03 / OUR VALUE CREATION APPROACH 01 02 04 05 06 07 08 09 25 ECONOMIC REVIEW The global economic environment entering 2026 has been marked not only by diverging growth and inflation dynamics but also escalated geopolitical risks. Most notably, renewed conflict in the Middle East has heightened uncertainty across energy markets, trade flows and inflation expectations. While these developments are still evolving as 2026 unfolds, a prolonged escalation could result in heightened volatility in oil prices and supply chains, potentially adding to macroeconomic pressures that may drag on the global outlook and sentiment. Set against these emerging risks, global economic conditions in over the past year were generally supported by domestic demand resilience, policy buffers and sector‑specific growth drivers across major economies. Against this backdrop, economic performance in 2025 remained broadly resilient despite persistent external headwinds. The US economy continued to expand, supported by firm household spending and strong investment in AI-related sectors. Europe experienced a gradual recovery, anchored by improving industrial activity and stabilising inflation. China’s economic momentum softened, weighed down by weak property sector conditions, subdued consumer confidence and ongoing structural adjustments. India, by contrast, maintained strong growth, supported by robust domestic demand, public infrastructure spending and continued gains in manufacturing and services. ASEAN economies benefitted from resilient domestic demand, targeted policy support and continued improvement in tourism flows. Export-oriented sectors across the region also recorded solid growth, defying earlier expectations of tariff-related drags. Global inflation followed increasingly divergent paths in 2025. While price pressures in the Euro area remained anchored close to target, inflation in the US, the United Kingdom (“UK”) and Japan proved more persistent, reflecting tighter labour markets, fiscal impulses and uneven growth dynamics. In the US, inflation stabilised at just below 3.0%, complicating the final leg of disinflation. Japan remained in an inflationary regime as wage growth strengthened, despite temporary relief from energy subsidies. Against this backdrop, major central banks shifted from broad easing towards more cautious and differentiated policy paths. Bond markets adjusted accordingly, with elevated term premia reflecting uncertainty over the pace and scale of future rate cuts rather than an outright reversal of the easing cycle. Market volatility rose late in the year following a sharp sell-off in Japanese government bonds, triggered by concerns over Tokyo’s proposed fiscal expansion and rising debt issuance. The move pushed global yields higher and briefly pressured risk assets across Asia. At the same time, renewed uncertainty over US trade policy weighed on sentiment. President Trump’s fresh tariff rhetoric and his confrontational response at the Davos forum to North Atlantic Treaty Organisation (NATO) members criticising his comments on Greenland highlighted a more unpredictable geopolitical tone. While markets remain alert to escalation risks, the economic impact has so far been contained. Malaysia’s economy stayed on a steady footing, expanding by 5.2% in 2025 (2024: 5.1%). Growth was driven primarily by domestic-oriented sectors, supported by higher household incomes, stable labour market conditions and continued investment. The services sector continued to underpin economic expansion, buoyed by rising tourist arrivals ahead of the Visit Malaysia 2026 campaign. Manufacturing also gained momentum, particularly from surging demand for electrical and electronics products. Inflation remained subdued and well contained. Malaysia’s Consumer Price Index (“CPI”) stayed below historical norms, supported by weak demand pressures, targeted fuel subsidies and imported disinflation from a firmer ringgit. Despite selective cost pressures, inflation remained anchored, allowing Bank Negara Malaysia (“BNM”) to maintain a steady policy stance. The ringgit benefitted from this stability, ending the year at 4.06/ USD, supported by improving carry dynamics, sustained bond inflows and credible fiscal management. In this environment, BNM maintained the Overnight Policy Rate (“OPR”) at 2.75%, balancing growth, price stability and financial stability following an unexpected 0.25% rate cut in July 2025. Sustainability in the Financial Landscape At the country level, taking on the chairmanship of ASEAN in 2025, the theme of “inclusivity and sustainability” was a timely reflection of the focus as the framework provided under the ASEAN Plan of Action and Energy Cooperation (APAEC) 20262030 highlighted the region’s strategic blueprint to steer regional energy cooperation, including collective goals. Core to this includes advancing the ASEAN Power Grid via a Memorandum of Understanding. This dovetailed adequately with continued emphasis locally, with the National Energy Transition Roadmap (NETR) initiatives, and Malaysia’s Ministry of Energy Transition and Water Transformation (PETRA) having, in January 2026, launched a five (5)-year plan to speed up energy transition and water transformation. The implementation of carbon tax, initially aimed at iron, steel and energy sectors, scheduled for 2026 and is expected to be broadened to other sectors will be aligned to compliance under the European Union’s Carbon Border Adjustment Mechanism in 2026, preserving export competitiveness.
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