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A. WORLD ECONOMIC OUTLOOK UPDATE
Looking Resilient amid Fragile Certainty
- The US-Israel military conflict started on 28 February 2026. On 17 June, both countries signed a 14-point 60-day memorandum of understanding (MOU) ceasefire plan to address issues, including freedom of navigation in the Strait of Hormuz, Iran’s nuclear and missile programmes, and sanctions. However, the respite was short-lived. Fresh theatres of war have sprung up across the Middle East since the beginning of July, and the US resumed bombing Iran on 29 July.
- The global picture shows that the world economy is resilient than feared. A slew of current and leading indicators points to a mixed performance. While the global growth lost momentum, the broader economy continues to expand, albeit unevenly amid highly volatile energy prices, costs pressure and supply chains disruption inflicted by the on-going Middle East conflict. The IMF has further lowered its 2026 global growth forecast by 0.1 percentage point to 3.0%, down from 3.5% in 2025, before projecting a recovery to 3.4% in 2027.
- Energy price shocks are a cost shock for producers and consumers. Inflation concerns have resurfaced, and inflation expectations are rising, prompting central banks in advanced and emerging economies to reassess their monetary policy stance. Firms are facing higher fuel, transport and input costs, which often pass through into goods (especially food prices) and services prices, and imports costs, as well as generate a squeeze on households’ purchasing power. Simultaneous costs pressure from the goods sector, strong labour growth and firmed wages, as well as firms’ pricing power, could push core inflation higher.
- Global central banks have pivoted toward hawkish monetary policy to combat renewed inflation. While there is a global divergence, major central banks are adopting cautious, data-dependent stances. The European Central Bank (ECB) led the charge among major central banks in the developed world in hiking its interest rate (refinancing) by 25 basis points (bps) to 2.40% in June, to counter inflation while maintaining its hawkish stance, suggesting that the ECB will continue to adjust rates to anchor inflation expectations.
- In conclusion, while the global economic momentum has softened in 1H 2026, a confluence of data shows that global economic activity will continue to expand at a moderate pace in 2H 2026, dismissing fears of a broad-based sharp economic deceleration or contractions.
B. MALAYSIA ECONOMIC OUTLOOK UPDATE
The Malaysian Economy Resilience Tested
- During the initial weeks and months of global oil shock inflicted by the US-Iran military conflict, business sentiment was badly shaken, and immediate concerns were the impact on global energy prices, supply chain disruptions (the shortage of raw materials), logistics costs, and knock-on effects on businesses (via increasing production costs) and households (via consumer inflation).
- The economic impacts were highly asymmetric, with industries relying on raw material imports, supply chain reliance, and high transport costs, particularly consumer-facing industries, facing rising operational risks.
- What does the high-frequency economic data show? While the economy is seemingly enduring the war shock so far, yet cautious consumer discretionary spending and a strained business environment. There is mixed performance among the sectors, featuring the K-shaped economy – growth differentials between the high-technology export-oriented and domestic industries, between large companies and SMEs, as well as between low- and middle-income and high-income households.
- Drivers of Malaysia’s economic resilience so far. An advanced estimate showed that real GDP growth expanded higher by 5.8% yoy in Q2 2026 (5.4% in Q1). The services sector growth eased a little to 5.4% in Q2 from 5.6% in Q1. In contrary, the manufacturing sector expanded at a much stronger pace at 7.5% in Q2 (5.9% in Q1), largely supported by export-oriented industries like electrical products and electronics (E&E). Growth in the manufacturing sector and exports were boosted by the front-loading activities and orders, rebuilding depleted inventory buffers, and hedging against the supply chain disruptions caused by the Middle East conflict.
- While Malaysia can avoid a sharp economic slowdown going into 2H 2026, but not be complacent. Going into 2H 2026, restocking activities and inventory accumulation are expected to slow down as the current surge in wholesale and manufacturing orders is largely a front-loaded response to supply chain risks. There remain positive drivers and negative drags for the domestic economy.