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Info Service on WTO and Trade Issues (May26/13) Penang, 20 May (Kanaga Raja) -- Regional growth prospects for 2026 are increasingly being shaped by energy shocks arising from the conflict in the Middle East, according to UN Trade and Development (UNCTAD). In an update to its Trade and Development Report 2025, UNCTAD said developing economies are especially exposed, with many facing rising bills for fuel, food and fertilizers while also dealing with currency pressure, tighter financing conditions and weaker investor sentiment. Highlighting some growth trends at the regional level, the report said GDP growth in Africa is projected to reach 4.2 per cent in 2026, matching the 2025 figure. It said that major oil and gas exporters, such as Algeria, Angola, Libya and Nigeria, will benefit from stronger external balances and greater fiscal space to navigate the ongoing macroeconomic turbulence, even though higher refining margins will partly offset these gains, as many African oil exporters still rely on foreign refineries. The situation will be particularly challenging for net energy importers such as Egypt, Ethiopia, Kenya and South Africa. Irrespective of this distinction, remittance inflows from the Middle East will take a hit, it added. It also said capital outflows and exchange rate depreciations will increase debt sustainability risks, particularly in the African frontier-market economies (FMEs), and could also force central banks to slow or revert their easing cycles. In Latin America and the Caribbean, growth will slow down from 2.3 per cent in 2025 to 2.0 per cent in 2026, as growth pickup in Central America and the Caribbean will be insufficient to offset a slowdown in South America. The report said that although in Mexico, growth will accelerate, it will remain subdued at 1.2 per cent in 2026, supported by consumption, whereas investment and government expenditures are expected to decelerate. In Brazil, the economic expansion will decrease to 1.6 per cent in 2026 on the back of elevated policy rates and borrowing costs that hinder investment and consumption. As the government has already adopted fiscal measures to mitigate the effect of higher oil prices on inflation, the central bank still has room to ease monetary policy in 2026, thereby avoiding a stronger economic downturn, the report suggested. It said in Argentina, growth will decelerate to 3.0 per cent following a sharp rebound in 2025 due to exchange rate pressures, fiscal tightening and sluggish consumption amid high inflation and rising unemployment. However, the report said an extended conflict in the Middle East could further deepen the region's slowdown through trade and financial channels, including terms-of-trade deterioration, lower foreign exchange revenues from tourism and remittances and higher external borrowing costs. The report said economic expansion in Northern America may decline by 0.2 points to 1.9 per cent in 2026. In the United States, growth has been more robust than expected, fuelled by steady AI investment and household services consumption. The labour market seems to be weakening, and inflation is limiting further monetary easing. Vulnerability may stem from the limited number of dynamic sectors supporting domestic growth, it cautioned. Canada started the year facing renewed external headwinds that are expected to limit GDP growth to 1.0 per cent in 2026. While the soft labour market and subdued domestic demand are likely to limit the passthrough of higher energy costs to core inflation, unemployment is edging up to 6.6 per cent amid falling participation, said UNCTAD. Early-year data also point to softer manufacturing activity and a still wide trade deficit, though increased energy exports will partially offset this. Meanwhile, the report said in East Asia, economic growth will slow to 3.7 per cent in 2026, partly owing to strong reliance on energy imports from the Middle East. China grew at 5 per cent in 2025, amid both domestic and external headwinds. For 2026, the economy started with momentum in January and February, though annual growth is projected at 4.6 per cent, in line with the new lower official growth target band of 4.5-5.0 per cent. The projection reflects the persistence of domestic concerns such as real estate markets and local government debt, and external challenges. In January and February, both Chinese merchandise exports (19.2 per cent) and imports (17.1 per cent) recorded double-digit growth, said the report. The escalation in the Middle East may affect growth performance due to the country's dependence on imported oil (around 70 per cent), it pointed out. "Against this backdrop, in 2026, macroeconomic policy will remain expansionary aiming to counteract these challenges." In this context, the report said in March, the government announced that it would maintain a budget deficit of 4 per cent of GDP, issue RMB 1.6 trillion (about $240 billion) special treasury bonds for targeted sectors and RMB 4.4 trillion ($640 billion) local government special-purpose bonds. In Japan, where fossil fuel imports from the Middle East constitute 95 per cent of oil imports, rising prices and supply disruptions are expected to slow economic expansion to 0.9 per cent in 2026, despite robust government spending and business investment. Japan has committed $550 billion in investments in the United States over three years. The Republic of Korea is projected to grow only 1.6 per cent in 2026 due to external volatility and inflation risks from geopolitical tensions. The report said that South Asia will remain the fastest-growing region. Yet, regional GDP growth is expected to decline from 6.5 per cent in 2025 to 5.8 per cent in 2026. It said across the region, economic conditions were gradually stabilizing, but rising fossil fuel prices are likely to increase inflation and external financing constraints in several economies. In India, GDP growth will slow but remain robust at 6.5 per cent in 2026, with economic activity supported by domestic demand, continued public investment in infrastructure, and expansion in services and manufacturing sectors. The report said government initiatives aimed at improving logistics, digital infrastructure and financial services are also contributing to productivity gains. Recent trade agreements with the European Union and the United States may support exports, but also imports, on top of more costly oil imports, which represent over 20 per cent of its trade balance, it added. Meanwhile, South-East Asia's growth will remain robust while decelerating to 4.4 per cent in 2026. Although Indonesia became a net oil-importing country in 2008 and will be negatively impacted by higher oil prices, GDP growth is expected to slow only marginally to 4.8 per cent in 2026. The report said expansive fiscal and monetary policies will support short-term domestic demand, adding that the government aims to mobilize investment in strategic sectors, including renewable energy, agriculture, and health, to foster long-term structural transformation. Externally, the Indonesia-EU Comprehensive Economic Partnership Agreement, the upgraded ASEAN-China Free Trade Agreement and the Indonesia-United States trade deals concluded in 2025 will foster trade, it said. Western Asia is most directly affected by the regional conflict. Accordingly, regional GDP growth will slow to 2.0 per cent in 2026, said UNCTAD. Unlike oil exporters from other regions, countries in the Gulf Cooperation Council have suffered from damage to oil and gas infrastructure, reduced output and a halt to oil exports shipped through the Strait of Hormuz. Key non-oil sectors, such as tourism, and longer-term investment supporting diversification, will be impacted, it added. In Saudi Arabia, economic activity will slow to 2.0 in 2026, while in Turkiye, GDP growth will decline to 3.5 per cent in 2026 amid macroeconomic stabilization efforts, including tighter monetary policy and fiscal consolidation aimed at reducing inflation and strengthening external balances. The report said that the economy of the Russian Federation is projected to expand by around 1.0 per cent in 2026. It said that the macroeconomic weakening stems from fading fiscal stimulus, high interest rates and slowing domestic demand. The report further said the economy of the United Kingdom remains sluggish, with growth expected at only 0.9 per cent in 2026. Employment and wages are unable to sustain consumption and investment growth, while net exports and government net borrowing are shrinking. The European Union is expected to register a marginal slowdown in its economic expansion, to 1.2 per cent in 2026. Net exports to the United States and China are set to decline, with weak consumption and fiscal restraint dampening demand. The report said labour income shares and expectations of rising interest rates from the European Central Bank further dim consumption growth prospects. It pointed out that investment and government spending on goods and services have increased in some countries, notably in Germany, as governments and businesses have begun to expand spending in the defence sector. Recent budgetary cuts in France and Italy signal that the EU's largest economies will continue relying on exports as the main source of growth, it added. "On the investment front, the loosening of previously announced emission targets for the manufacturing sector is expected to support businesses' balance sheets in the short term." Meanwhile, the report said that economic prospects in Oceania are very closely linked to developments in the region's largest economy. In Australia, GDP growth is expected to rise to 2.0 per cent in 2026 as continued population growth, public infrastructure investment, household incomes and commodity exports, including natural gas, will more than compensate for the tighter monetary policy, it added. +
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