US economy is slowing down. Despite lower risk of recession, Eurozone recovery is still weak. China's economy is growing but remains fragile.
US
Despite higher-than-expected inflation, labor markets and other indicators show more signs of an economic slowdown. The Fed decided to hold the benchmark rate at 5.25-5.50%, as expected, signaling no rate hike the rest of this year. In April, consumer confidence index slipped for the 3rd month to its lowest since August 2022. The Services PMI also fell to a 5-month low of 51.3. On the employment front, the JOLTS survey showed job openings at a 3-year low of 8.48m, growth in non-farm payrolls slowed from 315k a prior month to 175k and the unemployment rate rose by 0.1% to 3.9%.
The higher-than-expected inflation could cause the Fed to take longer time in bringing inflation back to the 2% target. However, signs of a US slowdown are becoming clearer as: (i) the services PMI has fallen to its weakest in 5 months; (ii) consumer sentiment has softened for 3 consecutive months; (iii) the job openings fell to its lowest since March 2021; and (iv) unemployment is inching up with a decline in jobs growth and a slowdown in wage growth. Given signs that the US economic expansion is losing momentum, we expect that the Fed could still move to cut rates this year. The rate cut may be seen in September and the Fed Funds rate could fall to 4.50-4.75% at year-end.
Eurozone
Growth momentum is improving but remains weak. Inflation is cooling down. In April, headline inflation stood at 2.4% YoY, its lowest since July 2021, while core inflation dropped from 2.9% a prior month to 2.7%. The Manufacturing PMI slipped to 45.7, recording a contraction for the 11th straight month.
Eurozone GDP returned to growth in Q1, moving in line with: (i) the Composite PMI’s second month in expansionary territory; and (ii) recovering household and business sentiment. The Eurozone economy is thus slowly expanding. Labor markets are becoming more balanced. Although the unemployment rate remains low, the job vacancy rate is declining. Moreover, cooling inflation will reduce workers’ bargaining power and this will further undercut pressure from wage-push inflation. Given the combined impact of these factors and likely ongoing slow growth through 1H24, we are maintaining our view that the European Central Bank (ECB) will announce a rate cut in June.
China
Services sector continues to expand, while manufacturing growth remains fragile. Real estate activity contracts further. In April, the official Manufacturing PMI was in expansionary territory for the 2nd month but slowed down slightly from 50.8 in March to 50.4. The new export orders softened from 51.3 to 50.6. While the PMI for hi-tech industries has been in expansionary territory for 11 months, the PMI for consumer goods showed slower growth. The private-sector Caixin survey showed Manufacturing PMI edging up from 51.1 to 51.4, and Non-manufacturing PMIs edging down from 52.7 to 52.5. However, new-home sales by the 100 largest developers fell for the 11th month, by 44.9% YoY in, less contraction than March’s -45.8% and February’s -60%. Medium-sized developers also reported that staff layoffs surged by 11-42% in 2023.
A further recovery in both manufacturing and services sectors could partially help offset problems in the real estate sector, pushing Q2 GDP growth to exceed Q1’s 5.3%. However, the expansion in manufacturing sector remains fragile, as its improvement was partly supported by the trade-in program for electrical appliances and industrial equipment. If this program ends and the real estate sector continues to struggle, China’s growth momentum could be adversely affected in the period ahead.
Economic activity in 1Q24 has improved from 4Q23 but its momentum began to dissipate in March. Inflation returned to positive territory in April.
BOT reported March economic growth slowed on weaker domestic demand and a drop in foreign arrivals after an acceleration in previous months. Private consumption slipped in March (-0.8% MoM sa and -0.6% YoY), partly due to the ending of the government’s Easy-E-Receipt scheme, led by lower spending on non-durable goods. Spending on durable goods continued to slide. Private investment index also fell in the month (-1.4% MoM sa, -1.5% YoY), with drops seen in expenditure on both machinery and construction. Foreign arrivals also declined from 3.35m a prior month to 2.98m in March. Seasonally adjusted exports (excluding gold) improved slightly from the previous month (+2.1% MoM sa) but dropped on a year-on-year basis
(-10.2% YoY).
Most economic indicators softened in March, although the overall economy in 1Q24 performed better than the last quarter of 2023. 1Q24 growth was lifted by: (i) the continuing strength of the tourism sector with regard to both arrivals and spending, and the industry is close to its pre-Covid level of health (arrivals are at 88% of their 2019 level); and (ii) thanks to the government’s Easy-E-Receipt scheme with higher spending on non-durable goods. Nevertheless, goods exports and manufacturing output remain weak. Delays to the passing of the FY2024 budget have significantly impacted government investment spending, and 1Q24 GDP growth is thus expected to remain low (the BOT sees this coming to 1% YoY).
April headline inflation turned positive for the first time in 7 months. Although this will likely return to the official target range later in the year, 2024 inflation may average less than 1%. In April, headline inflation rose from -0.47% YoY in March to 0.19%, the first positive rate since October 2023. This was a result of: (i) rising global oil prices and the ending of some subsidy on diesel price; and (ii) the impact of the drought on farm yields, which has in particular pushed up the prices of fresh fruit and vegetables. Core inflation (which excludes raw food and energy prices) remained unchanged at 0.37% YoY. During the first 4 months of the year, headline and core inflation averaged -0.55% and 0.42% respectively.
We see headline inflation could return to the 1-3% target range later in the year as some subsidies on diesel price are withdrawn and the cost of agricultural goods rises as a result of the current heatwave. Price levels may come under further pressure in Q4 with the government’s plan to raise the daily minimum wage to THB 400 nationwide. However, across all of 2024, inflation will likely average less than 1% due to: (i) only slow growth in domestic demand; (ii) difficulty in passing higher costs onto consumers; and (iii) the continuation of the remaining subsidy measures helping consumers with elevated energy costs.
Regarding the policy rate outlook, we see that probability of rate cuts will depend on the development of several factors, such as (i) 1Q24 GDP figures (due to be released by the NESDC on 20 May), (ii) inflationary pressure and (iii) US interest-rate direction. The weaker-than-expected growth momentum, low inflation (expected at below 1% this year) and trend of lowering US interest rates in 2H24 may increase the probability of Thai policy rate cuts later this year.
