Markets see a brighter global outlook; Central banks signal policy change this year; Some parts of China's economy show signs of improvement.
US
Fed revises up its growth and inflation forecasts and its Dot Plot indicates three rate cuts this year. In February, existing home sales rose 9.5% MoM to 4.38m units, the fastest growth in 11 months. Also, the Leading Economic Index (LEI) edged up for the first time in 2 years, climbing 0.1% MoM. The Flash Manufacturing PMI rose from 52.2 to a 21-month high of 52.5 in March. Initial jobless claims fell by 2,000 to 210,000 on the week ended March 16, below market expectations of 215,000.
Although the labor market has cooled, positive indicators are still being seen in: (i) the sharpest increase in sales of existing homes in 11 months; (ii) the return of the Manufacturing PMI to expansionary territory; (iii) the first rise in the LEI since February 2022; and (iv) the revision by the Fed of its 2024 growth forecasts from 1.4% to 2.1%. There is thus only a limited risk of the US entering a recession, and we expect that with inflation falling (this is forecast to fall below 3% in Q3) and signs of a broader slowdown expected to begin showing up in 2H24, the Fed is likely to begin the next cycle of rate cuts at its mid-year meeting.
Japan
The BOJ has raised rates for the first time in 17 years, indicating the official exit from its deflationary slump. At its latest meeting, the Bank of Japan (BOJ) agreed to raise the policy rate from -0.1% to 0.0-0.1% and to abandon yield curve controls (YCC). This follows large wage increases, 2.8% YoY core inflation (its 23rd month north of the 2% target) and 2.8% YoY headline inflation (its highest in 4 months). Having expanded 1.2% a month earlier, industrial output contracted -6.7% MoM in January, but at 7.8% YoY, February’s increase in exports extended January’s growth of 11.9%.
Strong exports and an improving outlook for private consumption will drive 2024 growth. This is reflected in the strongest rise in exports in a year, while consumption will improve from Q2 onwards following the conclusion of the annual Shunto negotiations, under which corporations have agreed 5.25% wage hikes, the highest in 33 years. The latter will help to lift real wages into positive territory in mid-year. In addition, although the BOJ decided to raise policy rates and abandon yield curve controls, monetary policy remains accommodative and with the real interest rate at between -2% and -3%, the economy will continue to benefit through the coming period.
China
The outlook is improving for some parts of the Chinese economy, but with unemployment edging up, domestic demand is slowing. G During January and February, growth in the manufacturing sector rose from 6.8% YoY in December to a 2-year high of 7%, although expansion in the service sector slowed from 8.1% to 5.5%, with this driven mainly by 12.1% growth in accommodation, food, and beverages. Fixed asset investment grew 4.2%, up from 3%, but investment in real estate contracted 9% and excluding this from the figures brings growth of fixed assets investment to 8.9%, aided by infrastructure spending and high-tech industries. Retail sales growth was also up 5.5% YoY, though this was down from 7.2%. However, urban unemployment rose from 5.1% to 5.3%, and among 16-24-year-olds not in education, this climbed from 14.6% to 15.3%.
Although signs of a rebound are still not visible in the real estate sector, overall improvements in manufacturing and investment indicate a recovery in some parts of the economy. This may encourage the government to hold off on targeted stimulus measures. However, slowing retail sales growth and rising unemployment may delay a recovery in domestic demand, which may undercut expansion in the manufacturing and service sectors in the period ahead.
The passing of the annual budget will boost public spending, and soft loans are expected to provide additional assistance for some groups.
Public-sector disbursements will accelerate following the passing of FY2024 budget bill and its enforcement from April onwards. On 22 March, the FY2024 annual budget, worth a total of THB 3.48trn, passed its 2nd and 3rd readings in the House of Representatives. The budget will now be debated in the Senate on 26 March and assuming it passes that hurdle, it will only then require royal assent before becoming law. This is now expected to happen in early April.
Data from the Ministry of Finance on budget disbursements show that over the first 5 months of the 2024 fiscal year (October 2023 to February 2024), spending of current budget came to THB 1.21tn, or 48% of the year’s total current budget. This thus represents a decline of 3.8% from the previous fiscal year. For capital budget, only THB 0.077tn was earmarked for public investments, just 11.6% of the total capital budget, down sharply by 58.2% from the previous fiscal year. However, the FY2024 budget bill should pass into law in early-April and so disbursements, especially for investment (budgeted at THB 0.664tn for the year as a whole), will expand through the remainder of the year. The crowding-in effect of this on private-sector investment should then help to improve economic growth.
The Ministry of Finance is drafting new measures to help targeted groups secure soft loans from state-backed financial institutions, while the Digital Wallet Board will meet in mid-April. The Ministry of Finance has announced that Specialized Financial Institutions (SFIs) are preparing a package of measures that will offer low-interest loans through 5 projects. These will be presented to the cabinet at the start of April and will consist of: (i) loans made through ‘IGNITE THAILAND’ to businesses active in the areas of tourism, health and wellness, and food; (ii) emergency loans for government welfare recipients; (iii) loans for improvements to manufacturing productivity; (iv) home loans for government employees; and (v) loans for export-based startups. Each of these includes measures to cover reductions to interest rates, debt suspension, and debt restructuring.
Officials hope that these quasi-fiscal measures will help to cut the cost of financing for businesses and consumers, increase liquidity, and boost consumption and investment, thereby helping to support economic growth. These measures should also reduce worries about the increasing number of debts within the financial system that are being classified as ‘special mentions’, especially for home loans and loans to SMEs. Nevertheless, it remains to be seen how effective these will be in practice and what the effects will be for consumer and business borrowers, in particular which groups will benefit, and how extensive assistance will be for affected parties. The Ministry of Finance has also announced that a working group has been established to gather opinions from the public as well as from public- and private-sector organizations on the implementation of the THB 10,000 digital wallet policy. The results of this survey are expected to be presented to the Digital Wallet Committee for their consideration and a decision on how to move forward with the policy before the Songkran holidays.
