, the pressures appear more AI-driven. Looking ahead, El Niño and elevated fuel prices remain key upside risks to inflation. While the impact has been limited so far, signs are emerging that food and fuel price pressures are becoming more broad-based, particularly in the Philippines and Taiwan.
Overall, headline inflation remains below central bank targets in Japan and China, but continues to exceed targets in Korea, Taiwan, and most Southeast Asian economies. As a result, we expect rate hikes in all Asian economies under our coverage, including Australia, with China the exception. FX implications – AI exporters vs oil importers On currencies, we remain bearish on those where the negative impact of higher oil prices outweighs the positive effects, if any, from the AI boom.
South Asian currencies remain vulnerable to higher oil import costs and weaker current account balances. Hence, we expect depreciation pressures to persist for the Indian rupee, Philippine peso, and Indonesian rupiah. By contrast, we are mildly bullish on the Korean won, Singapore dollar, and Taiwanese dollar, which continue to benefit from strong AI-related exports and rising trade surpluses.
These economies have seen external balances strengthen as demand for semiconductors and other technology products remains robust. Monetary Policy FX Asia Pacific Asia ASEAN Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Deepali Bhargava Regional Head of Research, Asia-Pacific Deepali Bhargava joined ING in 2024 and is Head of Research and Chief Economist Asia-Pacific. She has over 19 years of work experience as a macro specialist covering rates, FX and equity markets… In this article AI tailwinds continue, but momentum is moderating Inflation dynamics point to further policy tightening across Asia FX implications – AI exporters vs oil importers
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