Bracing for slower growth in 2026

WHEN US President Donald Trump took office early this year, it certainly brought chaos and uncertainty to global politics, international trade and investors alike.

As soon as the Liberation Day announcement was made, markets globally went into a tailspin as investors turned cautious.

This was the market’s response as to what the new tariffs would mean, not only on global trade, but also their impact on economic growth, inflation expectations, and, of course, markets.

However, as we navigated the year and negotiated Trump’s way, the tariffs were seen to be more manageable in terms of impact as we did not lose our competitiveness, vis-a-vis our neighbours.

Sub-par growth?

Despite a challenging year, the global economy has been resilient and is still expected to hit the 3.2% growth projected by the Organisation for Economic Cooperation and Development (OECD) a year ago.

However, the OECD, in its recent outlook for next year, predicts that the world economy will grow at a slower pace of 2.9% in 2026, with the United States expected to be the main weakness, slowing to a growth of just 1.7% next year from the expected 2% expansion in 2025.

The key to global economic growth in 2026 is not just about the tariffs that have been imposed on the rest of the world by the United States, but also the impact of higher commodity prices, which will see inflation rising next year.

As it is, in 2025 alone, key commodity prices rallied strongly, including precious metals and selected agriculture-based commodities.

However, this has been offset by the weaker crude oil price due to oversupply concerns and slower demand growth.

With tariffs and firmer commodity prices, this may also impact aggregate demand as well as the pace of global trade, which in turn will induce sub-par growth in the global economy.

The Trump agenda

The main agenda for 2026 is the path that the US Fed Fund Rate (FFR) will take, especially after the appointment of Trump-approved Federal Reserve (Fed) chair, which is now down to the two Kevins – Kevin Hassett and Kevin Warsh.

Although Hassett seems favoured by Trump, both will fit into the president’s agenda as they are seen to be dovish and will lean towards lowering the benchmark FFR.

This is despite the United States still experiencing elevated core personal consumption expenditure (PCE), with the latest indicator at 2.8%.

The Fed, in its latest assessment of the US economy, predicted that growth will be surprisingly robust, driven by artificial intelligence (AI) spending as well as a fiscal tailwind.

Whether this is going to materialise is left to be seen, but, of course, as the AI-theme is the key market theme this year, and there is so much that is going into the sector globally, the market theme will be a key catalyst for investors for 2026 as well.

Having pencilled in a gross domestic product growth (GDP) of 2.3% next year, the Fed believes that core PCE will remain elevated at 2.5% and well above its target of 2%, but still lower than this year’s estimate of 3%.

While the Fed has guided that FFR will be lowered by just 25 basis points (bps) from the current level of 3.5% to 3.75%, the market is looking at a deeper cut of between 50 and 75 bps in 2026.

The weaker US labour market, with the latest unemployment rate rising to a fresh four-year high of 4.6%, will push rates even lower if the rate worsens in the months ahead.

This will drive the dollar weaker, and, at the same time, cause some uneasiness among US consumers due to a higher import bill in dollar terms.

A slower growth

The Malaysian economy accelerated to register a GDP growth of 5.2% year-on-year (y-o-y) in the third quarter of 2025, higher than the preceding quarter’s y-o-y growth of 4.4%.

Going into 2026, the economy will be starting on a strong footing, led by growth in private consumption, a robust external sector, and a steady flow of foreign investment (FI).

The recent Cabinet reshuffle also signals that the Madani government is not dragging its feet in naming new appointments to ensure the continuous political stability enjoyed since the last general election.

Fiscal discipline

Malaysia will close the year 2025 with an estimated GDP growth 4.8%, and next year’s GDP growth target of between 4% and 4.8% is seen to be well within reach.

The government has also carried out substantial economic reforms, especially those related to subsidy rationalisation.

With a two-year window before the Parliament is automatically dissolved, the Madani government is seen to be less inclined to carry out more measures that could cause an increase in the cost of living.

Any measures to introduce new taxes will likely only be announced after the next general election.

As it is, most businesses and consumers are feeling the pinch in the form of higher compliance costs as well as a higher and wider scope of the sales and service tax.

Malaysia’s budget deficit target of 3.5% for 2026 will not be difficult to achieve, given the measures taken to reduce the subsidy bill as well as to boost revenue, especially with the full rollout of e-invoicing for taxpayers with annual revenue of between RM1mil and RM5mil, which comes into effect on New Year’s Day.

Sub-four ringgit

At the time of writing, the ringgit was trading at RM4.0875 and is among the top performing currency in Asia this year, rising by 8.7% year-to-date, due to the dollar’s weakness, which has dropped 9.2% over the same period.

The US dollar is expected to continue to weaken, mainly driven by expected lower FFR next year and faltering demand due to concerns about US debt and deficit levels.

Hence, the ringgit has a high probability of not only going below four to the dollar, but may even re-test its pegged level of RM3.80, a level last seen two decades ago, if dollar weakness persist, especially with the lower FFR.

In summary, the global economy is just humming along, but the risk of downward pressure is far greater than an upside surprise, given the precarious position that the US Fed is expected to be in next year on Trump’s insistence that rates should be a lot lower than what the market believes to be a fair FFR.

The rally among precious metals this year will continue with gold, platinum and the cheaper alternative, silver, taking precedence as safe-haven assets.

Domestically, growth will be slower in 2026, due to softer external demand, and adjusting for domestic price pressures from the government’s move to cut subsidies and higher taxes.

Next week, the article will focus on global markets and where the local bourse is headed in 2026.