US economy is approaching ‘soft landing’. Japanese growth to recover further in 2H24. Recovery in Chinese manufacturing remains fragile.
US
The path to a soft landing is becoming increasingly for the US, though there remains a high uncertainty over the timing of rate cuts. Revised Q1 GDP data show growth of 1.3% QoQ annualized, down from initial estimates of 1.6% mainly due to weaker-than-expected consumption. In addition, real consumer spending dropped in April (-0.01% MoM). Headline and core PCE price index increased at the same pace as the previous month at 2.7% and 2.8% YoY in April, in line with market expectations.
The overall pace of economic growth is gradually slackening while the risk of inflation reigniting in 2H24 is limited by: (i) cooling and rebalancing labor markets, partly helped by the influx of immigrant labor; (ii) higher production capacity backed by easing supply chain disruptions; and (iii) confined war in the Middle East and its limited effects on global energy prices. These factors should help the US economy to achieve a soft-landing this year. Moreover, slowing growth and the easing of demand-pull inflation is reflected in the latest core PCE price index, which is now at its lowest since March 2021. We are therefore holding to our expectation that the Fed will cut rates 3 times this year, bringing the Fed Funds Rate to 4.50-4.75% by the end of 2024.
Japan
The BOJ is indicating that it stands ready to hike rates if yen weakness affects inflation direction. May Tokyo headline inflation rose to 2.2% YoY from 1.8% a month earlier, and core inflation also rose to 1.9% from 1.6%. In April, jobs-to-applications ratio slipped from 1.28 to 1.26. Retail sales growth also jumped from 1.1% to 2.4% YoY.
Japan’s economy is likely to recover further given the positive read on many indicators, including: (i) the Index of Leading Economic Indicators reaching the highest since August 2022 at 112.2; (ii) the Manufacturing PMI, which posted its first move into expansionary territory in a year at 50.5 in May; and (iii) April retail sales which expanded for the 26th consecutive month. Although an end of fuel subsidies in May could potentially heighten inflation, its medium-term effect on growth should be limited, given the positive impacts of recent wage rises, growth in consumption, the strength of the tourism sector, fiscal stimulus and structural reforms of the economy. Despite the Bank of Japan (BOJ)’s worries over the possible impacts of yen weakness, the effects on the economy will likely remain limited and so we see only a slight risk of the BOJ needing to implement aggressive rate hikes.
China
The IMF has revised up China’s GDP growth forecast in 2024, but its manufacturing recovery remains fragile. The IMF has raised its forecast for 2024 GDP growth from 4.6% to 5%, but with weaker productivity growth and the aging population, it sees GDP growth sliding to just 3.3% by 2029. Meanwhile, the private-sector Caixin survey showed the manufacturing PMI rising from 51.4 in April to 51.7 in May, reaching its highest level since June 2022. However, the official manufacturing PMI slipped into recessionary territory in May, falling from 50.4 to 49.5. Moreover, consumer sentiment remained 30% weaker than in the pre-Covid period.
The differences in the reports of manufacturing PMI reflect the sector’s fragile recovery and vulnerability to worsening trade tensions with the West as some manufacturers rely more on foreign markets to help offset weak domestic demand. Moreover, the latest data might underscore the limited positive impacts of current stimulus measures, particularly the trade-in program aimed at encouraging purchases of new machinery and electronic appliances, amid persistently weak consumer sentiment and the real estate slump, which continued to undermine economic growth.
Cyclical recovery is being undermined by structural problems. Plans for short-term stimulus measures may risk longer-term fiscal stability.
Thai economy has continued to recover through Q2, driven by tourism sector and domestic spending, but overall economic growth this year may underperform expectations. The Bank of Thailand (BOT) reports that in April, the economy continued to grow thanks to the improving performance of the services sector, which was itself lifted by increased income from tourism (+7.1% MoM sa) and a rise in the total number of foreign arrivals (+4.4%). Following declines in March, domestic demand is also up, with private consumption and investment rising by respectively +1.6% and +5.0%. Exports excluding gold climbed +4.8%, mirroring a +3.5% increase in industrial output. However, ongoing sluggishness and the rise in the cost of living (driven by higher pump prices) is undercutting consumer sentiment.
Growth continued through Q2 across a broader section of the economy thanks to the effects of cyclical factors, including recovery in the tourism sector and the increasing influence of public-sector spending. However, growth in exports remains sluggish due to structural problems in the manufacturing sector that cause Thai export growth to concentrate in low value-added products. This is partly a consequence of Thailand’s weakening competitiveness. A study by Krungsri Research has shown the post-Covid drop in growth of labor productivity to -1.6% (CAGR). This decline has become evident in many industries and contrasts strongly with pre-Covid average annual growth of +4.2%. In addition, private consumption will come under pressure from high levels of household debt through the rest of 2024, and the adverse effects of the drought on farming incomes. Hence, we have revised down our 2024 economic growth forecast to 2.4% from 2.7% in the previous forecast.
The latest medium-term fiscal plan reflects that Thailand's fiscal stability faces increasing risks. At a cabinet meeting held on 28 May 2024, the government agreed to increase budget expenditure for fiscal year (FY) 2024 by extending the budget deficit from THB 693bn to THB 805bn. This will be used to fund the government’s digital wallet policy, which it hopes will provide additional stimulus to the economy. Fiscal plans for FY2025-2028 have also been revised, most importantly with regard to the downward revision in GDP forecasts, which have been cut in line with the downgrade to the 2024 outlook from growth of 2.7% to 2.5%.
The review of the medium-term fiscal framework and the expansion in FY2024 government budget expenditure from THB 3.48trn to THB 3.60trn will push the deficit to 4.3% of GDP this fiscal year and then to an historic high of 4.5% in FY2025. As such, public debt will jump from the current 63.7% of GDP (as of the end of March 2024) to 65.7% in FY2025 and then to a record high of 68.9% in FY2027, bringing the debt-to-GDP ratio to close to the 70% ceiling set by the government. The medium-term fiscal plans thus reflect that short-term stimulus for the economy will come with a surge in the debt burden, which will adversely affect the country’s fiscal stability, reduce policy space, and limit policy makers’ ability to successfully manage economic risk in the future. In addition, the weaker fiscal position may result in a downgrade to the country’s credit rating.
