US manufacturing is playing more role in growth and Eurozone is bottoming out. In China, sentiment and real estate remain weak.
US
US economic indicators and Fed’s comments support view of the first rate cut in mid-year. Existing home sales jumped 3.1% MoM to 4m units in January. In February, the Flash Manufacturing PMI climbed to 51.5, its highest since September 2022, although the Flash Services PMI softened from 52.5 to 51.3. Recently, Fed official Christopher Waller stated that clearer signs of cooling inflation are needed before the Fed will begin cutting rates. This mirrors the latest FOMC minutes, which show that worries over continuing high inflation are forestalling a more rapid pivot to rate cuts.
With growth stable and the US economy stronger than the economies of China, Japan, and the EU, labor markets remain tight and domestic consumption continues to expand. Inflation is thus cooling slower than the market expectation, and this therefore remains above the Fed’s 2% target. Against this backdrop, we expect that the Fed will begin to cut rates at its mid-year meeting as it looks to: (i) head off the possibility of a sharper slowdown, which may materialize if rates remain elevated for too long; and (ii) prevent the real policy rate rising too high, with this expected to reach 2.5% in mid-2024, its highest since 2009 global financial crisis.
Eurozone
The Eurozone economy remains weak and fragile, but it likely passed through the worst in 4Q23. February’s Flash Manufacturing PMI slowed from a 10-month peak of 46.6 to 46.1, but the Flash Services PMI inched up to a neutral 50 points, its strongest in 7 months, and the Composite PMI thus climbed to an 8-month high of 48.9. At the same time, headline and core inflation eased from respectively 2.9% and 3.4% YoY to 2.8% and 3.3%. Germany’s 4Q23 GDP contracted 0.3% QoQ and because this followed a 0.1% contraction in 3Q23, the economy entered a technical recession.
Despite continuing weakness, the Eurozone likely passed through the worst of the slowdown at the end of 2023, and slow recovery should lift the bloc through 2024. This will be helped by: (i) the lower probability of an energy crisis this year; (ii) slowing inflation, which will boost real wages and lift consumption; (iii) the easing of supply chain disruptions and going forward, the positive impacts of this on manufacturing; and (iv) the impact of low-base effects. We therefore anticipate that the European Central Bank (ECB) will begin the first rate cut in mid-year.
China
FDI inflows to China fell to a 30-year low, while prices for new and existing homes continue to slide. Net FDI inflows declined to the lowest since 1993 at just USD 33bn in 2023, an 82% fall from 2022. Declining investment mirrored the 6.7% drop in profits for foreign-owned industrial companies, contrasting with the 17.3% rise in profits for state-owned enterprises. However, for private businesses, profits inched up just 2%. The government is now drafting new laws to protect the property rights and benefits of private businesses and to ensure the equal treatment of private and state-owned enterprises. Property markets remained sluggish in January, and across 70 cities, prices for new and existing homes slipped by respectively 1.2% and 4.4% YoY, their 22nd and 24th months of declines. Meanwhile, the PBOC has cut the 5-year loan prime rate (LPR) (a benchmark for mortgage rates) from 4.2% to 3.95%, the biggest cut in 5 years.
Declining FDI and poor earnings reflect weak business sentiment, and although the government is attempting to improve the latter, solely relying on the new private company law may prove insufficient. Cuts to the LPR may help to boost demand alongside measures to improve liquidity for developers, but although this may ease the real estate crisis, it will take some time for the effects of this to become clear.
Thai economy will see a cyclical recovery in 2024 but growth will remain uncertain and uneven. January export growth benefited from low-base effect.
Krungsri Research has revised down 2024 economic growth forecast from 3.4% to 2.7% amid high uncertainty. Growth should be up from 2023’s 1.9% largely thanks to domestic drivers of the economy. (i) Improving capacity and government support will boost the tourism sector, and as such, 35.6m arrivals are expected in 2024. (ii) Private consumption is forecast to expand by 3.1% on the back of continuing recovery in the tourism sector, stronger labor market, and government measures to help with the cost of living and to stimulate consumer spending. (iii) Public spending will have a greater impact from Q2 onwards once the annual Budget Bill for FY2024 has been approved, and thus government consumption and public investment is expected to grow by 1.5% and 2.4%, respectively. (iv) The combined effects of expansion in the service sector, the positive effects of increased spending on infrastructure projects, and government support for some industries will help to keep growth in private investment close to 2023 at 3.3%. However, Thai export growth would remain low following weakness in trading partners’ economies although some key export sectors may benefit from specific factors.
The 2024 growth outlook is expected to improve from a year earlier, but the growth will likely stay low at 2.7%, below 3% since the outbreak of Covid-19 started in 2020. Headline inflation is expected to average just 1.1% (compared to 2023’s 1.2%). The weaker-than-expected growth and inflation outlook implies greater probability of the first policy-rate cut in mid-year in order to accommodate a further recovery of the Thai economy.
The domestic factors that may drag on growth include high household debt with higher cost of borrowing, drought impact, and structural problems such as declining competitiveness in many industries. External risks include the impacts of two-decade high of interest rates in major economies, China’s slowdown & ongoing property crisis, the US-China decoupling, and geopolitical tensions that have the potential to spread.
Thai exports grew for the 6th straight month in January. For 2024, exports are forecast to expand by 2.5%. The Ministry of Commerce reports that in January, exports generated receipts worth USD 22.6bn, up 10.0% YoY, though this falls to 9.2% if gold and oil are excluded. The largest gains were seen in iron, steel & related products (+106.5%), rice (+45.9%), computers & computer equipment (+32.2%), fresh, chilled, frozen & dried fruit (+30.1%), rubber (+5.5%), and processed & canned seafood (+5.2%). The best performing markets were the US (+13.7%), China (+2.1%), the EU (+4.5%), Japan (+1.0%), the ASEAN-5 (+18.1%), and the CLMV group (+16.6%).
Strengthening exports at the start of 2024 mirror the situation across the ASEAN region, where export industries are tending to benefit from improved world trade and comparison to the low base set during Chinese New Year in January 2023. We see Thai exports growing by 2.5% in 2024, compared to 2023’s 1.7% contraction (based on the BOT’s data). The supportive factors are growth in the global economy (close to last year’s 3.1%), the positive impacts of easing inflation on purchasing power, and specific factors such as a cyclical recovery in sales of electronic products, the impacts of the El Niño on global agricultural prices, and the increasing trend to regionalization. Nevertheless, an expansion in Thai exports will not be broad-based and risks could arise from geopolitical tensions. In particular, attacks on shipping in the Red Sea have the potential to drag on trade, disrupt supply chains, and add to transportation costs, the impacts of which may then become manifest in the coming period.
