Hopes are rising that the US economy will achieve a soft-landing, while the BOJ indicated that the end of negative interest rates may be closer
US
Hopes for a 2024 soft landing have been raised by cooling inflation and a better-than-expected GDP print. The Flash Manufacturing PMI climbed to 50.3 in January, reentering expansionary territory for the first time in 9 months, while the Flash Services PMI rose to a 7-month high of 52.9. Preliminary estimates also show 4Q23 GDP growth hitting 3.3% QoQ, significantly above the 2.0% expected by the markets. Headline PCE price inflation was flat at 2.6% YoY in December and Core PCE price inflation eased from 3.2% YoY to 2.9%.
Markets may be expecting faster rate cuts following December’s softening Core PCE inflation, which has brought this below 3% for the first time since 2021. However, with economic growth powering ahead, consumption expanding, labor markets still strong, and tensions rising in the Red Sea, further declines in inflation are likely to be only gradual, though this is in line with the soft-landing scenario. We thus expect that to prevent a new bout of inflation breaking out, the Fed will not rush into rate cuts, and so we see policy rates remaining at 5.25-5.50% through to mid-2024, with cuts possibly then scheduled for 3Q24.
Japan
The risk of Japan having slipped into recession in 4Q23 has receded on stronger-than-expected export data. In December, exports jumped 9.8% YoY, a turnaround from November’s -0.2% and the fastest growth in a year. At the same time, imports contracted -6.8%, generating a trade surplus of JPY 62 billion. Likewise, headline inflation slowed from 2.4% in December to a 22-month low of 1.6% in January, while core inflation was also down from 2.1% to 1.6%.
The Bank of Japan (BOJ) is indicating that with wages rising and this passing through into higher prices for goods and services, the long-term trend is for inflation to return to the bank’s 2% target and so officials are now considering drawing the period of negative interest rates to a close. In addition, the outlook for the export sector has improved and the number of tourist arrivals in 2023 are now reaching 80% of pre-pandemic level, and so the expectation is that this will have helped Japan skirt a recession in 4Q23. We therefore see the BOJ now beginning to consider an exit from its ultra-loose monetary policy, with an end to negative rates expected during the first half of this year.
China
The PBOC has cut some interest rates and reduced the reserve requirement ratio, and this should support growth in the short run. The People’s Bank of China (PBOC) has announced 25bps cuts in the re-lending and re-discount rates for small firms and agricultural businesses, bringing these down to 1.75% from 2% with effect from 25 January. As of 5 February, the reserve requirement ratio (RRR) will also be cut by 50 bps from December’s average of 7.4%, the largest cut in 2 years. In addition, the PBOC will allow real estate developers to use commercial property as loan collateral to assist distressed firms in meeting their debt repayment obligations. Chinese stock market improved last week after plunging to a 5-year low on 22 January.
Cuts to the re-lending and re-discount interest rates, a reduction in RRR (which will help inject CNY1trn into the economy), real estate rescue measures, and other fiscal measures (e.g., the issuance of the special sovereign bond), will help to boost the economy to some extent. However, given the ongoing real estate crisis, weak business sentiment, and persistent structural headwinds (such as the high debt burden), the positive effects of these measures will be limited to the short term.
Having contracted in 2023, exports are forecast to expand slightly in 2024. FPO cut its estimate of 2023 GDP growth, but most major components of its growth were revised up.
Thai exports grew for the 5th month in December 2023, and having contracted -1% in 2023. 2024 exports are forecast to expand by 2.5%. The Ministry of Commerce reports that in December, export value climbed 4.7% YoY to USD 22.8bn, though excluding gold and oil from the calculations brings this down to 2.1%. Major areas of growth included sugar (+43.2%), rice (+27.4%), rubber (+13.2%), automobiles, components & equipment (+4.3%), rubber products (+3.9%), and computers & equipment (+2.5%). Exports rose to the US (+0.3%), China (+2.0%), and the ASEAN-5 countries (+18.0%) but dropped to Japan (-3.7%), the EU (-5.3%), and the CLMV nations (-9.4%). For all of 2023, exports fell -1.0% to a total of USD 284.6bn, compared to 2022’s USD 287.4bn (+5.7%).
The steady recovery in the export sector at the end of 2023 matches trends in exports across the Asian zone. We expect that for all of 2024, the Thai export sector will benefit from growth of around 2.5%. This improving outlook will be supported by a lessening of inflationary pressures and an expansion in global trade, which the World Trade Organization (WTO) sees coming to 3.3% this year, an improvement from 2023’s anemic 0.8%. In addition, Thai exports will benefit from specific factors, including cyclical recovery in the electronics industry, worries over food security that will drive demand for agricultural goods, and deepening regionalization. Nevertheless, recovery in exports remains somewhat patchy and a broad-based recovery has yet to materialize, while the worsening geopolitical outlook will generate stiffer headwinds that may then pose a threat to manufacturing supply chains and add to transport costs in the period ahead.
The FPO estimated 2023 Thai economic growth at just 1.8% but raised its estimates of private consumption, investment and trade balance. Data from the Fiscal Policy Office (FPO) indicate a cut in estimated 2023 and 2024 growth, down from last October’s forecasts of respectively 2.7% and 3.2% to 1.8% and 2.8% (the 2024 forecast excludes the possible impacts of the government’s digital wallet policy). The most important factor behind this downgrade was the underperformance of the Thai economy in Q4 of 2023, when growth significantly undershot forecasts on a fall-off in manufacturing output that was most notable in the automobile, computer, and electronics industries. However, the International Monetary Fund (IMF) has a slightly more positive take, seeing 2023 growth of 2.5% accelerating to 4.4% in 2024, though the latter figure incorporates the effects of the roll out of the digital wallet.
Although the FPO has cut its estimate of 2023 GDP growth to 1.8%, this is based on data that runs only as far as the end of November, and looking at the details of the most recently revised estimates reveals that the majority of the components have strengthened from the last assessment made in October 2023. Thus, the FPO’s latest estimate of 2023 private consumption, private investment, the trade balance, and the current account balance have all improved from the previous forecast (see table). Given this, assessing recent economic performance and the impacts of this on the future direction of growth momentum will need to wait for official data from the Office of the National Economic and Social Development Council (NESDC). This will be published on 19 February, and will include details on how the economy performed in both Q4 of 2023 and the year as a whole.
