By the official scorecard, Pakistan’s economy had a good year. The Pakistan Economic Survey 2025-26 reports real GDP growth of 3.7%, easing inflation, improved foreign exchange reserves, and a primary fiscal surplus, according to reporting in Pakistan Today. The Asian Development Bank’s July 2026 outlook confirms the trajectory, projecting 3.7% growth for both 2026 and 2027, with inflation forecast at 7.2% for the year, per the ADB’s Pakistan country page.

Yet the same data that shows recovery also shows why it hasn’t reached most households — and understanding that gap matters more for policymakers, investors, and ordinary Pakistanis than the headline growth number itself.

Where the growth is actually coming from

The composition of Pakistan’s 3.7% GDP growth reveals a sharply uneven expansion. Large-scale manufacturing grew 6.1% in FY2025-26 — nearly double the headline rate — while agriculture, which remains the primary income source for tens of millions of Pakistanis, expanded by just 2.9%, according to the Pakistan Economic Survey figures reported by Pakistan Today. That gap is not a rounding error: agriculture still accounts for roughly 23% of GDP and employs over a third of the national labour force, based on the sector breakdown in Pakistan’s economic profile.

In effect, the recovery has been concentrated in industrial and formal-sector output — the parts of the economy captured most cleanly in GDP statistics — while the rural, agriculture-dependent majority has seen far more modest gains, if any.

The stabilization is real — but so is the poverty backdrop

It would be inaccurate to characterize the improvement as illusory. Pakistan’s headline inflation figures, foreign exchange reserve position, and fiscal balance have all genuinely improved from the acute crisis years of 2022-2024, when the country faced a severe balance-of-payments crunch driven by excessive external borrowing, the 2022 floods, and a global energy price shock, according to background compiled in Wikipedia’s account of the Pakistani economic crisis. By June 2025, Pakistan had reportedly led emerging markets in sovereign credit risk improvement, and April 2025 inflation briefly hit a historic low.

But stabilization from crisis is a different achievement than broad-based prosperity. Pakistan’s population below the poverty line stood at nearly 45%, with close to 16% in extreme poverty as of the latest figures cited in its national economic profile — context that helps explain why 3.7% aggregate growth, concentrated in manufacturing, does not translate into a broadly felt recovery. Unemployment remains close to 7%.

What this means for policy and for markets

For investors and multilateral lenders, the read-through is that Pakistan’s macro stabilization — inflation control, reserve accumulation, fiscal discipline — is on track and consistent with the trajectory the IMF has projected under its ongoing programme, with the Fund’s own data showing 2026 real GDP growth near 3.6% and consumer price inflation around 7.2%, according to the IMF’s Pakistan country page. That is the story that tends to dominate sovereign bond pricing and credit-rating commentary.

For domestic policymakers, the harder problem is structural: converting industrial-sector growth into broad income gains requires addressing agricultural productivity, rural credit access, and job creation in sectors beyond large-scale manufacturing — none of which move as quickly as a GDP print. Sindh’s cotton output, for instance, posted a 67% surge by end-July that offset declines in Punjab linked to monsoon disruption, illustrating how volatile and regionally uneven agricultural performance remains even within a single growing season, per Dawn’s business desk.

Key takeaways

• Pakistan’s FY2025-26 GDP grew 3.7%, but large-scale manufacturing (+6.1%) far outpaced agriculture (+2.9%), the sector employing the largest share of the workforce.
• Inflation, reserves, and the fiscal balance have genuinely improved from the 2022-2024 crisis years.
• Nearly 45% of the population remains below the poverty line, meaning macro stabilization has not yet closed Pakistan’s underlying poverty gap.
• The IMF and ADB both project ~3.6-3.7% growth continuing into 2026-2027, with inflation forecast around 7.2%.
• Regional agricultural performance remains volatile — Sindh’s cotton crop surged even as Punjab’s declined amid monsoon disruption.

FAQ

Is Pakistan’s economy actually recovering in 2026? Yes, by macro indicators — GDP grew 3.7% in FY2025-26, inflation has eased, and reserves have improved. But the growth is concentrated in large-scale manufacturing rather than agriculture, which employs more Pakistanis.

Why don’t ordinary Pakistanis feel the recovery? Because growth has been uneven: agriculture, the main income source for over a third of the workforce, grew only 2.9%, versus 6.1% for large-scale manufacturing, and poverty remains near 45% of the population.

What is Pakistan’s GDP growth forecast for 2027? The Asian Development Bank projects 3.7% growth for both 2026 and 2027, broadly matching IMF projections of around 3.6%.

Malaysia posted its biggest trade surplus on record and second-quarter GDP growth of 5.8% in 2026, yet its stock market has stubbornly refused to rally — a disconnect that is puzzling investors even as the country climbs global competitiveness rankings and hosts record investor turnout at its largest retail investing event.

Record Growth Meets a Muted Market

Malaysia’s economy expanded 5.8% year-on-year in the second quarter of 2026, underpinning what former senior investment banker Ian Yoong Kah Yin describes as one of the most competitive economies globally, buoyed by the country’s largest-ever trade surplus, according to reporting in The Star. Yet with the exception of the semiconductor and plantation sectors, Yoong notes that many shares on Bursa Malaysia remain undervalued relative to that underlying strength — a gap he summarised memorably: “It’s like we held a party and no one came.”

The disconnect comes even as Hong Leong Investment Bank upgraded Malaysia’s full-year 2026 growth forecast to 4.7% from 4.5%, citing stronger-than-expected performance in the electrical and electronics sector alongside resilient domestic demand, according to BusinessToday. Household loans grew 5.2% year-on-year and credit card spending rose 10.2%, signalling that consumer demand remains a genuine pillar of growth rather than a statistical artefact of export strength alone.

A Competitiveness Ranking Jump — and a Retail Investing Boom

Malaysia’s underlying reform story has been validated externally. The country climbed eight places to rank 15th among 70 economies in the 2026 IMD World Competitiveness Ranking, its best showing in recent years, following an 11-place jump the year before, according to The Star. Economists attribute the climb to policy reforms improving government and business efficiency, streamlined investment approvals, accelerated digitalisation, and stronger fiscal management.

Retail investor enthusiasm, meanwhile, appears robust even if institutional capital has been slower to follow. INVEST Fair 2026, Malaysia’s largest retail investment event, drew an expected 20,000 visitors across more than 70 hours of programming at Kuala Lumpur’s Mid Valley Exhibition Centre in July, according to event coverage on TradingView. Separately, a survey of more than 3,500 active users by digital wealth platform Versa found that 70% of respondents would prioritise investing over debt repayment or emergency savings if they received a sudden windfall, according to The Star — evidence of a pronounced retail “investment reflex” even amid broader questions about household financial resilience.

Fixed Income Is Where the Real Money Is Flowing

While equities lag, Malaysia’s fixed income market tells a different story. Employees Provident Fund chief investment officer Mohamad Hafiz Kassim told the Sasana Symposium 2026 that Malaysia is “punching above its weight” on global fixed income indexes, drawing outsized capital allocation given interest rate and yield differentials between Malaysian Government Securities and US Treasuries — a dynamic occurring even as the ringgit has remained notably stable, according to The Star. Speakers at the same event pointed to the broader global shift toward passive investing as a structural tailwind Malaysia is well-positioned to capture with continued policy follow-through.

What Explains the Equity Gap

Analysts point to several possible explanations for the growth-market disconnect: persistent foreign investor caution tied to regional and Middle East-driven geopolitical risk, a valuation overhang from prior years, and sector concentration that leaves broad indices under-exposed to the semiconductor and technology names actually capturing AI-linked investment flows. Whatever the cause, the gap represents either an opportunity for value-focused investors or a warning sign that Malaysia’s headline growth figures are not yet translating into corporate earnings momentum broad enough to move the market.

What to Watch

The second half of 2026 will test whether Malaysia’s fixed income strength and competitiveness gains eventually pull equity valuations upward, or whether the stock market’s caution proves to be the more accurate signal about underlying corporate health. Continued data centre and semiconductor investment, alongside any further IMD-style competitiveness validation, will be key catalysts to track.

Introduction

China’s economy expanded just 4.3% in the second quarter of 2026, the weakest quarterly pace since late 2022, missing economists’ 4.5% consensus forecast and slowing sharply from 5% growth in the first quarter (CNBC). The reading came in below Beijing’s own full-year target range of 4.5% to 5% — already the least ambitious growth goal China has set in decades — and has intensified calls for fresh stimulus even as policymakers show little appetite for aggressive intervention (CNBC).

What’s Actually Slowing

The slowdown is being driven by an accelerating slide in investment and stubbornly subdued consumption, even as exports have remained comparatively resilient — helped, paradoxically, by a global oil shock that boosted demand for Chinese goods in some categories even as it squeezed household budgets in others (WHBL/Reuters). Reuters’ polling of analysts projects growth will edge up slightly to 4.6% in the third quarter before easing to 4.5% in the fourth, putting full-year 2026 growth at roughly 4.6%, down from 5.0% in 2025 and expected to slow further to 4.4% in 2027 (WHBL/Reuters).

Notably, one bright spot within the investment slump is technology: surging tech-related imports point to a deepening domestic AI infrastructure buildout, with autos and consumer electronics adding further momentum even as broader fixed-asset investment weakens (CNBC).

The Deflation Problem Beijing Can’t Shake

Underlying the growth numbers is a more persistent structural issue: China’s producer prices have now fallen for roughly three years running, undercutting corporate profitability and discouraging the kind of household spending that would normally pull the economy out of a slowdown (FXStreet). When prices fail to rise, consumers have less incentive to spend “today,” a dynamic that suppresses GDP and forces the central bank to actively target positive inflation rather than simply react to it (FXStreet). Analysts at FxPro describe China as a continued “net exporter of deflation” to the rest of the world — as its own overcapacity pushes discounted goods into global markets, applying disinflationary pressure well beyond its borders (FXStreet).

Why Beijing Is Holding Back on Stimulus

Despite the weak headline numbers, most analysts expect no aggressive stimulus action from the late-July Politburo meeting unless growth deteriorates more sharply. The reasoning is twofold: exports have remained resilient, and policymakers remain more focused on curbing excess factory capacity to fight deflation than on further juicing demand, which risks worsening the overcapacity problem that is driving deflation in the first place (WHBL/Reuters).

That said, fiscal policy is expected to accelerate through the second half of the year. Beijing has set a budget deficit of around 4% of GDP for 2026 and lined up heavy government bond issuance specifically to shore up growth after early-year support was front-loaded and then faded (WHBL/Reuters). Capital Economics expects growth to pick up over the second half as this fiscal support ramps up, while cautioning that domestic overcapacity will remain entrenched — meaning China’s economy stays structurally reliant on exports for growth rather than a genuine consumption rebound (WHBL/Reuters). Analysts polled by Reuters expect the People’s Bank of China to hold its key seven-day reverse repo rate unchanged for the remainder of 2026, signaling that Beijing sees this as a fiscal problem rather than a purely monetary one (WHBL/Reuters).

The Trade War Backdrop

The slowdown is unfolding against continued tensions with trade partners, including the United States, which have weighed on export growth even as it has held up better than domestic demand (CNBC). U.S. tariffs specifically are cited as a factor exacerbating China’s domestic deflationary trend by reducing demand for Chinese goods abroad, compounding the overcapacity problem at home (FXStreet). Analysts note that a meaningful reversal of China’s deflationary spiral would likely require either a Federal Reserve rate cut that eases global financial conditions, or a easing of the tariff regime directly — neither of which is fully within Beijing’s control (FXStreet).

What to Watch Next

• The late-July Politburo meeting: the clearest near-term signal of whether Beijing shifts from measured fiscal support to a more aggressive stimulus posture.
• Producer price index trends: continued multi-year declines would reinforce the deflation narrative and pressure corporate margins further.
• Bond issuance pace: heavy issuance against a 4%-of-GDP deficit target will be a key gauge of how quickly fiscal support actually reaches the real economy.
• U.S.-China trade signals: any easing of tariffs would provide more relief to Chinese exporters than domestic policy alone is currently offering.

Key Takeaways

1. China’s Q2 2026 GDP growth of 4.3% was its weakest since late 2022, missing forecasts and falling below Beijing’s own full-year target range.
2. Producer prices have declined for roughly three years, cementing China’s role as a net exporter of global deflation.
3. Beijing is prioritizing capacity reduction over demand-side stimulus, betting that fiscal spending — not rate cuts — will carry the second-half recovery.
4. Full-year 2026 growth is forecast at around 4.6%, cooling further to 4.4% in 2027 as structural export-reliance persists.
5. A genuine reversal of China’s deflation trend likely depends on external factors — Fed policy or US tariff relief — as much as domestic stimulus.

Sources: CNBC, WHBL/Reuters, FXStreet