Slowing inflation reduces risks to US and Japan. New round of US tariff hikes on Chinese products may have limited impact in the short term.
US
US economy is slowing but remains on track for a Goldilocks outcome. Headline PPI accelerated from 1.8% YoY to 2.2% in April alongside an increase in core PPI from 2.1% to 2.4%. However, the headline and core CPI prints slowed to 3.4% and 3.6% from 3.5% and 3.8%, respectively. Growth in retail sales also slipped to 3.04% YoY, down from 3.83% in March, and this growth also posted zero on a month-on-month basis.
Fed Chair Jerome Powell has said that although US PPI rose in April, this is not a sign of the need to raise interest rates and it is expected that the US economy will expand at more than 2% this year. Meanwhile, the interest rates are likely to stay high for longer than expected due to a stubborn inflation. We therefore expect that with the CPI cooling in April, labor markets relaxing, and economic indicators (especially in the service sector) showing signs of a wider slowdown, the path will be open for the FOMC to announce the first rate cut at its September meeting. This would then allow for a total of 3 rate cuts to be made this year, bringing the Fed Funds Rate down to 4.50-4.75% at the end of 2024.
Japan
Japan’s economy slipped into a contraction in Q1 but should gradually recover from Q2 onwards. In Q1, Japanese GDP saw negative growth of -0.5% QoQ and -2.0% YoY, worse than market expectations of -0.3% and -1.5%, respectively. With inflation outpacing wage growth, private consumption dropped 0.7% QoQ, while capital expenditure slipped 0.8%.
Although Japan’s economy slipped into a contraction in Q1, the highest wage hike in 30 years, weakening inflation, and growth in the services sector should help to boost domestic purchasing power and lift the economy back to growth from Q2 onwards. The Bank of Japan (BOJ) is increasingly concerned about the rapid slump in the value of the yen, but until the impacts of this on the economy become significantly more evident, the bank is unlikely to make any moves towards aggressive rate hikes. Given this, we see the BOJ keeping monetary policy accommodative until the impacts of the recent round of wage rises and recovery in the economy feed through into an extended strengthening of inflation that brings this back to the 2% target.
China
Increases to US tariffs on Chinese imports will have limited effects in the short-term. China’s manufacturing is expanding but consumption is slowing. Over 2024-2026, US tariffs on EVs, solar cells, lithium-ion batteries, and semiconductors will rise by 2 to 3.7 times their previous level. Domestically, industrial output expanded further by 6.7% in April, but the real estate sector continues to struggle. New house sales dropped 44.9% YoY in April, their 11th month of declines. Weakness in prices for new and existing homes also accelerated to -3.5% and -6.8%, respectively.
Exports of EVs and solar cells to the US are small compared to those to the EU, and so the short-term impacts of the latest round of US tariff hikes is likely to be restricted. Meanwhile, the government announced the refinancing funds with low interests worth USD 41.5 bn for selected state-owned enterprises to purchase excess housing supply. This measure may help to add some liquidity to the developers directly, but overall signs of recovery in the real estate sector remain elusive. Meanwhile, the low inflation rate is expected to persist due to excess supply and weak domestic demand. In April, retail sales grew by only 2.3%, the slowest growth since July 2023.
Thai economy in 1Q24 grew more than expected but overall growth remained weak. Confidence indices are declining in early 2Q24.
1Q24 GDP grew 1.5% YoY and 1.1% QoQ sa. Krungsri Research is reviewing our economic forecast. The NESDC officially reported that the Thai economy expanded 1.5% in 1Q24, above expectations by the market (+0.8% in a Reuters survey) and Krungsri Research (+0.7%). The growth slightly decelerated from 1.7% in 4Q23. The key factor driving growth in 1Q24 was stronger tourism sector which helped to boost private consumption (+6.9%) and exports of services (+24.8%). However, growth of goods exports turned negative (-0.2%) and public investment (-27.7%) also contracted sharply.
Thailand’s seasonally adjusted GDP in 1Q24 grew by +1.1% (QoQ sa), well above expectations by the market and Krungsri Research (+0.6% and +0.5%, respectively). This indicates the Thai economy has escaped a technical recession after recording a contraction (-0.4% QoQ) in 4Q23. During the rest of this year, the Thai economy should see a cyclical recovery with GDP growth on a year-on-year basis likely to improve from 1Q24 due mainly to (i) accelerating disbursement of public spending from 2Q24, particularly capital expenditures (after a 7-month delay in the budget bill), and (ii) further growth in the tourism sector. These would be tailwinds to drive the growth of domestic economic activity. However, we are reviewing our economic forecasts to reflect both the unexpected 1Q24 GDP growth and recent headwinds. It is noted that structural problems like lower competitiveness and high household debt, are increasingly capping Thai exports, private investment, and household consumption amid weaker business and consumer confidence. The drought impact will also pressure farm output and income. The NESDC has revised down its 2024 GDP growth forecast to a range of 2.0-3.0% from 2.2-3.2% in its previous forecast in February.
Consumer and industrial sentiment indices slipped at the start of 2Q24, reflecting the fragility of economic recovery. In April, the consumer sentiment index fell for the second month, slipping from 63.0 in March to 62.1 on consumer worries over slow economic growth and the ending of government subsidies for diesel, which is then allowing prices for this to rise. The Thai Industrial Sentiment Index also weakened from 92.4 in March to 90.3 as a result of soft domestic demand, the tightening of purse strings by consumers, and worries over the impact on costs of rising diesel pump prices and concerns over the government’s plan to raise the daily minimum wage to THB 400 nationwide.
Although the passing of the budget bill at the end of April and the resulting uptick in disbursements will help to boost the economy through Q2, softening consumer sentiment is weighing on demand. In addition, the National Credit Bureau has recently reported that the outlook for both credit card debt and property loans has worsened significantly. As of 1Q24, the proportion of these classed as special mentioned (SM) loans (i.e., borrowers are behind on payments by between 30 and 90 days) has risen by respectively 32.4% YoY and 15.0% YoY. These are thus at elevated risk of becoming NPLs, potentially negatively impacting growth in consumer spending and adding to the already worrying situation with household debt.
For the latest development of the policy to increase the daily minimum wage to THB400 nationwide, the Tripartite Minimum Wage Commission recently has agreed to allow provincial committees to consider on a per-province basis over how much to raise the minimum wage, which professions should be eligible for the increase, and when this should be implemented. This consideration process should be completed by July.
