Riding on AI boom

LAST week, the International Monetary Fund (IMF), in its July 2026 World Economic Outlook (WEO) update, lowered its global gross domestic product (GDP) growth forecast for this year to 3%, from 3.1% and 3.3% estimated three and six months ago, respectively.

According to the IMF, the main reason for the slower growth compared with its forecasts three and six months ago is the offsetting impact of the war in the Middle East on accelerated demand-driven momentum in the global technology cycle, thanks to advances in artificial intelligence (AI).

Hence, depending on a country’s exposure to the war and its position in the global technology supply chain, it could either be severely impacted or greatly benefit from the shifting global dynamics.

Nations that are energy exporters and part of the global technology supply chain, especially those linked to AI-related expenditure, will see the strongest upside, while countries heavily dependent on oil and other supplies from the Middle East may be impacted severely.

The IMF also provided another revision to its 2027 global GDP growth outlook, but this time, upping its estimate with growth projected at 3.4%, up from the 3.2% forecast in its April and January 2026 updates.

Inflationary pressure

The IMF in its July 2026 WEO, also flagged concern over rising inflation pressures.

The world body now estimates that global inflation will hit 4.7% this year, up from 4.1% in 2025.

For 2027, global inflation is expected to remain elevated, with headline inflation seen at 3.9%.

The current inflation estimates for this year and 2027 suggest that the IMF has upped its inflation forecast by 0.9 and 0.7 percentage points, respectively, from the 3.8% and 3.4% it predicted in January 2026, and by 0.3 and 0.2 percentage points, respectively, from the 4.4% and 3.7% estimated three months ago, especially after the war in Iran.

The IMF warned that commodity prices remain elevated.

End of war?

Interestingly, the IMF’s projections for the global economy are based on the premise that the reopening of the Strait of Hormuz begins in mid-July, with the situation returning to its pre-war status by March 2027.

Although this projection probably was “accurate” at the time the July 2026 WEO projections were prepared, the Middle East situation, as we know it now, is rather fluid and unpredictable.

Hence, the GDP growth estimates may be on the bullish end, while inflation forecast data may have room to move even higher.

As it is, the Brent crude oil price was last seen at about US$85 per barrel, about 18% higher than its recent low but well below its 2026 high of US$126 per barrel.

Rate outlook – higher?

Given the slowing economic momentum and higher inflationary pressures, it does not come as a surprise that the IMF sees monetary policy to be less supportive of growth, as there is little room for rate cuts.

On the contrary, the European Central Bank (ECB) and the Bank of Japan are both expected to raise rates by another 25 basis points each, having raised by a similar quantum last month.

The US Federal Reserve, which last cut rates by 25 basis points in December last year, is expected to raise rates by the same 25 basis points by September this year, taking the Fed Funds Rate (FFR) to 4% to 4.25%.

Looks like US President Donald Trump’s wish for a lower FFR will take a while longer, as another closure of the Strait of Hormuz has made oil price forecasts difficult and unpredictable.

Malaysia – AI beneficiary

The IMF made special mention of economies that are part of the global technology supply chain, although some of these economies also have exposure to commodity market disruptions due to the war in Iran.

According to the IMF, “the top four net exporters of AI-related hardware (Taiwan, South Korea, Thailand and Malaysia) had an average seasonally adjusted annualised surprise of 4.4 percentage points, whereas the surprise for the world’s remaining countries was -0.3 percentage point”.

Positive momentum

Although the fuel subsidy will likely skyrocket for Malaysia due to persistently high global crude oil prices, the country’s inflation has remained well under control.

The latest data for May 2026 showed both headline and core inflation hit a high of 2% year-on-year. This is still within the 1.5% to 2.5% guidance by the central bank, and it is unlikely that inflation will rear its ugly head locally.

As for GDP growth, the IMF maintained its 2026 forecast for Malaysia at 4.7%, which is still within the projected 4% to 5% growth that Bank Negara Malaysia is looking at for this year.

The IMF viewed that Malaysia’s growth will be supported by the global technology cycle and data centre activities.

However, economic growth is expected to be slower next year, with a projected growth of just 4.3% in 2027.

A strong 2Q26

Judging by several key economic indicators for the first two months of the second quarter of 2026 (2Q26), growth is expected to be significantly stronger than the 5.4% recorded in 1Q26. This is mainly driven by strong external demand, while domestic consumption has remained robust.

While the Malaysian economy is seen as a key beneficiary of AI spending and its position in the global technology supply chain, the diversity of the economy will be a key differentiator in the near term, as it is not overly reliant on one sector alone.

Malaysia’s diversified economic pie is a blessing as it allows us to benefit from sectoral booms at different times.

For now, Malaysia stands to gain from the AI and technology sector, but as we recall, the country has also been a beneficiary of other cyclical booms in the past, including those in the plantation, rubber glove, semiconductor, construction, and oil and gas sectors.