US and Japan may delay a change in direction in monetary policy while China faces a greater threat from protectionism.
US
The strength of the US economy and the slower-than-expected fall in inflation may delay Fed rate cuts. In January, the headline Consumer Price Index (CPI) cooled to 3.1% YoY, but above the 2.9% expected by the market. At 3.9% YoY, the core CPI print was also hotter than the anticipated 3.7%. Likewise, the Producer Price Index was above estimates. Although retail sales slowed sharply by 0.65% YoY and -0.8% MoM in January, but partly due to the worsening weather conditions that may be temporary. February’s read of consumer sentiment also rose to 79.6, its highest since July 2022, lifting 1-year inflation expectations from 2.9% to 3.0%.
Although tighter monetary conditions are affecting the economy, the inflation has been cooling slower than anticipated, and ongoing resilience in labor markets and the economy overall is now showing up in: (i) the firmest consumer sentiment since July 2022; (ii) the strongest data on non-farm payrolls and average hourly earnings in 11 months; and (iii) the most expansionary Services PMI in 4 months. This has increased the probability of a 2024 soft landing. However, continuing geopolitical tensions and the end-of-year US presidential elections are adding to uncertainty for the economy. We therefore expect that the Fed will leave policy rates at 5.25-5.50% before starting to cut rates in mid-2024.
Japan
Although Japan entered a technical recession in Q4 of 2023, rising wages should provide the space for the BOJ to abandon its negative interest rate policy in mid-2024. With private sector consumption down -0.2% QoQ and business expenditure falling -0.1%, the Japanese economy shrank by -0.4% YoY and -0.1% QoQ in Q4. Given that GDP contracted -3.3% YoY and -0.8% QoQ in Q3 of 2023, Japan thus tipped into a technical recession.
With inflation high, wage growth running behind the rising cost of living, and business spending softening, GDP growth turned negative for two consecutive quarters, thereby pushing Japan into a technical recession. Despite this, the export and tourism sectors both strengthened in Q4. Given that the spring Shunto wage negotiations will likely result in at least a 3% increase in earnings, sentiment is expected to strengthen, domestic spending power should recover, and inflation will remain north of the 2% target over the mid-term. This will then open the way for the Bank of Japan to consider tightening its current ultra-loose monetary policy, and negative interest rates may therefore be abandoned in mid-year.
China
China’s support for 3 new industries is increasing pressure on its competitors, and this may worsen trade tension. China is hoping that support for the 3 new industries of EVs, solar cells, and lithium batteries will help drive growth over the next decade. Indeed, exports of these industries jumped 30% to USD 147.3bn in 2023. However, many countries, especially EU, are concern about the impact of cheap Chinese imports on domestic industries. In 2023, the Euro Area experienced a USD 235bn trade deficit with China, contributing to these concerns. The European Commission is expected to conclude an investigation into Chinese subsidies for producers of EVs and solar cells this year, which may result in the imposition of high punitive tariffs.
US-China trade relations also remain tense. Last October, US Department of Commerce further tightened restrictions on high-tech exports to China by expanding control over additional types of semiconductor manufacturing equipment and adjusting the equipment’s performance density threshold for export control. On the US domestic scene, trade with China remains a hot issue, especially as the election gets underway, and Donald Trump has now proposed slapping 60% tariffs on all Chinese goods imported into the US. The knock-on effects of this would, though, be enormous, and analysis shows that if this policy was enacted, China’s share of imports to the US would go from 14% in 2023 to close to zero by 2030, with the most heavily affected industries being textiles, and electronics goods.
New industrial promotion may help to support growth to some extent at a time when signs of recovery in the real estate sector remain unclear but at the cost of worsening external trade relations. Over the short term, if the EU hits China with punitive tariffs, China may respond in kind. Meanwhile, over the longer term, the general trend towards reducing European and US reliance on Chinese supply chains through de-risking will steadily strengthen, especially in upstream production related to the manufacture of chipsets and batteries, where China has an advantage in access to mineral inputs and the costs of mining and processing. Eventually, higher trade barriers could likely raise manufacturing costs, lower efficiencies, and cut overall productivity, potentially hindering the global economy and trade in the years to come.
Consumer sentiment rose to almost 4-year high, but the economy remained sluggish in 4Q23, and this will drag on the growth for 2023 and 2024
Strengthening consumer sentiment and government help for the economy are supporting growth in expenditure through the start of the year. In January, the Consumer Confidence Index rose from 62.0 to 62.9, its 6th month of gains and its highest in 47 months. Sentiment has been lifted by government policies that have included the Easy-e-receipt scheme, help with electricity bills, and the lifting of visa requirements for arrivals from a number of countries. However, consumers remain worried about only slow domestic growth, the possible impacts of the drought on income and agricultural yields, and international stresses that remain intense and that have the potential to keep oil prices elevated, adding to manufacturing costs and impacting purchasing power.
Private consumption should continue to rise through Q1, helped by: (i) improving consumer confidence, with 6-month anticipated sentiment rising to 70.9, its highest since March 2020; (ii) continuing recovery in the tourism sector, which is feeding a rise in employment and incomes in services generally (as of 11 February, 2024 foreign arrivals totaled 4.4m, generating income worth THB 215bn); and (iii) government stimulus measures that include help with the cost of living, relief for agricultural loans, and restructuring of debts across the system. With regard to the government’s digital wallet policy, a working group has been established to consider opinions and proposals on policy implementation over a 30-day timeframe.
4Q23 GDP growth came in at just 1.7% YoY, and Krungsri Research thus will cut its forecast for 2024 growth to below 3%. The Office of the National Economic and Social Development Council (NESDC) reports that for 4Q23, the economy grew by just 1.7%, lower than the 2.6% expected by analysts and contracted for the first time in a year at -0.6% QoQsa. It was caused by (i) a decline in public spending owing to the delay in the budget adoption for FY2024; (ii) a slowdown in tourism receipts following lower tourist spending per person despite a recovery of foreign tourists; and (iii) a quarter-on-quarter (QoQ) contraction of private investment. Likewise, private consumption saw a zero growth on a QoQ basis. For the whole of 2023, the economy thus expanded by 1.9%, weaker than the 2.5% recorded in 2022. The NESDC has also revised its 2024 growth forecast downward to a range of 2.2-3.2% (2.7% median), down from 2.7-3.7% (3.2% median).
Krungsri Research sees 2024 economic growth improving relative to 2023 thanks to: (i) the continuing rebound in the tourism sector; (ii) increasing government spending once the annual budget comes into force in 2Q24; and (iii) rising consumption spurred by higher employment and additional stimulus measures expected to be seen in 2H24 However, with the economy underperforming in 4Q23 and ongoing structural problems meaning that expansion in manufacturing output and exports has disappointed relative to that experienced by Thailand’s regional peers, we are preparing to revise down our 2024 growth forecast from our earlier prediction of 3.4% to below 3%. If these structural issues weigh on cyclical recovery in the economy and erode domestic demand, probability of policy rate cuts this year will increase.
