The artificial intelligence (AI) boom is driving a sharp divergence across the Asia-Pacific economy, boosting exports, data-center investment and financial markets in technology-heavy economies while weaker-linked sectors face higher costs, trade disruptions and subdued domestic demand, Moody’s Analytics said on Wednesday.
The region is experiencing a “K-shaped” economy, with some countries and industries accelerating while others fall behind, although overall growth is proving more resilient than Moody’s expected earlier this year, the rating agency said in a report.
The AI boom has fueled strong demand for semiconductors and other technology products, lifting exports across Taiwan, South Korea, Mainland China and parts of Southeast Asia.
In the first half of 2026, nominal goods exports from South Korea and Taiwan exceeded Japan’s for the first time, Moody’s said. The electronics boom has also lifted equity markets, with the stock market capitalization of Taiwan and South Korea overtaking that of the UK earlier this year.
The strength in exports, however, masks weaker domestic conditions across much of the region, where demand remains below pre-pandemic trends and global averages.
“AI has also turbocharged business investment in data centers,” Moody’s said, adding that its real-time foreign direct investment proxies showed data-center investment had taken off, with most of the money originating in the United States and flowing predominantly to Asia, particularly India and Singapore.
Moody’s said the AI-driven investment surge is supporting economic growth for now, but is also increasing the region’s exposure to a reversal in investor sentiment.
“Although AI is propping up growth for now, it also leaves the region exposed if sentiment flips,” it said.
The agency expects Asia-Pacific gross domestic product (GDP) growth to slow to 4.3 percent in 2026 from 4.4 percent in 2025, before decelerating further to 3.7 percent in 2027.
Higher prices and tighter monetary policy, partly resulting from the conflict in the Middle East, are expected to weigh on household consumption and investment in traditional manufacturing and services.
Economies most deeply integrated into the AI supply chain are expected to buck the broader slowdown.
Taiwan, South Korea, Singapore and Malaysia are forecast to grow faster in 2026 than in 2025, while all except South Korea are expected to outpace Mainland China this year.
Six major Asia-Pacific economies — Taiwan, Singapore, Malaysia, India, Vietnam and Indonesia — are expected to grow faster than China in 2026, according to Moody’s.
The region is also on track to grow slightly faster than Moody’s projected in January, before the conflict in the Middle East began. The agency said almost all of the upward revision reflects the boost from the AI boom.
The rapid expansion of data-center investment is a key part of the AI-driven growth story. Moody’s said its cross-border investment data showed that data-center investment had accelerated, with the US providing most of the capital and Asia attracting the bulk of the flows.
Singapore and India have been among the main destinations for this investment.
However, the AI boom is increasingly creating imbalances elsewhere in the economy. Prices for a range of electronics have risen, while shortages in some hardware segments have disrupted markets.
Moody’s referred to the phenomenon as the “RAMpocalypse”, reflecting shortages of random-access memory and the resulting pressure on electronics prices.
At the same time, investor enthusiasm has pushed equity valuations to record highs, increasing the potential impact of a reversal in sentiment.
Higher energy and food prices are another challenge for the region. They are adding to inflation and reducing household real incomes, particularly in economies where domestic demand is already weak.
The combination complicates monetary policy. Higher inflation can strengthen the case for interest-rate increases, particularly in economies where the AI boom has pushed growth higher and asset valuations have become stretched.
But rate increases also weaken demand, making monetary tightening less effective when household consumption and domestic activity are already subdued.
Since the outbreak of the conflict in the Middle East, Indonesia has raised interest rates by a cumulative 100 basis points, while Australia and the Philippines have increased rates by 75 basis points each.
Japan, South Korea and New Zealand have each raised rates by 50 basis points, while Hong Kong has followed the United States with a 25-basis-point increase.
Malaysia and Taiwan have kept rates unchanged but have room to tighten if needed, Moody’s said. China, India and Thailand are likely to look through the oil shock because of domestic economic concerns.
The agency said risks to the regional outlook are tilted firmly to the downside, with geopolitics posing the biggest threat.
A renewed escalation of the conflict in the Middle East or a prolonged blockade of key shipping routes, including the Strait of Hormuz, could send oil prices sharply higher and force countries to draw down reserves.
Higher energy costs would raise inflation, weaken economic growth and complicate central-bank decisions.
The impact would also extend beyond energy because Middle Eastern economies are important producers of chemicals and fertilizers. Disruptions could therefore push food prices higher across Asia-Pacific, where food represents a relatively large share of household spending and consumer price baskets.
El Niño could add further pressure through hotter and drier conditions across parts of the region, while shortages of chemicals and petroleum products could affect petrochemicals, aviation, construction and traditional manufacturing.
A prolonged Middle East conflict could also undermine the economics of the AI boom itself.
Moody’s said doubts had already emerged over the long-term profitability and viability of some AI business models before the conflict. Higher energy prices and tighter financial conditions could further increase operating and financing costs.
The agency highlighted several existing pressures on AI investment, including intensified competition from open-weight models, the risk of rapid capital depreciation as graphics processing units become obsolete, and opaque financing structures involving off-balance-sheet leverage through special-purpose vehicles.
Meanwhile, Moody’s said tariffs were increasingly becoming a permanent feature of global trade rather than a temporary disruption, adding to uncertainty for economies heavily dependent on exports and global supply chains.
Financial markets are also contributing to the risks, with equity valuations appearing stretched, bond markets showing signs of unease and exchange rates having moved away from underlying fundamentals.
Despite those risks, Moody’s said the Asia-Pacific economy had proved more resilient than expected.
The region’s performance is being supported heavily by the AI cycle, particularly in economies that are deeply integrated into semiconductor, electronics and data-center supply chains.
But the concentration of growth in AI-related activities means a sharp change in investor sentiment, a correction in financial markets or a slowdown in technology investment could have wider consequences.
“A prolonged conflict in the Middle East, a sudden bursting of the AI boom, fresh trade tensions, or a financial market correction alongside a broader global slowdown would leave the region exposed,” Moody’s said.
AI boom is a growth cushion for SEA amid mounting energy, tariff, and weather risks – Moody’s