ECB prepares to cut interest rates in June. Global trade under threat from new US tariffs. China considers retaliatory measures
US
The Fed adopts a data-dependent approach, expecting to cut rates after there is stronger evidence of a slowdown of inflation. US President Biden has announced that a raft of new duties will be imposed on Chinese imports with the twin aims of raising tax revenue and protecting American manufacturing industries. For the latest economic data, May’s Composite PMI climbed to a 25-month high of 54.4, while the Services PMI also rose to 54.8, its highest in a year. However, Consumer Confidence Index slipped to 69.1, its weakest in 6 months.
The FOMC minutes showed that in the absence of stronger evidence that inflation is cooling and is on track to hit the 2% target, the majority of committee members remain opposed to making rate cuts in the immediate future. Although the latest PMI print was stronger than expected, overall economic growth is slowing, and labor markets are loosening. With wage rises easing, demand-pull inflation should cool. This will then open the way for the US to start the next cycle of rate cuts. We see the Fed beginning to reduce interest rates at its September meeting, with 3 cuts possible this year. This would then bring the Fed Funds Rate down to 4.50-4.75% by the end of 2024.
Eurozone
The ECB president has said that inflation is softening in line with ECB forecasts and so rates are likely to be cut in June. In May, the Eurozone Composite PMI edged up to an 11-month high of 52.3, helped by ongoing strong growth in the service sector that offset persistent weakness in manufacturing.
The outlook for the Eurozone is improving but growth will likely remain sluggish through to mid-year. Also, core inflation dropped from 2.9% YoY in March to 2.7% in April. Hence, there is now space for the European Central Bank (ECB) to consider rate cuts. President Christine Lagarde has thus recently indicated that given the cooling of inflationary pressures and the expectation that price rises will fall back into the 2% target range in the second half of the year, rate cuts could be expected next month. We are therefore maintaining our view that the ECB will act ahead of the Fed (which is expected to delay rate cuts until September) and will instead announce its first reduction in policy rates at its June meeting, with the benchmark rate potentially ending the year at 3.75%.
China
China signals to retaliate with tariffs on EU and US goods. The US announced to hike duties on Chinese goods, and so from 1 August, these will rise from 25% to 100% for EVs, from 7.5% to 25% for EV lithium-ion batteries, and from 0-7.5% to 25-50% for medical devices. Tariff increases from 25% to 50% for semiconductors and from 7.5% to 25% for non-EVs lithium-ion batteries will be introduced on 1 January 2025 and 2026, respectively. China has responded to the EU and the US with an anti-dumping investigation into polyformaldehyde (POM), an engineering plastic used in the production of autos, electronic goods, and medical devices. Moreover, China signaled its intention to increase tariffs on large automobiles from 15% to 25% in response to the EU's anti-subsidy investigation into Chinese EVs, which will conclude on 5 June.
China's recent actions aim to exert pressure on the EU, which could have significant impacts if China raises import tariffs on large automobiles. This move also signals the potential for future tariff retaliation between China, the US, and allied nations, possibly intensifying and spreading to upstream industries, particularly critical minerals used in electronics, where China is one of the major player. Ultimately, this could significantly increase global production costs.
Recovery of Thai exports and investment faces several headwinds and challenges, including structural problems and political uncertainty
Although export value returned to growth in April, continuing structural problems within Thai manufacturing will drag on the recovery. The Ministry of Commerce reports that having contracted 10.9% in March, export value bounced back to growth of 6.8% in April, thereby climbing to USD 23.3bn. Excluding gold and oil, exports grew by 11.4%. The largest gains were reported for rice (+91.5%), computers and computer equipment (+62.0%), machinery and parts (+58.8%), rubber (+36.2%) and autos, auto equipment and auto parts (+20.4%). However, declines were seen in exports of fresh, chilled, frozen and dried fruit (-29.8%), integrated circuit boards (-9.2%), and sugar (-9.1%). Exports to the US, the EU, the ASEAN-5 and the CLMV nations saw the expansion, while exports to China and Japan contracted. During the first 4 months of this year, export value is up just 1.4%.
Although export growth turned positive in April, monthly export value in the first 4 months has averaged USD 23.6bn, down from a monthly average of USD 23.7bn in 2023. Over the rest of this year, structural problems within the manufacturing sector are expected to continue to weigh on export growth. This is reflected in the 18-month contraction in the Manufacturing Production Index and further weakness in Thailand’s Manufacturing Purchasing Managers' Index (PMI), which in April spent its 9th month below the key 50-point waterline and thus in contractionary zone. This is in contrast to both the global and ASEAN Manufacturing PMIs, which remain above 50, indicating expansionary conditions. In addition, the new export orders component of Thailand’s Manufacturing PMI is at its lowest in more than 3 years, pointing to the weaker competitiveness in Thai industries and their weaker ability to respond effectively to demand in the global market. Exports will therefore likely remain weak through 2024, and export growth this year may be lower than our 2.5% forecast.
Foreign investments in Thailand expanded by more than 40% over 4M24, led by inflows from Japan. The Ministry of Commerce reports that as per the 1999 Foreign Business Act, 253 applications (+17% YoY) for business licenses to operate in Thailand were granted, these having a combined value of THB 54.96bn (+42%). The most important originating nation by far was Japan (63 companies with total investments of THB 34.06bn), followed by Singapore (42 companies, THB 4.50bn), the US (41 companies, THB 1.15bn), China (20 companies, THB 2.87bn) and Hong Kong (11 companies, THB 1.02bn).
foreign investments have been gradually improved with investment value rising for 4 consecutive months to THB 19.06bn in April, almost double 2023’s monthly average of THB 10.63bn. Through 2024 to date, Japan has been the most important source of foreign investment, accounting for 62% of all investment inflows to Thailand. Japanese investments grew 143% from the same period last year, led by advertising business, quality control of electronic components, metal coatings, digital content creation (e.g., animators), and contract manufacturing services (e.g., aluminium forging, automobile parts and other metal parts). However, at the same time, foreign investments from Singapore, the US and China have contracted by 7%, 33% and 64% YoY, respectively. This reflected Thailand’s increased reliance on capital inflows from a smaller number of sources. Moreover, the domestic political situation has become somewhat more uncertain following the Constitutional Court’s decision to accept a case involving alleged wrongdoing by Prime Minister Srettha Thavisin. This could result in the Prime Minister having to leave office, but it will take months for a judgement to be reached and in the meantime, uncertainty will undercut sentiment and threaten the investment climate.
