Global economic growth is expected to sustain, given the continuation of monetary easing policies despite the heightened level of trade protectionism. Global growth will be supported by the US economy which appears resilient, outperforming earlier projections of recession and hard landing, largely due to a robust services sector. This sector, buoyed by job creation policies, is expected to drive economic growth in 2025, sustaining robust private consumption. With the return of President Donald Trump to office, a renewed focus on protectionist policies, such as broad-based tariff hikes, is anticipated. However, the implementation of these measures will take time amid complex global trade networks, providing economic actors sufficient headroom to adapt to the evolving trade landscape.

Meanwhile, the eurozone and China face their own sets of challenges. The eurozone’s key economies, such as Germany, faced another year of contraction in 2024 due to weakness in their manufacturing sector, an issue stemming from the high energy prices and elevated financing costs. On the other hand, China faces the challenge of revitalising domestic demand amid renewed risks of higher tariffs from the US. Stimulus measures, including additional interest rate cuts, have been announced to address these challenges. Nevertheless, both the eurozone and China are expected to achieve only modest economic growth in 2025.

Malaysia’s economy is set to grow at 5.0% in 2025, driven by the accelerated implementation of projects outlined in various national development plans, adequate external demand, and broad-based sectoral expansion. Furthermore, sectors such as construction and agriculture are likely to remain stable, given: i) accelerated progress in ongoing public infrastructure, ii) continued expansion of data centres, and iii) increased palm oil demand due to Indonesia’s upgraded mandates for biodiesel to 40% of fuel composition.

Private consumption, a major contributor to Malaysia’s 2024 economic growth, is projected to remain robust in 2025. This will be driven by the increment of civil servant salaries, increase in minimum wage to RM1700 from RM1500, as well as withdrawals from Employees Provident Fund Account 3. Additionally, private consumption will benefit from an improving employment rate and rising private sector wages, as observed in 3Q2024.

Globally, inflation will remain a key indicator to monitor in 2025. Despite the US Federal Reserve’s (Fed) “higher-for-longer” interest rate policy, inflation has struggled to reach its preferred 2% target throughout 2024. In the eurozone, inflation briefly fell below the 2.0% target in September but inched higher thereafter due to rising services costs. This will shape the respective central bank’s monetary policy, with the Fed expected to cut interest rates by just twice in 2025, while the European Central Bank will adjust its policy based on evolving inflation trends rather than a predetermined trajectory.

In Malaysia, inflationary pressures are anticipated due to measures such as rationalisation of subsidies, especially fuel, and a widened scope of the Sales and Services Tax. Furthermore, wage hikes could drive domestic demand and push prices upward. We project headline inflation to average around 2.6% in 2025 (2024F: 1.9%). Therefore, contained inflation and strong GDP growth of around 5.0% suggest flexibility for Malaysia’s central bank to keep the Overnight Policy Rate unchanged at 3% in 2025. In consideration of Malaysia’s robust economic growth and stable interest rate outlook, we forecast USDMYR to average around 4.30-4.50 in 2025, as the Fed’s anticipated moderation of its interest rate cuts will likely limit the extent of the ringgit’s appreciation.