Data on growth and inflation in the major economies point to an ongoing Q4 slowdown and so the likelihood of further rate rises is falling
US
With the US inflation cooling and the economy slowing, markets are reducing a chance of the ‘higher for longer’ scenario. In October, headline and core PCE softened from 3.4% to 3.0% YoY and from 3.7% to 3.5% YoY, respectively. In November, at 46.7, the ISM Manufacturing PMI remained in contraction for the 13th month and the S&P Global Manufacturing PMI slipped from 50.0 to 49.4. Alongside this, Fed Governor Christopher Waller has also said that monetary policy should now be sufficiently tight to slow the US economy and to pull inflation back into the 2% target range, and so further hikes will likely be unnecessary.
Against a backdrop of weak household savings and a slowdown in wage growth, the rising cost of borrowing is increasingly dragging on US growth. This outlook is reflected in the Fed Beige Book and accompanying data that show the slowdown spreading. This outlook has been further underlined by the Fed Chair, who has said that the financial authorities need to find the balance between being overly restrictive and overly accommodative. Given this environment and the likely softening of both growth and inflationary pressures, we expect the Fed to leave the policy rate at 5.25-5.50% through to mid-2024.
Eurozone
Economic indicators point to continuing softness in the Eurozone, and there is a significant possibility that the bloc will enter recession in Q4. Tight monetary policy continues to affect the economy and so growth in private credit dropped from 0.8% to 0.6% YoY in October alongside a -1.0% tightening in M3 money supply, its 4th month in contraction. In November, headline and core inflation slowed from respectively 2.9% to 2.4% and from 4.2% to 3.6%, its weakest since May 2022. Beyond this, although the HCOB Manufacturing PMI ticked up from 43.1 to a 6-month high of 44.2, the index has remained in recessionary territory for 16 months.
The widespread slowdown in the Eurozone points to the elevated risk of recession in 2H23. The European economy is under pressure from: (i) tight monetary policy; (ii) weakness in export markets; and (iii) deteriorated consumer and business sentiment. However, inflationary pressures should continue to ease through 2024 and labor markets remain strong, thus helping to offset the impacts of high interest rates and restricting any recession to a relatively mild contraction. We therefore expect that the European Central Bank carried out its last rate hike in October, and we see the key ECB deposit rate remaining at 4.00% through to 2Q24.
China
Economic recovery remains uncertain in China, and the outlook for the service sector is at its weakest since the reopening. In November, the Caixin and S&P Global Manufacturing PMI edged up from 49.5 in October to a 3-month high of 50.7, but this ran counter to the official NBS Manufacturing PMI, which fell for the 2nd straight month to 49.4 from 49.5. The Services PMI also slipped from 50.6 to 50.2, its weakest since December 2022.
The latest indicators show growth remaining patchy and soft across the Chinese economy. Government stimulus measure is boosting growth for small and medium-sized manufacturers, but output by large manufacturers has slipped on weaker export orders. Industrial profits slumped from 11.9% in October to 2.7% YoY in November. Over the first 10 months, a rise in profits was seen in electric/power industry, machinery & equipment and general manufacturing. However, profits dropped in chemical industry, petroleum & coal industry, computer manufacturers, and raw materials sector. In the service sector, the momentum gained by the reopening is also dissipating as new domestic and export orders declined. Also, The Economist recently noted, “China is suffering from long-covid” and for the Chinese economy, “Covid’s legacy will be long.”
The current cycle of rate hikes is likely at an end following the MPC decision to hold policy rate at a 10-year high of 2.50%. The BOT reports that signs of economic recovery is improving on the back of stronger domestic demand.
The MPC has decided to leave policy rate unchanged at 2.50%, viewing this as an appropriate level given the current economic environment, and we now expect that rate will likely not change through 2024. At its 29 November meeting, the Monetary Policy Committee (MPC) voted unanimously to keep policy rate at 2.50% given ongoing economic recovery. However, the MPC has trimmed its GDP growth forecast for 2023 and 2024 from 2.8% and 4.4% in the previous projection to 2.4% and 3.8% in the case that the digital wallet policy is implemented, respectively. Headline inflation forecasts for 2023 and 2024 have also been cut from 1.6% and 2.6% in the previous projection to 1.3% and 2.2%, and core inflation forecasts from 1.4% and 2.0% to 1.3% and 1.5% respectively. In the event that the digital wallet policy is not implemented, the 2024 GDP growth forecast now stands at 3.2%, and headline and core inflation are expected at 2.0% and 1.2%, respectively.
Although the policy rate was unchanged at the latest MPC meeting, the downward revision to growth and inflation forecasts have prompted markets to increase expectations of a rate cut next year. However, we anticipate the MPC to leave the policy rate at the current level of 2.50% through the year 2024, given comments in the committee’s post-meeting statement. (i) Overall, the Thai economy continued to recover, despite some slowdown in merchandise exports and related production. Growth is expected to be more balanced in 2024 and 2025, supported by domestic demand, the tourism sector, and a recovery in merchandise exports. (ii) Headline inflation is low on temporary factors, but looking ahead, this should pick up in 2024. (iii) The current policy interest rate is conducive to keeping inflation sustainably within the target range, fostering long-term macro-financial stability by preempting the buildup of financial imbalances, and ensuring sufficient policy space in light of an uncertain outlook.
Domestic demand strengthened in October, which may help to lift Thai economic growth in Q4. The Bank of Thailand (BOT) reports that overall, the economy improved in October on stronger demand that was driven by an uptick in private consumption and investment. Improving sentiment helped to lift the Private Consumption Index, turning September’s -1.3% contraction into growth of 1.7% MoM sa. Strengthening investment in both construction and machinery & equipment also converted September’s fall in Private Investment Index of -1.6% into a 1.4% expansion. However, services activity weakened somewhat on a softening of both domestic and international tourism. Seasonally adjusted export value (excluding gold) also dropped -1.4% in October having jumped 4.8% a month earlier, and so industrial output remains depressed.
Having expanded just 1.5% in Q3, we expect the Thai economy growing by close to 4% YoY in Q4. Growth will be boosted by: (i) the impacts of visa-free scheme for tourists from many countries, which is expected to lift high-season foreign arrivals to 7.5m in Q4, up from 7m in Q3; (ii) an improving outlook for exports, which are expected to expand 7% YoY in Q4 (compared to a -2% contraction in Q3) due to a combination of stronger year-end demand, rising exports of agricultural and food products and low base last year, when China was in lockdown; and (iii) the positive impacts of the government’s efforts to address problems with the high cost of living, which have included cuts to energy and transportation costs, and debt suspension for farmers.
