French Budget Crisis Looms as Parliament Talks Collapse

Malaysia's economy closed out 2025 on a high note, posting stronger-than-expected growth that defied earlier forecasts. However, economists warn that the country's vital electrical and electronics (E&E) sector remains exposed to the looming impact of higher US tariffs, with significant risks expected to materialize in 2026.

Official estimates released by the Department of Statistics Malaysia (DOSM) show the economy expanded by 5.7% year-on-year in the fourth quarter of 2025, marking its fastest pace since the second quarter of 2024. This growth was largely driven by robust activity in the services and manufacturing sectors. For the full year, the economy is projected to have grown 4.9%, a slight moderation from the 5.1% recorded in the previous year.

US Trade Policy Casts a Shadow Over Export Outlook

Despite the strong performance in 2025, the export outlook for 2026 is clouded by uncertainty. According to Kenanga Research, the full effects of increased US tariffs have not yet been felt and could pose significant downside risks for export-heavy industries like E&E.

These concerns have been amplified by recent actions from the White House. Within the first two weeks of the year, US President Donald Trump reintroduced a 25% levy on certain advanced computing chips and announced a separate 25% tariff on countries conducting business with Iran.

While a temporary pause in the US-China tariff conflict until November 2026 may provide some breathing room for global trade, UOB Global Economics & Market Research still anticipates that Malaysia's economic growth will moderate to around 4.5% in 2026.

Domestic Demand Expected to Cushion External Headwinds

Economists broadly expect Malaysia's resilient domestic economy to buffer the potential fallout from trade risks. A broad-based expansion, particularly in the services and construction sectors, is forecast to provide a solid foundation for growth.

Several key factors are expected to support this domestic strength:

• Rising household incomes from civil service salary adjustments.

• A lower national unemployment rate.

• The realization of previously approved investment projects.

• Continued targeted cash transfers to households.

UOB also highlighted other catalysts, including a federal budget allocation of RM419.2 billion, which covers an RM18 billion second phase for the civil servants' pay hike in January 2026 and RM81 billion for development expenditure. The Visit Malaysia Year 2026 campaign and the continued rollout of national master plans are also expected to contribute positively.

The final, official GDP figures for Q4 2025, along with current account data, are scheduled for release by DOSM on February 13.

Bank Negara Malaysia Poised to Hold Interest Rates Steady

On the monetary policy front, the consensus is that Bank Negara Malaysia (BNM) will maintain the overnight policy rate (OPR) at 2.75% in its upcoming announcement. A Bloomberg survey of nine economists showed a median forecast of no change.

According to ANZ Research, the strong economic growth reinforces the view that BNM's next policy move will likely be a hike. However, with price pressures remaining benign, there is no urgency for immediate tightening.

Both UOB and Pantheon Macroeconomics see little reason for policy easing. They note that Malaysia has benefited from relatively competitive tariff treatment and ongoing exemptions for semiconductors. Furthermore, with the US Federal Reserve cutting its own rates, pressure on capital outflows has diminished.

Pantheon Macroeconomics concluded that BNM currently has the luxury of keeping rate cuts in its toolbox, ready to be deployed in the event of any new economic shocks.

Uganda's President Yoweri Museveni, leader of the ruling National Resistance Movement (NRM) party, addresses supporters during his final rally ahead of the general election, in Kampala, Uganda, January 13, 2026. REUTERS/Abubaker Lubowa

Veteran Ugandan President Yoweri Museveni held a commanding lead in early presidential election results announced on Friday as conflicting accounts emerged of violence reported after the vote.

Museveni, who is 81 and has ruled Uganda since seizing power in 1986, wants a decisive victory following a campaign marred by violence at opposition rallies.

Results announced by the electoral commission from Thursday's election showed Museveni with 76.25% of the vote based on tallies from nearly half of polling stations. His main challenger, popular singer Bobi Wine, trailed with 19.85% and the remaining votes were split among six other candidates.

Museveni had told reporters after casting his ballot on Thursday that he expected to win with 80% of the vote "if there's no cheating".

Wine alleged mass fraud during the election, which was held under an internet blackout that authorities said was needed to prevent "misinformation", and called on supporters to protest.

The U.N. human rights office said last week the election was being held in an environment of "widespread repression and intimidation", and recent political violence in neighbouring Tanzania and Kenya amplified fears about unrest in Uganda.

VIOLENCE SOUTHWEST OF THE CAPITAL

There were no reports of protests during voting hours, but violence broke out overnight in the town of Butambala, about 55 km (35 miles) southwest of the capital Kampala.

Agather Atuhaire, a prominent human rights activist, said soldiers and police had killed at least 10 opposition supporters who had gathered at the house of parliamentarian Muwanga Kivumbi to follow the early results.

Citing an account from Kivumbi's wife, human rights activist Zahara Nampewo, Atuhaire said the soldiers and police fired tear gas and then live bullets at people sheltering inside Kivumbi's compound.

Reuters was not able to reach Nampewo, who Atuhaire said was too shaken to speak to the media.

Lydia Tumushabe, a local police spokesperson, disputed that account. She said opposition "goons" organised by Kivumbi had attacked a police station and carried machetes, axes and boxes of matches.

She said the police had fired in self-defence and that there were fatalities and injuries, without saying how many.

Kivumbi could not be reached for comment, and Reuters was not immediately able to confirm the circumstances of the violence.

WINE'S PARTY SAYS HE'S UNDER HOUSE ARREST

Wine's National Unity Platform (NUP) party wrote on its X account late on Thursday that the military and police had surrounded Wine's house in the capital Kampala, "effectively placing him under house arrest".

Police spokesperson Kituuma Rusoke told Reuters he was not aware of Wine being placed under house arrest.

Security forces confined Wine to his home for days after the last election in 2021, in which he was credited with 35% of the vote. The United States said that election was neither free nor fair, a charge rejected by the authorities.

During the campaign, Wine's rallies were repeatedly interrupted by security forces firing tear gas and bullets. At least one person was killed in the violence and hundreds of opposition supporters were arrested.

The government defended those actions as a response to lawless behaviour by opposition supporters.

Source: Reuters

The Trump administration's legal challenge against the Federal Reserve is fueling speculation that Jerome Powell will remain on the Board of Governors after his term as chair expires in May. This sets the stage for a rival center of influence within the world's most powerful central bank, a dynamic Powell himself may not even want.

This unusual possibility gained momentum after the Department of Justice served the Fed with grand jury subpoenas last week. The move is widely seen as an unprecedented escalation of President Donald Trump's campaign to influence monetary policy.

While the legal outcome and Powell's final decision remain uncertain, those familiar with him believe he would only stay to protect the institution, not to act as a "shadow Fed chair."

Still, if Powell is provoked into staying, it would disrupt Trump's plan to fill the board with officials who favor his calls for aggressive interest-rate cuts. It would also establish a powerful counterweight to whoever the president selects as the next Fed chair.

The "Two Popes" Problem for Markets

While critics of the administration might welcome this development, analysts warn it could create significant confusion for investors trying to determine who truly holds sway over monetary policy.

"It really would set up, potentially, dynamics of having a 'two popes' situation where financial markets and the public may get a little confused about who's in charge," said Loretta Mester, former president of the Cleveland Fed.

Antulio Bomfim, a former adviser to Powell and now head of global macro at Northern Trust Asset Management, agrees that the optics would be unavoidable. He notes that a former chair with Powell's experience and record of defending the institution would inevitably be seen as an alternative voice.

"Knowing him, he would not aspire to be a shadow Fed Chair," Bomfim said. "But at the same time it is not under his control either."

Powell's Defiant Response

Until recently, most Fed watchers expected Powell to leave the central bank when his term as chair ends in May. The subpoenas have dramatically changed that outlook.

In a sharply worded statement released on January 11, Powell confirmed the subpoenas were related to his congressional testimony about renovations at the Fed's headquarters. He then placed the legal action in a much wider context.

"This should be seen in the broader context of the administration's threats and ongoing pressure," Powell stated. "The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president."

It is this forceful defense of the Fed's independence that has convinced many that Powell now intends to stay on the board.

Trump's Plan to Reshape the Fed Hits a Snag

Powell was first nominated as Fed chair by Trump in 2018, but his underlying term as a Fed governor extends until January 2028. The president has already claimed to have chosen Powell's replacement, with front-runners rumored to be Kevin Hassett, director of the National Economic Council, and former Fed Governor Kevin Warsh.

Powell remaining on the board complicates these succession plans. Steven Kamin, a senior fellow at the American Enterprise Institute and a former Fed division director, noted that while the Federal Open Market Committee (FOMC) would likely try to cooperate with a new chair, a divisive appointee could change things.

"One could imagine that if the new chair were sufficiently divisive, a coalition of FOMC members could end up gravitating toward Powell," he said.

The political fallout is already visible. Senator Thom Tillis, a key Republican on the Banking Committee responsible for vetting Fed nominees, has pledged to oppose any of Trump's picks until the subpoena issue is resolved.

Administration officials and allies are also reportedly concerned that the escalation could galvanize sitting board members and regional Fed presidents, making it more difficult for a new chair to implement their policy agenda.

Implications for Monetary Policy and the Board

For now, the direct impact on monetary policy is limited. The Fed cut its benchmark interest rate three times last month but has since signaled a pause, citing a stabilizing labor market while awaiting more data.

The most immediate consequence of Powell staying is that it would delay Trump's ability to name another person to the seven-member board. The president has openly discussed his desire to have a majority on the board, which holds power over personnel, regulation, and other key decisions.

A board majority could also be used to remove the presidents of the regional Fed banks, who are not appointed by the president.

"If the FOMC is reluctant to do what the Trump-appointed chairman wants, and the presidents are the obstacle, then will President Trump start pressing the Board of Governors to fire one or more of the presidents?" asked David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.

In a separate but related matter, Trump may find another path to reshape the board if he succeeds in firing Fed Governor Lisa Cook over allegations of mortgage fraud. That case, which could set a precedent for dismissing any Fed governor, is scheduled for arguments before the Supreme Court on January 21.

The European Central Bank sees no immediate need to debate interest rate changes, with its current policy settings seen as appropriate for the next several years. However, ECB Chief Economist Philip Lane has highlighted that potential shocks, particularly a deviation by the U.S. Federal Reserve from its mandate, could disrupt this stable outlook. A cyclical economic recovery is anticipated for the euro zone this year and next, assuming the bank's baseline scenario holds.

According to Lane, the ECB is not in a hurry to alter its policy. The central bank has kept rates on hold since concluding a rapid rate cut cycle in June. This decision is supported by surprisingly strong economic growth and inflation that appears to have stabilized around the 2% target for the foreseeable future.

ECB Chief Economist Philip Lane has signaled that interest rates will likely remain stable, citing a steady economic outlook.

The Federal Reserve: A Potential Shock to the System

A significant risk to Europe's benign economic outlook originates from the United States. President Donald Trump's ongoing efforts to influence interest rates and accelerate cuts to borrowing costs, faster than the Fed deems appropriate, introduce a major uncertainty.

In an interview with Italian newspaper La Stampa, Lane outlined the potential consequences. "It would be economically difficult for us if inflation in the U.S. did not return to target, or if financial conditions in the United States spilled over to a rising term premium," he said.

He also noted that a "reassessment of the future role of the dollar, could also constitute a kind of financial shock to the euro." Lane concluded, "So there are scenarios where, if the Federal Reserve departed from its mandate, that would create a problem."

The Fed operates under a dual mandate of promoting maximum employment and stable prices, defined as a 2% inflation rate. This differs from most central banks, which have a primary focus on inflation.

Euro Zone's Steady Path and Structural Hurdles

Despite these external risks, Lane expressed confidence in the Fed's policy direction. He reiterated that the ECB's December projections point to a sustained stabilization of inflation at the 2% target within the euro zone.

"In these circumstances, there is no near-term interest rate debate," Lane stated, dismissing questions about a potential rate hike. "The current level of the interest rate delivers the baseline for the next several years. But if we see developments in either direction, we will react."

Market sentiment aligns with this view. After a brief period of pricing in a possible rate hike for late 2026, investors now expect the deposit rate to remain steady at 2% throughout this year.

The economic backdrop includes the euro's sharp appreciation against the dollar last year, which was driven by investors moving out of dollar assets amid policy uncertainty. This strengthened euro has challenged European export competitiveness, compounding pressure from inexpensive Chinese goods that are already displacing European products in key markets.

Looking ahead, Lane anticipates a stronger cyclical recovery for the 21-nation euro zone in the coming year. However, he cautioned that the region's potential for long-term growth remains low and will require deep structural changes to shift into a higher gear.

Taiwan's government is publicly defending a landmark trade agreement with the United States after facing growing concerns that the deal could hollow out the island's world-leading technology sector. The debate intensifies as Taiwan Semiconductor Manufacturing Co. (TSMC), the nation's most critical company, continues its major expansion into the U.S.

Under the new agreement, Taiwanese firms have committed at least $250 billion in direct investment to boost American manufacturing in semiconductors, energy, and artificial intelligence. TSMC is leading this initiative, pouring significant capital into new fabrication plants and advanced packaging facilities in Arizona.

An Expansion, Not a Relocation, Officials Insist

Addressing the criticism, Vice Premier Cheng Li-chiun framed the overseas investments as a strategic move. "This is not an industrial relocation, but instead an extension and expansion of Taiwan's technology industry," she stated, assuring that the government remains committed to supporting companies that maintain their home base and increase local investment.

Cheng also emphasized that the U.S. goal of building a secure domestic chip supply chain does not rely solely on Taiwan. She noted that Washington is collaborating with multiple international partners and domestic American chipmakers to achieve its objectives.

"Everyone is working together in the United States to revitalize the development of the AI industry," Cheng added. "It is not something Taiwan is expected to accomplish on its own."

Echoing this sentiment, Premier Cho Jung-tai praised the negotiators for securing the deal, highlighting the significant effort involved.

Rising Concerns Over a Weakened 'Silicon Shield'

Despite official reassurances, some Taiwanese analysts and lawmakers are worried that the massive shift of capital and manufacturing capabilities abroad could erode the island's domestic high-tech ecosystem.

These fears were amplified after U.S. Commerce Secretary Howard Lutnick suggested relocating 40% of Taiwan's supply chain to America. The U.S. Commerce Department also noted that the agreement is designed to "drive massive reshoring of America's semiconductor sector."

For years, Taiwan's dominance in producing the world's most advanced chips has been considered a "silicon shield"—a strategic asset deterring potential military action from China. The opposition Kuomintang party has accused the ruling Democratic Progressive Party of jeopardizing this shield by making trade concessions to Washington.

TSMC's Strategy and Future Capacity Projections

TSMC, which is committing an additional $100 billion to its U.S. operations, has sought to calm these concerns. Company executives insist that their most advanced, leading-edge technologies will be developed and deployed in Taiwan for years before being transferred to overseas facilities.

Chief Financial Officer Wendell Huang explained the logic: "The most leading-edge technologies will be run in Taiwan because of practical reasons. When they get stabilized, then we can try to accelerate the technology to move overseas."

Speaking in Taipei, Economics Minister Kung Ming-hsin offered concrete projections on Taiwan's continued dominance in advanced chip manufacturing:

• By 2030: Taiwan is expected to hold approximately 85% of the global capacity for advanced chips (5 nanometers and below), with the U.S. accounting for about 15%.

• By 2036: Taiwan's share is projected to be around 80%, while the U.S. share will grow to roughly 20%.

Economic Impact Weighed Against Political Stakes

According to analysis from Bloomberg, the trade agreement is expected to have only a modest direct influence on Taiwan's economy. However, it carries significant political weight, especially amid rising geopolitical pressure from China.

The deal, which includes a tariff reduction on Taiwanese goods from 20% to 15% in exchange for $500 billion in investment or financing, is also expected to significantly boost domestic semiconductor production in the United States over the next decade.

BOJ Expected to Maintain 0.75% Policy Rate

The Bank of Japan (BOJ) is expected to hold its policy rate steady at 0.75% during its upcoming two-day monetary policy meeting. Following a rate increase in December 2025, the central bank is now in an assessment phase, closely monitoring the effects of its monetary tightening on Japan's economy and inflation.

Upgraded Economic Outlook on the Horizon

A key focus of the January meeting will be the release of the BOJ's quarterly "Outlook for Economic Activity and Prices." The central bank is preparing to revise its economic growth forecasts upward for fiscal years 2025 and 2026.

This marks a notable shift from the previous outlook report in October 2025, where the median forecast from board members projected real gross domestic product (GDP) growth at 0.7% for both fiscal years.

Key Drivers Behind the Forecast

The more optimistic growth projections are fueled by several positive factors:

• Government Stimulus: The government's supplementary budget is anticipated to stimulate household spending and corporate capital investment. Policymakers expect the most significant impact from these measures to occur in fiscal 2026.

• External Strength: A strong U.S. economy is providing a favorable external environment.

• Weak Yen Advantage: The depreciated yen continues to boost Japan's export performance.