Soft inflation may help ECB to cut rates ahead of Fed. Weak yen is worrying BOJ. Trade tensions and weak consumption threaten China.
US and the Eurozone
US economy shows signs of a slowdown while Eurozone begins to recover. Difference in inflation outlook will likely prompt ECB to begin rate cuts ahead of Fed. For the first time since September 2022, Eurozone retail sales returned to growth in March, edging up 0.7% YoY. Meanwhile, the Eurozone’s service PMI rose to its highest in almost a year at 53.3 in April. This was in contrast to the US services PMI, which has weakened to a 5-month low. US initial jobless claims rose to 231,000 last week, their highest since November 2023. In May, consumer sentiment index fell to a 5-month low of 67.4, with 1-year inflation expectations rising to 3.5% from 3.2% in previous month.
The Eurozone economy looks to have passed through the worst before slowly recovering for the rest of 2024, backed by: (i) the Composite PMI staying in expansionary territory for 2 months thanks to the strength of the service sector. (ii) Falling inflation, which is now close to the 2.0% target, is supporting real income and consumption. This is in line with the economic confidence (ZEW) that has continued to increase since October 2023. This is different from the US economy that shows more signs of a slowdown after previously posted a favorable growth, reflected by: (i) the Services PMI has weakened steadily since the start of the year. (ii) Labor markets are weakening and growth in wages is slowing. (iii) The difficulties the Fed is having pulling down inflation may lead to an extended period of high rates, with negative consequences for the economy going forward. Given this, we expect that with Eurozone and US inflation standing at respectively 2.4% and 3.5% in March, the European Central Bank (ECB) will consider initiating rate cuts at its June meeting, with Fed cuts now unlikely before September.
Japan
The yen has weakened to a 33-year low, adding to pressure on the BOJ to adjust its monetary framework. In March, wage growth slowed to a 6-month low of 0.6% YoY and household spending contracted -1.2% YoY (the 13th month of declines). As of 10 May, the yen has weakened to JPY 155.78 against the USD (-9.45% YTD).
Although the Japanese economy is still expected to see slow growth through 1H24, indicators are pointing to improving performance in Q2, supported by: (i) the highest wage hike in 3 decades and the rebound in the tourism sector which will encourage domestic consumption; (ii) a stronger recovery in Q1 exports; and (iii) ongoing support from accommodative monetary policy. Bank of Japan (BOJ governor Kazuo Ueda has said that policy will be adjusted if weakness in the yen begins to impact inflation and the economy overall. However, we do not regard this as a sign of an approaching aggressive rate hike, and indeed, this will not be seen as long as evidence that weakness in the yen is hurting the economy, remains unclear. In April, core inflation dipped below 2.0%, its lowest since March 2022.
China
Domestic consumption remains fragile, while trade tensions may harm manufacturing and exports. Per capita spending during the long holiday in early May fell 11.5% from its pre-Covid level as consumers chose to travel to cheaper lower-tier cities. Moreover, according to the People’s Bank of China survey in Q1, 61.8% of consumers preferred to increase savings. Meanwhile, consumer confidence was still 28% lower than in 2019. Unemployment among those aged 16 to 24 remained high at 15.3%. On the trade front, exports grew 1.5% YoY in April, close to the average in Q1. However, exports of the three new industries (EVs, lithium-ion batteries, and solar cells) shrank 18.5% YoY in Q1 due partly to weaker prices. Moreover, the EU has signaled anti-subsidy measures for Chinese EVs and steel, while the US planned to propose tariffs targeting the three new industries.
Frugal spending, low consumer confidence, and high unemployment suggest domestic spending may remain fragile in Q2 despite some support from the trade-in program. Meanwhile, potential tariff hikes resulting from rising trade tensions between China and the EU, as well as China and the US, may hinder the recovery in the manufacturing sector, especially in export-reliant industries previously expected to help offset the still-weak domestic demand.
Applications for investment promotion are rising. Tripartite Commission will discuss the proposed hike in daily minimum wage to THB 400 nationwide.
By value, applications for investment support via BOI rose by more than 30% in Q1, but other indicators show only weak growth in investment at present. The Board of Investment (BOI) reported that in the first quarter of 2024, 724 applications for investment support were made (+94% YoY) with a total investment value of THB 228.21bn (+31% YoY). The three most heavily represented industries were electronics & electrical appliances, autos & auto parts, and chemicals & petrochemicals. Total foreign direct investment (FDI) came to THB 169.32bn (+16% YoY) from 460 projects (+130% YoY), with the most important sources of this being Singapore, China, Hong Kong, Taiwan, and Australia.
The medium-term outlook for investment is positive for some industries. This is reflected in the number and value of applications for investment support via BOI and in details of approved applications, currently at 785 projects with investment value of THB 255bn (+6% YoY). In addition, investment promotion certificates, which are a key indicator of investments to be made 1-2 years out, have been issued for 647 projects worth THB 257bn (+107% YoY). Nevertheless, data from the Bank of Thailand paints a less positive picture for Q1 Private Investment Index, with this up just 0.2% YoY. The Manufacturing Production Index has also softened for more than a year (-3.7% YoY in Q1) and production capacity utilization is below 60%. These indictors suggest signs of a recovery in private-sector investment remain unclear at present.
The government has decided to extend assistance with the cost of energy, and is in addition preparing to raise the daily minimum wage to THB 400 nationwide late this year. At a cabinet meeting held on 7 May, the government agreed with measures to help reduce energy costs for Thai people. These include: (i) holding the price of diesel to no more than THB 33/liter (from 20 April to 31 July 2024); (ii) capping the price of cooking gas at THB 423 for a 15-kg cannister (from 1 April to 30 June 2024); and (iii) limiting electricity tariffs to THB 3.99/unit for target groups not using more than 300 units a month (May to August 2024).
Against a backdrop of weak domestic demand (private consumption index was down -0.6% YoY and -0.8% MoM in March), the latest government measures to help with the cost of energy will support consumer spending in some parts of the economy. At the same time, the government is also moving to boost incomes by planning to raise the daily minimum wage to THB 400 nationwide in October. This will be the third adjustment to the minimum wage this year. It remains to be seen what the view of the Tripartite Minimum Wage Commission will be at its 14 May meeting while industries remain opposed to the change. Recently, the Thai Chamber of Commerce has said that any increase in the minimum wage should be in line with local economic conditions in each area and increases in labor productivity. The study by Krungsri Research has shown that since the outbreak of Covid-19, growth in labor productivity has slipped to minus 1.6% CAGR (see chart). In several key industries, growth in wages has outpaced productivity gains, and so excessive wage hikes run the risk of dragging on overall economic growth and undercutting competitiveness in some parts of the economy.
