With US hotter-than-expected inflation, the Fed may cut rates later than the ECB. In China, more fiscal policy is employed to stimulate the economy
US
The US slower-than-anticipated growth and rising inflation in Q1 raise concern over stagflation. With consumer expenditure slowing, GDP growth came in at 1.6% QoQ annualized in Q1, weaker than the expected 2.5%. In Q1, headline PCE inflation bounced back from the previous quarter’s 1.8% YoY to 3.4%, while core PCE inflation also rose to 3.7%. In March, headline and core PCE inflation rates were at 2.7% and 2.8% YoY. In addition, the Composite PMI slipped to a 4-month low of 50.9 in April.
The combination of rising inflation in Q1 and a slowing economy increased the risk of stagflation in the US. The US economy has begun to show signs of slowing down given the decline in the composite PMI index to the lowest level in 4 months, including weaker wage growth. With inflation remaining some way off the 2% target, pressure on the Fed to make mid-year rate cuts had been reduced. However, an activity in the service sector is showing signs of slowing with the real interest rates remaining above 2%. This should prompt the Fed to begin its rate cuts in the second half of the year, though the outlook for the Middle East remains extremely uncertain and there is potential for rising energy prices to add to upward pressure on prices.
Eurozone
The Eurozone economy is recovering and ECB rate cuts are expected in June. In April, the Composite PMI climbed up driven by the service sector. The Flash Services PMI rose from 51.5 to 52.9 a prior month, though manufacturing remains depressed. M3 money supply also expanded by 0.9% YoY in March, in line with a gradual recovery in loans to non-financial corporations (+0.4% YoY from February’s +0.3%), but growth in private-sector debt contracted slightly (+0.2% YoY compared to +0.3% a month earlier).
Though the Eurozone economy may stagnate through the first half of the year, momentum should gradually improve before returning to the recovery phase in the second half of this year, as reflected by: (i) The Eurozone Composite PMI has been in expansionary territory for 2 months. (ii) The ZEW survey of economic sentiment has risen to its highest since February 2022. (iii) Inflation has cooled to close to the 2% target. However, this needs to be set against the risk of fighting in the Middle East impacting energy prices, thereby dragging on growth, and influencing the direction of monetary policy. Overall, we expect that the ECB will still initiate its first rate cut in June.
China
China employs more fiscal measures, but it remains cautious in implementing monetary policy. Trade tensions still cast a shadow over the economy. To stimulate domestic spending and investment, the government has rolled out a trade-in program targeting increased purchases of new machinery and electrical appliances. The government aims to boost spending for equipment upgrade by 25% by 2027. Meanwhile, the government is being careful in its approach to monetary policy. The 1- and 5-year loan prime rates (LPR) have been steady at 3.45% (for the 8th month) and 3.95% (last cut in February, down from 4.2%), respectively.
Trade tensions between China and the US and the EU continue to weigh on the economy. Recently, the US is planning to triple tariffs on imports of Chinese steel and aluminium (from 7.5% to 22.5%). Meanwhile, the EU has expanded its investigation of unfair Chinese subsidies to include medical devices, in addition to its previous investigations into wind turbines, solar cells, and EVs. This investigation may eventually lead to higher punitive tariffs. More positively, China has relaxed controls on agricultural imports from Germany, following Spain, Belgium, and Austria, which were previously granted earlier this year.
China’s new trade-in program should help to reduce oversupply and boost domestic consumption, manufacturing sector, and investment. The policy is thus expected to lift retail sales and investment by respectively 0.5% and 0.4% this year. At the same time, the government remains cautious about loosening monetary policy due to concerns over the weaker yuan and capital outflows amid possibility of delayed US rate cuts. We expected Chinese policy rates to remain unchanged in early to mid Q2. Nevertheless, with pressure from the US continuing to rise and the EU remaining a major market for Chinese exporters, the government appears to be trying to relax trade tensions with the bloc. Moreover, given the competitive prices offered by some Chinese exports, comparing to rivals and the global market, the impact of punitive tariffs on China would possibly be limited.
BOT is likely to monitor Q1 GDP data before making a decision on interest rate policy. Foreign investments remain weak despite signs of improvement.
The BOT affirms the current policy rate is appropriate for economic conditions though it is ready to review in case of unexpected economic situation. The Bank of Thailand (BOT) has said that at 2.50%, the policy rate is in line with the needs of the economy and that authorities are pursuing a robust policy that will provide space to respond to future uncertainties. In addition, the BOT has indicated that excessively accommodative interest rates will allow risk to accumulate. Although interest rate cuts would reduce the debt burden over the short term, over a longer timeframe, this would increase levels of indebtedness.
Commercial banks have cut their minimum retail rate (MRR) for vulnerable individual borrowers and SMEs for a period of 6 months. This is in keeping with BOT policy to use targeted policies to address the needs of vulnerable groups. In our view, although the BOT has signaled to maintain the policy rate, it does not close the door to rate cuts later this year. The central bank said that should new economic data emerge that affects 2024 growth forecasts, they are ready to review the current monetary policy. At present, the BOT estimates Q1 GDP at 1% QoQ sa. However, forthcoming data may indicate the weak domestic demand, including a possible low growth of GDP (the NESDC will release Q1 GDP figures on 20 May) and the cooling of core inflation (March core CPI fell 0.1% MoM). This data would then potentially influence the decision made by the Monetary Policy Committee (MPC) at its next meeting on 12 June.
Foreign investments in Thailand increased by 9% in Q1, with growth driven in particular by Japanese investors. The Ministry of Commerce reports that as per the 1999 Foreign Business Act, 178 (+2% YoY) overseas projects were approved for investment in Thailand, these having a total value of THB 35,902m (+9%). The most important source of foreign investment was Japan (40 projects worth THB 19,006m), followed by Singapore (32 projects worth THB 3,294m), the US (29 projects worth THB 1,048m), China (20 projects worth THB 2,886m) and Hong Kong (11 projects worth THB 1,017m).
Overall, foreign investments are improving, having risen from THB 7,171m and THB 10,099m in January and February to THB 18,632m in March. This growth is largely attributable to the strength of Japanese investments in Thailand through Q1, when Japan remained by far the most important source of funds. These were also up nearly 50% from a year earlier, and investments were made in areas as diverse as advertising, sourcing & installing equipment for the manufacture of acetylene black, installers of solar equipment, and contract manufacturers (e.g., of fiber optics equipment, auto parts and metal parts). By contrast, foreign investments from Singapore, the US and China dropped by respectively 27%, 38% and 74% from the same period last year. This indicates foreign investments remain fragile though the trend is improving.
