US economy shows signs of slowdown. Eurozone faces risks from Chinese trade retaliation. China’s consumption growth remains weak.
US
US housing market is showing clearer signs of slowing down, supporting the chances of the Fed’s rate cuts this year. In May, retail sales grew 2.27% YoY, decelerating for the 3rd consecutive month. At the same time, housing starts contracted by -5.5% MoM to 1.27m units, the lowest level since July 2020, while building permits fell by -3.8% MoM to 1.38 million units, the lowest since June 2020.
May’s slump in building permits and housing start to a near 4-year low is partly a result of long-restrictive level of interest rates with 30-year mortgages rate staying at a 22-year high of 6.8%. This is in line with sales of new and existing homes that have continued to decline since 2022, when the FED started the first rate hikes. Added to this, signs of a slowdown in the US economy can also be seen in: (i) weaker GDP growth in Q1; (ii) contraction of real consumer spending and manufacturing output; and (iii) the slide in ratio of job openings to unemployment to 1.24, close to its pre-Covid level. Given the above, we are maintaining our view that two rate cuts are possible later this year.
Europe
Worsening trade tensions are adding to uncertainty over the Eurozone’s growth track through 2H24. At 50.8, June’s Eurozone Composite PMI spent its 4th month in expansionary territory, although the index was down from 52.2 in May due to a slump in the Manufacturing PMI to a 6-month-low and a dip in the Services PMI to 52.6 from 53.2. However, the ZEW Economic Sentiment climbed to 51.3 in June, its 9th month in positive territory and its highest since July 2022.
Major indicators are pointing to ongoing recovery from the lows of 4Q23: (i) The Composite PMI expanded for the 4th consecutive month; (ii) the ZEW Economic Sentiment is at a 23-month high; and (iii) retail sales have strengthened for the past 2 months. However, an escalating trade war with China may affect the recovery outlook of the Eurozone, especially in target industries in the next period. The most recent sign of approaching danger is the move by China’s Ministry of Commerce to launch an anti-dumping investigation aimed at certain pork products from the EU (annual exports of pork to China from the EU are worth more than USD 3bn, or around 0.5% of all EU exports to China).
China
Consumption, production, and investment all remain exposed to risk, while property crisis continues to undermine China’s economy. May retail sales grew by just 3.7% YoY, up slightly from April’s 8-month low of 2.3%. Even though sales of electrical appliances surged 145% in the latter half of May, sales of some key items remained sluggish. Expansion in industrial output and fixed assets investment underperformed market expectations, decelerating from 6.7% YoY in April to 5.6% May and 4.2% to 4%, respectively. Prices for new and existing homes in 70 cities have continued to decline for two years, with rates accelerating from -3.5% to -4.3% and from -6.8% to -7.5%.
The improving but still weak retail sales figures reflect limited positive impacts of the trade-in programs that aimed to stimulate purchases of new electrical appliances and machinery. Moreover, production and investment in some industries may face risks when this stimulus program ends and trade tensions escalate. In the real estate sector, the decline in new home sales has slowed and prices may slightly improve in 2H24 following government stimulus efforts. However, the supply glut would continue to pressure home prices.
May exports benefit from a rebound in agricultural yields. Structural headwinds expected to weigh on manufacturing sector through 2024.
Export figures beat market expectations in May, but we trimmed our 2024 export growth forecast to just 1.8%. The Ministry of Commerce reports that following growth of 6.8% in April, the value of exports jumped 7.2% YoY in May to hit a 14-month high of USD 26.2bn, outperforming market expectations of a 1.9% expansion. Excluding gold and oil from the calculations, exports grew by 6.5%. Product categories that performed well include fresh, chilled, frozen and dried fruit (+128%), rubber (+46.6%), computers and computer equipment (+44.4%), and fax machines, telephones, equipment and parts (+110.7%), while export contractions were seen in autos, equipment and parts (-2.1%), electronic integrated circuits (-11.9%), rice (-4.5%), and sugar (-46.1%). For export destination, an expansion was seen in exports to the US, China and the CLMV nations, while exports to Japan, the EU and the ASEAN-5 posted a contraction. Over 5M24, export growth averaged 2.6%.
May’s jump in export value is partly attributable to a rise in agricultural yields and the resulting 36.5% YoY surge in exports of agricultural goods. Unfortunately, the outlook is less positive for the remainder of the year, and the export sector will have to contend with the structural problems that now trouble the manufacturing sector, the significance of which is reflected in a range of worsening industrial indicators. These include the -2.0% contraction in the Manufacturing Production Index through 4M24, and the 3rd month of declines in the Thai Industries Sentiment Index to a 7-month low of 88.5 in May, and the weak Manufacturing PMI at 50.3. In addition, Thailand’s labor productivity is worsening in many industries. Rising trade tensions between the US and China are adding to the risk as the US may decide that Thailand and other ASEAN countries are acting as production bases for Chinese businesses and then act accordingly. In light of these gathering headwinds, we trimmed our forecast for 2024 growth in export value from 2.5% to just 1.8%.
Thailand’s competitiveness is improving, but this is largely explained by cyclical factors. Thailand’s placing in the 2024 IMD World Competitiveness Yearbook has improved, climbing from 2023’s 30th place to 25th and moving from 3rd to 2nd place in the ASEAN region (after only Singapore, which is in 1st place both within ASEAN and globally). Competitiveness is assessed across four areas: (i) economic performance, for which Thailand has risen from 16th to 5th place; (ii) business efficiency, up from 23rd to 20th; (iii) government efficiency, unchanged at 24th; and (iv) infrastructure, unchanged at 43rd.
Although Thailand’s competitiveness has improved this year, this is mostly a result of the impact of cyclical improvements in economic performance, including rising income from tourism, the current account surplus, and higher employment. However, structural factors related to business and government efficiency, and improvements to the state of national infrastructure have at best been limited, and in key items no change at all has been recorded. Thus, when the positive impacts of these cyclical factors weaken, Thailand’s ranking could worsen again, especially in the absence of concerted efforts to make improvements in other areas. In particular, Thailand’s infrastructure ranks only 43rd out of the 67 countries assessed and so there is considerable room for improvement here.
