As the global economy enters 2026, growth is expected to moderate following a resilient 2025 in which major economies avoided recession, supported by strong services activity. However, structural constraints, including demographic pressures and tight labour markets, are set to weigh more heavily on momentum. Against this backdrop, the global economy is projected to transition into a period of steadier, more moderate expansion rather than renewed acceleration, though shifts in monetary policy, trade dynamics, and geopolitical developments will remain key risks to capital flows and market conditions.
In the US, economic performance remained relatively strong through end-2025, supported by robust services activity, firm household spending and continued investments related to artificial intelligence (AI). Nonetheless, manufacturing growth is constrained by labour shortages, elevated input costs and limited reshoring gains. In the euro area, growth has been sustained largely through public spending on defence and infrastructure alongside easing inflation and a less restrictive monetary backdrop, though structural constraints and uneven fiscal space are likely to temper momentum in 2026.
China’s growth profile is uneven, with stronger external demand and export competitiveness offsetting weak domestic conditions stemming from the prolonged property downturn and subdued household confidence. Japan, meanwhile, has emerged as a relative bright spot, with rising wage growth supporting a gradual recovery in domestic demand, although demographic constraints and higher borrowing costs will be key challenges.
MARC Ratings forecasts Malaysia’s economy to grow by 4.3% in 2026 (2025F: 4.5%). Growth is expected to be supported by continued domestic demand and sustained investment activity, driven by the global AI capex cycle, which will boost demand for electrical and electronic products as well as data centre infrastructure. This outlook is underpinned by moderate inflation levels, which MARC Ratings projects at 1.6% in 2026, alongside steady income growth. Externally, Malaysia’s export performance is expected to benefit from stronger regional trade flows due to improved trade developments following the 47th ASEAN Summit. While the overall outlook has brightened, the upcoming Trump Xi meeting in the first half of 2026, together with evolving geopolitical dynamics, will shape the trajectory of trade policy. Of note, recent geopolitical developments in Latin America are unlikely to materially affect Malaysia’s trade prospects. As a net crude oil importer, Malaysia is expected to benefit from lower oil prices stemming from increased supply.
MARC Ratings expects the ringgit to appreciate to around 3.93 USDMYR by mid-2026, supported by steady foreign portfolio inflows, subdued inflation levels, an improving Malaysian Government Securities – US Treasuries (MGS-UST) spread in Malaysia’s favour, and firmer external sentiment that is expected to boost the trade surplus. By the end of 2025, the ringgit rallied 10.1% against the greenback, securing its position as Asia’s best performing currency. MARC Ratings opines that resilient domestic fundamentals and ongoing fiscal consolidation, with the fiscal deficit projected at 3.5% of GDP in 2026 (2025F: 3.8%), will support the anchoring of the 10 year MGS yield at around 3.35%–3.40% in 2026.
UST yields extended their downtrend by the end of 2025, with the 10 year yield falling by approximately 37 bps to 4.17%. The yield decline reflected safe haven demand amid heightened tensions in the Middle East, trade uncertainties, and the US government shutdown. At the front end, yields reflected three consecutive Federal Reserve (Fed) rate cuts in 2H2025, whereby the upper bound of the Fed Funds Rate declined to 3.75% from 4.50%. Looking ahead, the UST curve is expected to steepen as short dated yields adjust to markets pricing in at least two Fed rate cuts in 2026, with a 33%-45% probability of a third cut at present. The US military intervention in Venezuela on 3 January 2026, together with prospects of softer oil prices from additional supply, will also support a near-term easing bias. Longer dated yields are likely to rise, driven by fiscal and inflationary pressures from the “One Big Beautiful Bill Act”, projected to add USD3 trillion in borrowings over the next decade, and the temporary increase in the State and Local Tax deduction cap, which is expected to support consumption and further strain the US’ fiscal position. In Europe, fiscal pressures stemming from the Dutch Pension Reform and elevated debt spending on defence and infrastructure upgrades are expected to weigh further on Bund yields.
While global growth is set to moderate in 2026 amid structural constraints and ongoing geopolitical uncertainties, Malaysia’s economic outlook remains relatively resilient. Steady domestic demand, sustained investments linked to the AI upcycle, low inflation, institutional reforms and continued fiscal consolidation are expected to underpin economic stability. These factors will support the ringgit and anchor domestic bond yields. However, an external risk to monitor in 2026 is Japan’s exit from ultra low interest rates, which raises the prospect of a partial unwinding of longstanding yen carry trades. Such repositioning could inject volatility into emerging markets, particularly those with substantial foreign participation.