Asia is showing early resilience amid the energy shock, but second-round inflation and policy tightening risks still warrant caution

Overview

This report discusses the impact of the energy supply shock triggered by the near closure of the Strait of Hormuz on Asian economies, policy, and markets. Goldman Sachs judges the shock to be stagflationary in direction: crude and refined product prices are rising, natural gas shortages are causing power outages in some economies, shorter workweeks, work-from-home policies, and petrochemical capacity shutdowns, while growth forecasts are being revised down and inflation forecasts revised up. However, as of the report date, Asia’s overall economic activity and market performance remain more resilient than initially feared, due to lower energy intensity, greater substitution flexibility in consumption and transport, fiscal and FX reserve buffers, energy inventories, China’s macro stability, and support from the AI investment cycle for technology-exporting economies such as Korea and Taiwan.

Core views

The core views are: first, the energy shock is still ongoing, with the Q4 Brent forecast raised to $90/bbl and risks still skewed to the upside; second, Asia faces the strongest direct impact, but the actual shock is so far below the most pessimistic scenarios; third, markets reflect a belief that the shock is temporary, with stronger performance in tech-related equities and currencies; fourth, structural declines in energy intensity and policy buffers have mitigated the impact of higher oil and gas prices; fifth, South and Southeast Asia are more vulnerable, while North Asia’s technology economies and China are relatively more resilient; sixth, if growth continues to hold up and second-round inflation emerges, regional central banks will face greater tightening pressure.

Analysis framework

The report uses a macro event-shock analysis framework, mapping energy supply disruptions to oil prices, refined products, natural gas, electricity, inflation, growth, current accounts, exchange rates, interest rates, and equity market performance. Combining Goldman Sachs commodities team oil price forecasts, historical oil price sensitivity analysis, revisions to regional growth and CPI forecasts, FX reserve and inventory data, and fiscal and external account buffers across economies, the authors compare the relative resilience and vulnerability of China, North Asia, South Asia, and Southeast Asia.

Methodology notes

• Macro shock transmissionEnergy price sensitivity analysis

  The impact of oil prices on growth, inflation, and the current account

  The report uses existing oil price sensitivity studies to calibrate the impact of higher energy prices on GDP growth, CPI inflation, and current accounts across Asian economies, and accordingly makes modest adjustments to growth, inflation, and external account forecasts for Japan and some Southeast Asian economies.

• Cross-asset strategyRegional vulnerability comparison

  External accounts, fiscal space, reserves, and industrial structure jointly determine shock absorption capacity

  The report compares South Asia, Southeast Asia, North Asia, and China in grouped fashion, emphasizing that fuel weights in CPI, current account deficits, fiscal constraints, FX reserves, energy inventories, technology exports, and trade surpluses are the key variables explaining differences in asset performance.

• Policy reaction functionCentral bank growth-inflation tradeoff

  Growth resilience and second-round inflation will raise rate-hike pressure

  The report argues that if economic growth remains resilient while second-round effects appear in food, manufactured goods, and core inflation, central banks’ assessment of growth and inflation risks may turn more hawkish, leading to further policy tightening.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Brent crude oil

  Core variable of the energy shock

  Strengths

  Supply risks support further price increases, with the Q4 forecast raised to $90/bbl.

  Weaknesses

  If the Strait reopens faster than expected or demand weakens significantly, upside price pressure may ease.

  Comparison

  Compared with the previous $80/bbl forecast, the latest forecast is meaningfully higher, and in a delayed reopening scenario it could reach $100/bbl.

  Risks

  A prolonged closure of the Strait of Hormuz, tighter refined product markets, and geopolitical escalation would push prices higher.

• Asian equities

  Risk assets under macro shock

  Strengths

  Regional equities have recovered most of their pre-war losses, tech-heavy markets have reached new highs, and markets believe the shock may be temporary.

  Weaknesses

  Higher energy prices, weaker currencies, and rising rates are still weighing on valuations and earnings.

  Comparison

  North Asia’s technology markets are outperforming South and Southeast Asian markets, which have been weaker year-to-date.

  Risks

  If second-round inflation and policy tightening intensify, equities may reprice growth risks.

• CNY

  A relatively favored Asian currency

  Strengths

  China’s trade and current account surpluses are widening, capital inflows are improving, and its energy mix is relatively diversified.

  Weaknesses

  If the Strait of Hormuz is disrupted for an extended period and drags on demand in other emerging markets, China’s exports would still face indirect pressure.

  Comparison

  The report continues to expect CNY to outperform within regional FX.

  Risks

  Falling external demand, prolonged geopolitical conflict, and a larger-than-expected property drag.

• MYR

  A relatively favored Asian currency

  Strengths

  Supported by both energy-related exposure and technology supply chain links, while the recent improvement in risk sentiment is also beneficial.

  Weaknesses

  Fiscal and public debt constraints limit policy space.

  Comparison

  Together with CNY, it is listed in the report as one of the stronger-performing regional currencies.

  Risks

  If the energy shock turns into broader inflation or global demand weakens, support could fade.

• INR, IDR, PHP

  Asian currencies under pressure

  Strengths

  Further policy tightening or the use of FX reserves could temporarily cushion pressure.

  Weaknesses

  Current account deficits, higher fuel weights in CPI, and deteriorating terms of trade make these currencies more sensitive.

  Comparison

  Relative to CNY and MYR, the report believes INR, IDR, and PHP will remain under pressure.

  Risks

  Oil prices staying above pre-war levels, depletion of FX reserves, and rising inflation expectations.

• KRW, THB and India swaps rates

  Interest rate market pricing

  Strengths

  Markets have already priced in substantial rate hikes, so if actual hikes are fewer than expected, related rates may decline.

  Weaknesses

  If second-round inflation strengthens or energy prices stay higher for longer, central banks may still turn more hawkish.

  Comparison

  The report believes pricing of about 4 hikes in KRW rates, about 1.5 hikes in THB, and about 3-4 hikes in India swaps is unlikely to be fully realized.

  Risks

  Rising core inflation, greater FX pressure, and resilient growth leading to more tightening than expected.

• Philippines and Indonesia government bonds

  High-yielding bonds supported by rate-hike risk

  Strengths

  Higher yields can be justified by BSP and BI rate-hike risks.

  Weaknesses

  Inflation and FX pressure mean bonds still face upside yield risk.

  Comparison

  Compared with KRW, THB, and India rate curves, the higher yields on Philippine and Indonesian government bonds have stronger fundamental justification.

  Risks

  Elevated oil prices, fiscal constraints, external financing pressure, and further central bank rate hikes.

Key data

• Asia oil and gas exposureDuring normal periods, nearly 90% of oil and gas exported through the Strait of Hormuz flows to AsiaThis shows that Asia is the region most directly affected by the risk of a Strait closure.
• Brent oil price forecast$90/bbl in Q4 2026, previously $80/bbl; if reopening is delayed by one month, it could rise to $100/bblThis is the updated forecast from Goldman Sachs’ commodities team, with risks skewed to the upside.
• Growth and inflation adjustmentsAsia-Pacific inflation forecasts were raised by nearly 1 percentage point on average, while growth forecasts for most economies were lowered; in the latest update, Japan and some Southeast Asian economies saw growth reduced by 0.1-0.2 percentage points and CPI raised by 0.1-0.3 percentage pointsThis reflects the stagflationary nature of the energy shock, though the scale of the latest round of revisions is relatively limited.
• China macro resilienceChina’s growth and policy remained broadly stable during the Iran war, with large trade and current account surpluses and gradual RMB appreciationThe report believes China’s coal, renewables, ample oil reserves, and export resilience have reduced the direct shock.
• Taiwan growth forecastTaiwan’s 2026 growth forecast is 7%Supported by the AI investment and technology export cycle, it is one of the positive sources of Asia’s resilience.
• Korea quarterly growthKorea’s Q1 GDP grew 1.7% quarter-on-quarterThis shows that AI-related exports are supporting Korea’s growth.
• Fiscal constraintsIndonesia’s fiscal deficit is close to the 3% of GDP ceiling; Malaysia’s public debt is close to 65% of GDP; Thailand’s public debt is 66% of GDP, near the 70% ceilingThese constraints limit fiscal buffer space for some South and Southeast Asian economies.

Impact & implications

From an investment perspective, the energy shock is increasing divergence among Asian assets. North Asia’s technology-related markets are supported by the AI investment theme, with stronger equities and some currencies; China is showing defensiveness thanks to its trade surplus, energy mix, and policy stability; Malaysia is also supported by both energy exposure and technology supply chain links. By contrast, India, Indonesia, and the Philippines face greater pressure from current accounts, fuel inflation, and policy tightening risks, and their currencies may remain under pressure. On rates, the report believes the hikes priced into KRW rates, the THB curve, and India’s swap curve may not be fully realized, while the elevated government bond yields in the Philippines and Indonesia are more fundamentally justified.

Risks

• Delays in reopening the Strait of Hormuz, leading to further increases in oil and refined product prices.
• Natural gas shortages, power supply disruptions, and petrochemical capacity shutdowns spreading and dragging on industrial activity.
• Food inflation rising due to lower fertilizer output, while manufactured goods prices rise because of reduced naphtha supply.
• Buffers such as FX reserves, fiscal space, and energy inventories being continuously depleted, making resilience harder to sustain.
• If growth remains resilient while core inflation rises, central banks may tighten policy faster or by a larger magnitude.
• South and Southeast Asia suffer more concentrated damage due to current account deficits, fiscal constraints, and higher fuel inflation weights.
• Although China is stable in the short term, if the Strait is disrupted for a prolonged period and drags on demand in other emerging markets, China’s exports will face indirect pressure.

What to watch

• Developments in the closure and reopening of the Strait of Hormuz, as well as related news on the Iran conflict.
• Changes in Brent oil prices, Asian refined product prices, and natural gas supply.
• Asian energy inventories, especially data gaps in refined products and downstream chemical inventories.
• The sustainability of FX reserves, fiscal balances, and government subsidy policies.
• Whether second-round effects emerge in food prices, manufactured goods prices, core inflation, and inflation expectations.
• Policy signals and rate paths from the central banks of India, Indonesia, the Philippines, Thailand, Korea, Taiwan, New Zealand, Japan, and Australia.
• The relative performance of Asian currencies such as CNY, MYR, INR, IDR, PHP, KRW, TWD, and SGD.
• Whether North Asia’s AI-related exports, GDP data from Korea and Taiwan, and improvements in China’s exports and property drag continue.