Globally, momentum is improving but 2024 growth will remain relatively low. China’s manufacturing recovers, but real estate is still depressed.
US
Slower-than-expected decline in growth and inflation reduce pressure for the Fed to rush into rate cuts. 4Q23 GDP expanded 3.4% QoQ annualized, higher than the first and second estimates of 3.3% and 3.2%, respectively. Meanwhile, February’s headline PCE inflation stood at 2.5% YoY and 0.3% MoM, while core PCE inflation cooled slightly from 2.9% YoY and 0.5% MoM to 2.8% and 0.3% respectively. March’s Consumer Sentiment Index rose to 79.4, its highest since July 2022.
The US economy continues to slow down but the risk of recession is declining given: (i) better-than-expected growth in 4Q23; (ii) the manufacturing PMI expanding for 3 straight months; (iii) stronger retail sales in February; and (iv) the firmest consumer sentiment since July 2022. Although overall risk has declined, still-tight monetary policy will likely drag on growth through 2024. Also, uncertainty may rise in the latter half of 2024 as a potentially fractious presidential election could undercut sentiment. Thus, with inflation continuing to cool (this is expected to dip below 3% in Q3) and signs of an economic slowdown predicted to become clearer in the second half of the year, we expect that the Fed will begin the next cycle of rate cuts at its mid-year meeting.
Japan
Strengthening wages and exports are helping recovery in the Japanese economy, while the Minister of Finance has not ruled out intervening to support the yen. In February, retail sales rose 4.6% YoY, better than market expectation of 2.8%, though unemployment edged up from 2.4% to 2.6%. Manufacturing output slipped 0.1% MoM, worse than the market expectation of 1.2% growth but improving from 2023’s contraction of 6.7%. March’s Tokyo CPI inflation came in at 2.6% YoY, with the Tokyo Core CPI inflation inching down from 2.5% to 2.4%.
Japan’s economy shows positive signs: (i) rising exports for 3 months; (ii) improving business and consumer sentiment; (iii) increasing capital expenditure; and (iv) still-relaxed monetary policy and the recently concluded 5.25% wage hike, which will underpin recovery in consumption. The government has also recently said that it is prepared to use all available tools to prevent excessive volatility in foreign exchange markets, though it has not specified how far the yen will have to weaken before it will intervene. We expect that the Bank of Japan will maintain accommodative monetary policy until at least mid-2024, or until there are clear signs of continued improvements in the areas of inflation, employment, and domestic spending power.
China
Manufacturing is improving but the real estate crisis is adding to pressure on the financial sector. Industrial profits rose 10.2% YoY in January-February, down from 16.8% in December, posting an expansion since August, despite the Producer Price Index falling 2.5% and 2.7% in January and February, respectively. Profits for state-own enterprises and private-sector undertakings climbed by 12.1% and 12.7%, but for foreign-owned companies, these surged 31.2%. Nevertheless, foreign direct investment fell 19.9% in January-February after jumping 22.2% in December. Meanwhile, the real estate crisis puts pressure on the financial sector, with the ‘big four’ state-backed banks reporting that total NPLs from property developers were up 2.1% in 2023, and those from construction-related companies surged 38.4%.
Rising profits in the industrial sector reflect ongoing recovery in some parts of the economy but weakness in foreign investment persists despite government efforts to address these problems, including its 24-point action plan. The rising NPLs from property developers and construction companies also indicate that government efforts to improve liquidity and to stimulate demand have been underpowered, and there is an increasing risk that troubles in real estate markets may spill over into the financial sector.
Recovery in exports is fragile and overall economic growth is likely to remain anemic through the first quarter of 2024
In February, Thai economy was largely driven by the tourism sector and overall economic growth remained weak. The Bank of Thailand reports that in February, growth was driven by services, in particular by the tourism sector, which enjoyed seasonally adjusted growth in arrivals and receipts of respectively 20.1% and 9.3% MoM sa. Private investment and manufacturing output improved in some areas, while private consumption remained flat. Exports excluding gold contracted 2.9% MoM sa. In addition, delays to the passing of FY2024 budget have meant that government spending for both regular disbursements and investment has slipped.
During the first two months of this year, economic growth was driven by the tourism sector, which is benefiting from foreign arrivals and receipts that are now back to respectively 87% and 88% of their 2019 pre-Covid total. Arrivals have been boosted by the introduction of visa-free travel for tourists from countries including China, India, Russia, Taiwan, and Kazakhstan. However, private consumption has remained largely flat despite the rollout of the government’s ‘Easy-E-Receipt’ program and the positive short-term effects of this on spending. Moreover, government spending has dropped on delays to FY2024 budget. These factors will ensure that the slow growth recorded at the end of 2023 will continue through Q1 of this year. Looking ahead, the legislative procedure of FY2024 budget is nearing its end and spending is expected to pick up from April onwards once the budget becomes law. In addition to the positive effects of increased government spending, the recent decision to raise (from 13 April) the minimum wage to THB 400/day for workers in hotels with 4-star and above in some areas of 10 provinces will help to improve sentiment and spending power for some households.
Although exports expanded for the 7th month in February, the sector faces a number of challenges. Data from the Ministry of Commerce show that exports brought in USD 23.4bn in February, but the 3.6% YoY expansion was less than the forecast 4.4% and a decline from January’s 10.0% growth. Moreover, excluding oil and gold from the export figures brings this down to 2.3%. Many of the major product categories performed growing exports, including rice (+53.6%), rubber (+31.7%), computers and computer equipment (+24.9%), iron, steel and ferrous goods (+18.0%). However, exports fell in other areas, including autos, parts & equipment (-5.6%), integrated circuit boards (-13.2%), fresh, chilled, frozen & dried fruit (-24.2%), and sugar (-34.9%). By area, exports increased to the US, the EU, and the CLMV countries, though they shrank to Japan, China, and the ASEAN-5. During January-February (2M24), total export value was thus up 6.7%.
Although export sectors in many Asian nations are strengthening on an improving outlook for global manufacturing, greater demand for electronic goods, and the easing of global supply chain disruptions, the value of Thai exports averaged just USD 23.0bn a month over 2M24, compared to 2023’s average of USD 23.7bn a month. Moreover, export value hit USD 28bn in March 2023 and so growth may turn negative in March 2024. Exports also continue to be hurt by structural issues in the Thai manufacturing sector that kept Thailand’s February Manufacturing PMI in contractionary territory (below 50) for the 7th month, even though the Asian and Global Manufacturing PMIs moved above 50 and into the expansionary zone. This subpar performance reflects the loss of competitiveness in parts of the manufacturing sector and the inability of Thai industries to respond effectively to changes in global demand. The outlook for Thai exports will thus be uncertain through 2024 and growth is likely to remain at an unimpressive 2.5%.
