Fed is in no rush to cut rates. ECB will likely begin reducing rates in June. Chinese Q1 GDP growth exceeds expectation.
US
Chance of Fed’s rate cut in June has been reduced by stronger-than-expected inflation and economic growth. Headline inflation rose to 3.5% YoY in March from 3.2% in the previous month, while core inflation was unchanged at 3.8%. Consumer sentiment stayed close to a 33-month high. Growth of retail sales accelerated to 4.02% YoY in March from 2.1% in previous month.
The markets continued to lower chance of June rate cut after comments by Fed Chair Powell and other Fed officials supported the implementation of restrictive monetary policy to control inflation back towards 2% target given rising tensions in the Middle East and possibly increasing inflation pressure. In addition, several economic indicators have reflected the strength of the US economy, and as such, the IMF has added 0.6% to its forecast for 2024 US GDP growth, bringing this to 2.7%. Nevertheless, we expect that with consumer activity showing signs of slowing, the real interest rates at more than 2%, and wage growth softening, the Fed may begin to cut interest rates in the second half of this year.
Eurozone
The ECB signals to cut rate in June though the Fed remains hawkish. In keeping with market expectations, the European Central Bank (ECB) held interest rates steady at 4% at its 11 April meeting, amidst a backdrop of March’s falls in headline and core inflation of respectively 2.6% YoY to 2.4% and 3.1% to 2.9%.
Although the Eurozone has escaped a recession, weakening inflation and slowing economic activity indicate that the bloc is at risk of stagnation through 1H24. Evidence for this can be seen in: (i) the 19 months that the Manufacturing PMI has spent in contractionary territory; (ii) the continuing impact of tight monetary policy on demand for credit from households and businesses; (iii) soft consumer sentiment and the drag placed on recovery in consumption by high interest rates; and (iv) the unwinding fiscal stimulus as governments look to reduce budget deficit and subsidies for energy costs are withdrawn. For these reasons, with economic growth remaining weak and inflation falling to close to the target range of 2%, Krungsri Research expected the ECB to start cutting interest rates for the first time at June’s meeting.
China
Q1 GDP growth outperformed market expectations but consumption remains weak, and the real estate crisis continues to rumble on. The IMF is keeping its forecast for 2024 Chinese growth steady at 4.6%. Meanwhile, Q1 GDP grew 5.3%, surpassing market expectations of 4.3% and up slightly from Q4 growth of 5.2%. Against this, the real estate crisis shows no signs of recovery. House sales by the top 100 developers plummeted by 45.8% in March, following a 60% drop in February. The decline in sale prices for new and existing homes also worsened from -1.9% to -2.7% and -5.1% to -5.9%, respectively. Beyond this, growth in retail sales slowed from 5.5% in January-February to 3.1% in March. Meanwhile, headline inflation fell from 0.7% in February to 0.1% in March, and the Producer Price Index slipped from -2.7% to -2.8%.
Better-than-expected growth in Q1 partly resulted from the ongoing expansion in the service sector and the early sign of recovery in manufacturing sector. These sectors will likely continue expanding and be the main economic drivers in Q2. However, the unresolved real estate crisis and fragile consumption will threaten the economy. Meanwhile, still-low inflation reflects problems with oversupply in the manufacturing sector, aggressive price cuts, and weak consumer sentiment.
Digital Wallet scheme raises hope for improving consumption growth in Q4 but hurdles and uncertainties remain
Economic impact of Digital Wallet program is estimated at 0.5-1.1% to GDP. Although sources of funding have now been identified, hurdles and uncertainties remain. On 10 April, the government released information on how the THB 500bn required for the Digital Wallet scheme is to be funded: (i) THB 175bn will come from the FY2024 budget; (ii) THB 152.7bn will come from the FY2025 budget; and (iii) as per article 28 of the State Fiscal and Financial Disciplines Act, THB 172.3bn will be financed by the Bank for Agriculture and Agricultural Cooperatives (BAAC) for payments to 17m farmers. Authorities hope to open registration to the scheme for both eligible people and retailers in Q3 and then to start their spending in Q4.
Although its sources of funding have become clearer, uncertainty and potential problems remain for the Digital Wallet program. These include questions over exactly how the money will be raised, how payments to participating shops will be regulated, how payments between local shops and non-local shops will be managed, and when it will be possible for retailers to consider these as cash earnings. We estimate the economic impact of this program at 0.5-1.1% of GDP. The exact details of the extent and timing of these impacts will depend on when the project is rolled out and details of its implementation. Moreover, the funding from FY2024 budget has been already included in economic forecast this year. Although policymakers hope that the disbursements will boost Q4 spending, consumption is currently under pressure from: (i) the ending of the Easy E-Receipt scheme in February and the likely negative impacts of this on spending in Q2; (ii) weaker farm incomes as a result of falling agricultural outputs; and (iii) high household debt that stood at 91.3% of GDP at the end of 2023.
Tourism remains the main driver of the economy through Q2, helped further by the extension of visa-free travel. The Economics Tourism and Sports Division reports that between 1 January and 14 April, 10.72m tourist arrivals were recorded (up 43% from a year earlier) and in the period, the industry generated income worth THB 518.04bn. The most important sources of arrivals were China (2.03m arrivals), Malaysia (1.39m), Russia (0.70m), South Korea (0.62m), and India (0.55m).
The tourism sector continues to provide the primary impetus for growth in the economy. Over 1Q24, arrivals rose from the previous quarter’s 8.10m to 9.37m. These were therefore at 87% of the pre-Covid (1Q19) level, and with income from tourism hitting THB 454.65bn (88% of the pre-Covid level). The outlook for income growth has improved from 2023, when income from tourism was still only 63% of its pre-pandemic level. Less positively, the Chinese market remains somewhat sluggish, and in 1Q24, arrivals from China were still only 56% of their pre-Covid level. Moreover, although tourism was boosted in April by the Songkran celebrations, growth may now slow through the Q2 offseason. The government is hoping to stimulate the industry by converting temporary visa-free travel for Kazakh tourists (due to expire in August) into a permanent arrangement.
