KENANGA INVESTMENT BANK BERHAD 26 INTEGRATED ANNUAL REPORT 2025 ECONOMIC REVIEW At the corporate level, 2025 was also pivotal with the launch of the National Sustainability Reporting Framework launched by the Securities Commission, which ushered in more stringent disclosure requirements. This will align Malaysia with global standards and continue to deepen access to investors that are aligned with sustainability goals. Specifically, firms need to prepare for disclosures relating to financial information and climate risks under respective categories of S1 and S2. Starting with Main Market issuers for those with market capitalisation exceeding RM2.0 billion, adoption will be phased in until 2027, for ACE market firms and large non-listed firms by 2027. This phased approach in reporting also corresponds with more incentives given to drive mass adoption. By 2025, Malaysia had introduced a RM50,000 tax deduction that continues to benefit firms, including micro, small and medium enterprises. Outlook for 2026 • Global Economy: Global growth faces its stiffest test since the pandemic and is projected to ease modestly in 2026, weighed down by the ongoing conflict in the Middle East, the persistent drag from US tariff actions, and uneven economic recoveries across major economies. Disruptions in the Strait of Hormuz have compounded an already fragile outlook, creating a stagflation trap in which central banks are caught between supply-driven inflation and fragile demand, while sovereign debt at historic highs and rising defense expenditures are pushing financial conditions tighter. The US economy is expected to retain support from AI-related investments, trade deals and resilient consumer spending, though elevated energy costs and sticky inflation pose a ceiling on momentum. Europe’s recovery is expected to remain steady but modest, with energy price exposure and weak external demand limiting upside. China’s outlook remains constrained by structural challenges, primarily property sector stress, demographic headwinds, and declining investment returns, which are further pressured by residual tariff headwinds and weak domestic demand. ASEAN economies, however, are expected to remain relatively resilient, supported by domestic demand, and their position as beneficiaries of ongoing trade and supply chain diversification. The balance of risks globally remains skewed to the downside. • Key Risks: Risks to the global outlook remain firmly tilted to the downside. These include rising geopolitical conflict in the Middle East, the delayed and potentially broadening impact of US tariffs, renewed US–China tensions, China’s uneven recovery, and volatile commodity prices. At the time of writing, the blockade on the Strait of Hormuz has led to oil prices returning to above US$100 per barrel, potentially disrupting supply chains and re-accelerating global inflation. Offsetting support may come from monetary easing by major central banks, fiscal stimulus and resilient domestic demand in key emerging markets. • Inflation Outlook: Global inflation is expected to remain uneven rather than uniformly resurgent, though the Middle East conflict has materially shifted the near-term trajectory, with the International Monetary Fund (“IMF”) revising global headline inflation up to 4.4% on surging energy and food costs. The Euro area inflation should stay close to the European Central Bank’s 2.0% target, supported by moderating wages, declining goods prices and anchored expectations. In contrast, inflation in the US is likely to stay the most stubborn among advanced economies, with tariff pass-through effects and persistent goods price pressures keeping it above 3.0% and delaying a return to target beyond 2027. UK inflation should ease more decisively as growth weakens and labour market conditions loosen. Japan stands apart, having achieved a genuine regime shift after three decades of deflation, with demand-driven wage and price dynamics now sustaining above-target inflation, and supporting continued Bank of Japan rate normalisation. Across emerging markets, dollar strength and elevated energy import costs are adding an imported inflation channel that narrows the space for monetary easing. • Malaysia’s Economy: Malaysia’s GDP growth is projected to moderate to 4.5% in 2026, a mid-point to BNM’s latest forecast of 4.0% to 5.0%, reflecting external risks and uncertainty. Nonetheless, domestic demand will remain the main driver, supported by resilient consumer spending, stable labour market conditions, major investment projects, higher tourist arrivals following the Visit Malaysia 2026 campaign and targeted policy measures under the Madani reform agenda. The IMF’s upward revision of Malaysia’s GDP forecast to 4.7%, in its April 2026 World Economic Outlook, cited domestic resilience and a diversified export structure as key buffers against external headwinds. Malaysia’s position as a net energy exporter provides a partial natural hedge against the Middle East oil shock, though BNM cautions that higher energy prices, weaker external demand, and volatile capital flows remain meaningful transmission risks to the domestic outlook. • Inflation in Malaysia: Malaysia’s inflation remains contained for now, but the balance of risks has shifted materially to the upside. A firmer ringgit continues to lower imported cost pressures, while the pass-through from US tariffs remains limited due to Malaysia’s diversified export base. The government has moved aggressively to shield consumers from the energy shock: Malaysia’s monthly subsidy bill has risen to RM7.0 billion from RM700.0 million
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