Global economic growth is expected to moderate in 2H2025 as trade tensions and geopolitical risks weigh on sentiment. The US’ sweeping tariffs have reignited protectionist concerns, contributing to slower global growth. The US economy contracted by 0.2% in 1Q2025, with the Purchasing Managers’ Index for both manufacturing and services falling below the neutral 50 mark in May. Consumer sentiment also weakened, with the University of Michigan Consumer Sentiment Index dropping to 52.2 in May from 74.0 in December 2024.
In July, the US announced new tariff rates starting from 20% on several countries, effective 1 August, superseding initially imposed tariff rates. For Malaysia, the US imposed tariffs of 25%, signalling the need for greater reciprocity in future negotiations. Over time, US tariffs are anticipated to settle significantly higher than the long-term global average rate of 2.7%, potentially in the high teens. The US outlook remains uncertain, hinging on disinflation progress, the Fed’s policy stance, and clarity surrounding fiscal and trade policy directions.
In contrast, the eurozone economy expanded by 1.5% in 1Q2025, benefitting from front-loaded trade activities during the US tariff pause. Key economies such as Germany also saw gains from increased defence spending and industrial policy shifts. Meanwhile, China continues to face weak domestic demand and persistent deflation, with May’s Consumer Price Index at -0.1%. However, a recent trade deal with the US, alongside ongoing stimulus and a gradual consumption rebound, may help China reach its “around 5%” growth target.
MARC Ratings forecasts the Malaysian economy to grow by 4.4% in 2025, down from 5.1% in 2024, as external trade uncertainties dampen export momentum. Nonetheless, domestic demand remains resilient, driven by labour market improvements, accommodative policy settings, and tourism recovery. The wholesale and retail trade index grew 4.8% year-to-date (YTD) through April, up from 3.6% in the same period last year. Construction rose 14.2% in 1Q2025 (4Q2024: 20.7%), while agriculture rebounded by 0.6% (4Q2024: -0.7%). However, lingering external uncertainties prompted Bank Negara Malaysia (BNM) to cut the Overnight Policy Rate from 3.00% to 2.75% in July; BNM is expected to retain policy flexibility and respond accordingly to incoming data.
Malaysia’s inflationary pressures remain contained, with headline inflation easing from 1.7% in January to 1.4% in April. The expanded Sales and Service Tax (SST), effective 1 July 2025, is expected to cause only mild price increases, as essential items remain exempt. Meanwhile, lower oil prices — Brent crude is projected to average USD70/barrel (2024 average: USD74.58/barrel) — are expected to cushion inflation. As a result, MARC Ratings has revised its 2025 inflation forecast to 2.3% (from 2.6% previously).
Malaysian Government Securities (MGS) saw strong demand in 1H2025, supported by healthy fundamentals and dovish pivots by major central banks. Cumulative net foreign debt inflows reached RM26.9 billion between January and May, driving MGS yields 15–42 bps lower. These factors contributed to a 5.3% YTD appreciation of the ringgit as of mid-June. MARC Ratings opines that these trends may moderate in 2H2025 amid ongoing external uncertainties. Nevertheless, structural reforms under the 13th Malaysia Plan, SST adjustments, and anticipated Fed easing could help mitigate downside risks. We expect the 10-year MGS yield to anchor around 3.50% and the ringgit to approach RM4.25/USD by year end.
Yield movements diverged across other major bond markets. In 1H2025, German Bund yields on short- to medium-term tenors declined by 15–42 bps on expectations of rate cuts by the European Central Bank, while long-term yields rose by 25–28 bps amid higher expected issuance and repricing of the term premium. In the US, the 10-year Treasury yield averaged 4.41% by 13 June (1H2024: 4.30%), driven by renewed fiscal concerns and market reactions to Trump’s proposed tax cuts. These factors also briefly pushed long-end yields above 5.00% and triggered broad-based bond sell-offs.