The IMF has revised its forecasts for US and Chinese growth upwards, while the risk of recession in the Eurozone and the US is falling
US
The increasing likelihood of a soft-landing may delay Fed rate cuts. Although the Manufacturing PMI remained in recessionary territory in January, it climbed to a 15-month high of 49.1, while the Consumer Confidence Index also strengthened to hit 114.8. Employment data were also positive, with non-farm payrolls beating market expectations of a rise to 187,000 to jump by 353,000, the unemployment rate remained unchanged at 3.7%, and average hourly earnings increased by 4.5% YoY, the largest increase since February 2023.
The IMF has raised its outlook for 2024 US growth from 1.5% to 2.1% in line with the positive signs coming from the improving Manufacturing PMI, consumer sentiment that is at a 6-month high, unexpectedly strong labor markets, and the steady softening of inflation (although this remains above target), all of which is increasing the chance that the Fed will achieve a soft-landing. In response, markets are pricing in lower expectations of a rate cut in March. Likewise, the Fed’s recent announcements have emphasized its intention to hold rates at 5.25-5.50% until data confirms that inflation has returned to the 2% target over the medium term. Given this, we expect that the Fed will announce the first cut to policy rates at its July meeting.
Eurozone
With the Eurozone economy stagnating, the pressure on the ECB to cut rates is rising. Eurozone growth outperformed market expectations in Q4 of 2023 to expand 0.0% QoQ and 0.1% YoY, thus avoiding a recession. However, at 46.6, January’s Manufacturing PMI remained in contractionary territory for the 19th month. January’s headline inflation figures edged down from 2.9% YoY to 2.8%, with core inflation also down from 3.4% to 3.3%.
Although the Eurozone avoided a recession in Q4 of 2023, the economy remains weak and at risk of stagnation, and this is reflected in indicators including: (i) softening sentiment; (ii) the elevated cost of funds; and (iii) the weak outlook for overseas markets, which is impacting exports. In addition, the extended Russia-Ukraine war and the worsening crisis in the Red Sea are adding to uncertainty and increasing the risk that impacts on international trade will pile up going forward. Given the recent downgrade in the IMF’s outlook for 2024 Eurozone growth from 1.2% to 0.9%, the overall weak state of the economy, and the ongoing slowdown in inflation, opportunities for the European Central Bank (ECB) to relax monetary policy will open. The President of the ECB has stated that rate reductions will be made mid-year at the earliest, which is in line with our forecasts.
China
China’s exports and manufacturing output have slightly improved but real estate and excessive debt issues remain unresolved. The IMF has raised its forecast for 2024 GDP growth from 4.2% to 4.6%. Meanwhile, January’s official Manufacturing and non-Manufacturing PMIs rose from 49.0 in December to 49.2 and 50.4 to 50.7, respectively, with new export orders up from 45.8 to 47.2. While the private-sector Caixin Manufacturing PMI was steady at 50.8, the Services PMI edged down from 52.9 to 52.7. However, positive signs have yet to emerge in the property market. New house sales by China’s 100 largest developers shrank by 34.2% YoY in January, the 8th month of falls. Moreover, on 26 January, a Hong Kong court ordered Evergrande with debts of USD 300bn, to be liquidated. China’s debt-to-GDP ratio or macro leverage ratio is also up from 274.3% in 4Q/2022 to 287.8% in 4Q/2023..
Although manufacturing and export PMIs are improving, they remain in the contractionary zone, or are slightly expanding. The recent data and the slump in house sales imply that the effectiveness of last year’s stimulus measures remains in doubt. Consumer confidence also remains weak, and China’s debt-to-GDP ratio should break north of 300% this year. Demand-side stimulus packages will thus be needed for the economic recovery, while an increase in direct borrowing by the central government will help relieve the debt burden faced by local governments to some extent.
Growth could be underperformed expectations, and this may impact the direction of monetary policy. The competitiveness of the Thai manufacturing sector is declining.
It remains to be seen how the first 2024 meeting of the MPC will respond to the BOT’s revision to 2023 and 2024 growth forecast. The Bank of Thailand (BOT) reports that overall, economic indicators worsened in Q4/2023 on a slowdown in the tourism receipts and in non-gold exports, which softened on weaker global demand. The economy also came under pressure from structural issues that are dragging on growth in exports and manufacturing, and as such, data on manufacturing output and private investment have weakened. Adding to these problems, public investment has been interrupted by delays to the passing of the FY2024 budget, though more positively, indicators point to an improvement in the services sector and in private consumption.
Data for Q4 of 2023 show that growth is slowing and the economy may be losing momentum faster than the BOT expected thanks to a combination of short-term cyclical factors and worsening structural problems. Thus, manufacturing and exports in some major product categories are losing competitiveness, and this will mean that although the IMF now sees global GDP growth for 2024 hitting 3.1% (up from its earlier estimate of 2.9% and equal to 2023’s growth), these Thai industries may not fully benefit from the stronger-than-expected performance by the world economy. Relatedly, the BOT is planning to revise its estimates for 2023 and 2024 growth downwards from its prior forecasts of respectively 2.4% and 3.2%. Against this backdrop, the Monetary Policy Committee (MPC) will meet on 7 February and issues to follow will include: (i) the unanimity of voting; (ii) how hawkish for the post-meeting statement or MPC’s concern over its growth outlook; and (iii) the extent of the adjustments to 2024 growth forecasts. This will also indicate the likely path taken by monetary policy going forward, and if forecasts are revised strongly downwards and drivers of growth are much weaker than previously expected, this will open the way to relax monetary policy to support a further economic recovery.
Metrics related to manufacturing continue to weaken at the start of the year. In January, the Business Sentiment Index dropped from 49.1 in a prior month to a 15-month low of 48.0, and within the manufacturing component, sentiment has now been below 50 points for 4 months. In the non-manufacturing sectors, sentiment has also softened, especially in areas related to trade, where confidence has slumped following the New Year holidays. In addition, although the Manufacturing PMI has edged up from 45.1 to 46.7, a worsening situation for new orders means that it remains below the key 50-point waterline and thus in recessionary territory.
The global Manufacturing PMI climbed to 50.0 in January, the first time in 8 months that it has exited the contractionary zone. Likewise, the ASEAN PMI rose to 50.3, above the 50-point waterline for the first time in 5 months. Strength in the ASEAN zone was led by Indonesia and Vietnam, though the Thai Manufacturing PMI was the weakest among major ASEAN nations. This bleak outlook is underlined by recent research from the Office of Industrial Economics that uses data from 2017-2021 to compare the competitiveness of the manufacturing sectors in 4 major ASEAN economies. This shows that this was worst for Thailand and the Philippines (-1%), followed by Indonesia (0%), Malaysia (+2%), and Vietnam (+4%). In 2023, the Manufacturing Production Index also contracted most in Thailand (-6.3% YoY in December), compared to strong expansion in Vietnam (+7.6%) and moderate growth in Malaysia and the Philippines (+0.6% and +1.9%, respectively, both in November). Given this unfavorable situation and the need to improve competitiveness and to bring it into line with trends in global demand, structural reform of the manufacturing sector is clearly needed.
