Manufacturing activities in the US and China are picking up. Eurozone economy moves out of recession but sees signs of stagnation.
US
Stronger-than-expected US jobs data reduce expectations for a sharp Fed rate cut. In March, non-farm payrolls expanded by 303,000, ahead of market expectations of a 212,000 rise, while unemployment rate also dipped to 3.8%, again better than the 3.9% expected by markets. February’s job openings rose to 8.75m, up from 8.74m in January. Likewise, the ISM Manufacturing PMI edged up to 50.3 in March, its first move into expansionary territory in 17 months, though the ISM Services fell for the 3rd straight month to 51.4.
Overall, the outlook is positive for the US economy, and far from recession risk given that: (i) non-farm payrolls have risen for 3 months running and the unemployment rate is down to 3.8%; (ii) the ISM Manufacturing PMI posted an expansion for the first time in 17 months in March; and (iii) consumer sentiment has improved at its most rapid since July 2022. Meanwhile, inflation is cooling at a slower rate and crude prices have risen. Several Fed officials now see rate cuts as less necessary. However, we still believe that with services activity pointing to a slowdown and the high level of real interest rate (above 2%), the policy rate cuts may begin in the middle of this year.
Eurozone
ECB signaled the first rate cut could be seen in June. Headline inflation eased from 2.6% YoY in February to 2.4% in March. Core inflation also slipped from 3.1% to 2.9%. At the same time, the Services PMI climbed to 51.5, its second month of an expansion, and as such, the Composite PMI moved into expansionary zone for the first time since June 2023. February retail sales contracted by 0.7% YoY, better than January’s -0.9% and the market expectation of -1.3%.
Eurozone indicators are pointing to a technical recovery: (i) The ZEW Indicator of Economic Sentiment has risen to a 25-month high; (ii) the Services PMI has expanded for 2 months; and (iii) retail sales have softened by less than expected. Nevertheless, although the short-term outlook is positive, the Eurozone economy remains weak and there is a risk of stagnation through 1H24. Thus, the manufacturing PMI has been in the contraction zone for the past 19 months and demand for credits from households and businesses continues to soften. As Eurozone economic growth would be low this year and inflation rate should continue to fall to close to the 2% target, we maintain our view that the ECB’s first rate cut would be seen in June meeting.
China
Manufacturing and services activities are improving, but real estate sector remains in trouble. The official Manufacturing PMI rose from 49.1 in February to 50.8 in March, above 50 for the first time since September. It new orders sub-index rose from 49 to 53, and new export orders also increased from 46.3 to 51.3. PMIs of small-, medium- and large-sized businesses all improved from 46.4 to 50.3, 49.1 to 50.6, and 50.4 to 51.1, respectively. Likewise, the non-manufacturing PMI also picked up from 51.4 to 53. The private-sector Caixin manufacturing and non-manufacturing PMIs rose from 50.9 to 51.1 and from 52.5 to 52.7. However, the real estate sector remains weak. March new home sales contracted for the 10th straight month by 45.8% YoY despite a slight improvement from a drop of 60% in February.
The move by the PMI into expansionary territory reflects the manufacturing recovery, due partly to stimulus measures and improving exports. Meanwhile, services remains the main driver of the economy through Q1. However, the economy is struggling from structural problems, especially the real estate slump and local government debt, and this will drag on growth through Q2 in contrast to the manufacturing and service sectors, which should continue to expand.
Inflation remains low. MPC is expected to cut policy rate to 2% this year. Digital Wallet scheme may boost Q4 growth, but this could add to fiscal risk.
Headline inflation remained negative for the 6th month in March, while core inflation continues to cool. MPC may loosen monetary policy later in the year. In March, headline inflation stood at -0.47% YoY, despite less negative rate than January and February’s -1.11% and -0.77%, respectively. Prices have fallen on: (i) continuing government subsidies on the cost of living, specifically for diesel and electricity, prices for which are now lower than the same period last year; and (ii) the increasing supply of fresh meat and vegetables, which has then pushed down prices. Core inflation, which excludes raw food and energy prices, also softened to 0.37% from 0.43% in January. For 1Q24, headline and core inflation rates have thus averaged -0.79% and 0.44%, respectively.
We expect that inflation will turn positive again in Q2 on: (i) rising global oil prices; (ii) the possible ending of domestic subsidies for diesel; and (iii) the weakening value of the baht, which will add to import costs. Inflationary pressures will remain limited, though, given ongoing sluggishness in the domestic economy and weak demand, the latter showing up in the most recent -0.1% MoM decline in core price inflation.
We expect that the Monetary Policy Committee (MPC) will consider relaxing monetary policy this year, given: (i) low rates of growth in the Thai economy, which has largely been restricted to tourism and related areas; (ii) core inflation remains low at just 0.44% in 1Q24, lower than the 0.72% average for the pre-Covid period of 2015-2019, when the policy rate averaged 1.55% compared to the current 2.50%; (iii) the release of 1Q24 GDP figures in mid-May, which are expected to show only depressed rates of growth; and (iv) the likely mid-year cut in policy rates by the US Fed, which will reduce downward pressure on the baht. In light of this, we anticipate the MPC to lower the policy rate to 2.0% in 2024.
The government has widened budget deficit for fiscal year 2025 by THB 150bn, with the additional funds being used to finance the Digital Wallet scheme. Funding sources for this scheme will be announced on 10 April. At a meeting held on 2 April, the cabinet agreed to revise the medium-term fiscal framework (for FY2025-2028) and as part of this, the cabinet is extending the FY2025 budget deficit by THB 152.7bn, raising this from THB 713bn to a total of THB 865.7bn. This will be used to fund stimulus spending.
The expansion in the annual budget expenditure for FY2025 (during October 2024 to September 2025) from THB 3.6trn to THB 3.75trn will increase the budget deficit from 3.56% of GDP in the previous plan to a record high of 4.42% of GDP, posting a deficit for 19 straight years, thus raising public debt to a record high of 66.93% of GDP. The THB 150bn increase in the budget deficit will be used to fund the government’s Digital Wallet policy, though details of how the additional THB 350bn required for financing the stimulus spending will be announced on 10 April. S&P and Fitch credit rating agencies are viewed that although Thailand’s mid-term fiscal plans will help to boost growth over the short term, going forward, the increased burden of public sector’s debt will drag on efforts at fiscal consolidation. The government expected the annual budget will continue to post a deficit in the next 4 years.
