The timeline for rate cuts by the Fed and the ECB remains unclear, while China is at risk of a prolonged slowdown
US
The chance of the US achieving a soft-landing is rising, reducing the likelihood of Fed’s rapid rate cuts. Although existing-home sales dropped by -6.2% to 3.78m units, weaker than market expectations of 3.82m sales, other indicators have recently improved, including retail sales (+5.5% YoY in December, compared to +3.97% in November) and initial jobless claims (falling to a 16-month low of 187,000 in the previous week). In January, consumer sentiment also climbed to 78.8, its highest since July 2021, while one-year inflation expectations softened to 2.9% from 3.1% a month earlier.
With economic indicators stronger than expected in December and January and inflation likely to cool steadily through 2024, the chance that the US will face a sharp slowdown is receding. This is reducing the likelihood that the Fed will push forward with rapid rate cuts. Statements by Fed officials have also underscored their commitment to keeping monetary policy tight until clear signs emerge showing that inflation is back to the 2% target for the long run. We therefore expect that the Fed Funds rate will remain at 5.25-5.50% until mid-2024, with cuts possibly beginning at the start of Q3.
Eurozone
The ECB is indicating that rate cuts may begin in Q2 but the crisis in the Red Sea has the potential to impact the future direction of monetary policy. Eurozone industrial output slumped -6.8% YoY in November. December’s headline inflation rose from 2.4% YoY in November to 2.9% in December, although core inflation cooled from 3.6% to 3.4%. In addition, the ZEW Survey of Economic Sentiment inched down from 23.0 in December to 22.7 in January.
The Eurozone likely entered recession in 4Q23, and the outlook is for the European economy to remain sluggish through 1H24 on: (i) softening sentiment; (ii) the high cost of funds; and (iii) weak overseas markets that are dragging on exports. Tightening fiscal policy will also weigh on Eurozone growth this year, and so we expect that with the bloc slipping into recession, inflationary pressures will ease further, possibly opening the way for the European Central Bank (ECB) to begin relaxing monetary policy. However, in an interview on 18 January, the President of the ECB stated that mid-2024 is the earliest date when rate cuts could be made, while the continuation of fighting in the Red Sea has the potential to ignite a new round of inflation, and this is therefore a major source of risk for future monetary policy.
China
Although China outperformed its growth target for 2023, weak domestic demand and troubles in the real estate sector will drag on growth in 2024. At 5.2% YoY, 2023 growth beat the official 5.0% target and improved from 2022’s 2.2%. The economy benefited from both the full reopening of the country and government stimulus measures, and the impacts of these are reflected in the year’s 7.2% jump in retail sales (vs -0.3% in 2022) and 4.6% growth in industrial output (vs +3.6% in 2022). However, property sales (residential, office, and commercial buildings) and investment in real estate contracted by -12.5% and -16.5% respectively. Meanwhile, 2023 exports in US dollar terms shrank -4.6%, although with manufacturers cutting prices to gain market share, exports returned to growth of 0.7% and 2.3% YoY in November and December, respectively.
Domestic consumption and stimulus packages will be major drivers of the Chinese economy through 2024, with the latter including a possible USD 139bn ‘special sovereign bond’ that would be used to fund projects connected to food, energy, supply chains, and urban development. However, signs of recovery in the export sector remain unclear, the positive impact of the reopening is dissipating, the real estate sector remains in trouble, and deflation threatens. Given this, we see Chinese growth slowing to around 4.6% in 2024.
The MPC is expected to leave policy rate unchanged at its first meeting of 2024. The economy could be boosted by the passing of the new budget, which will carry with budget deficit of over 3% of GDP in FY2025.
The BOT has said that the Thai economy is affected by structural problems that are dragging on growth but that are not amendable to short-term solutions involving changes to policy rates. At a policy briefing held on January 15, Bank of Thailand (BOT) officials said the current 2.50% policy rate is appropriate for the Thai economy, citing three key points:
(i) The Thai economy has recovered on several fronts, with significant improvements seen in domestic demand, the service sector, and labor markets. However, the recent drop in inflation was not broad-based and was due partly to government subsidies and assistance with the cost of fuel and energy, while the Thai policy rate remains low and below those of most other countries.
(ii) Lending conditions are improving, with an increase in new loans and corporate bond issuance accompanied by limited rollover risk.
(iii) Despite higher interest rates, targeted measures are still in place to help vulnerable groups, and the recently released Responsible Lending guidelines (in effect from
1 January, 2024) are expected to relieve some of the burdens faced by debtors repaying their loans.
BOT officials have stated that rate cuts are not a quick fix for a sluggish economy, and that in their view, the major headwinds to growth are structural. Coupled with the BOT’s views on the outlook for further economic recovery, the temporary drop in inflation, and the continuation of targeted policy helping vulnerable groups, the MPC is expected to hold the policy rate at 2.50% at its meeting on 7 February.
The government has set the annual budget for the fiscal year 2025 at THB 3.6trn, expanding the deficit by THB 20bn. On 16 January, the cabinet agreed with the FY2025 budget framework, setting this at a value of THB 3.6trn, up 3.4% from FY2024’s THB 3.48trn. The budget deficit has also increased to THB 713bn from THB 693bn, rising 2.9%. As a proportion of GDP, the deficit is at 3.56% in FY2025 vs 3.64% in FY2024.
The positive impact of government spending will be absent from the economy through 1Q/2024 as the effects of delays in establishing a new government in 2023 have carried through into postponements to the passing of the FY2024 budget (normally, disbursements from the annual budget should begin in October 2023). Nevertheless, the process should be completed rapidly and payments from the budget should begin in 2Q/2024, at which point government spending will again begin to boost economic growth, as was the case following the 2019 general election. However, more than two decades of deficit spending and a budget deficit of more than 3% of GDP in FY2025 indicates that the Thai economy will continue to be reliant on fiscal stimulus, and care needs to be exercised regarding the impacts of this on fiscal discipline and growth in public debt, which now runs to 62% of GDP.
