Two rate cuts expected in the US this year; Inflation risk may prompt BOJ to hike rates this year; Chinese recovery still patchy and fragile
US
The US economy remains strong, but growth momentum is dissipating. A recent stress test of the banking sector confirmed that 31 major commercial banks are capable of weathering the challenges resulting from a severe global recession. However, other data are less positive, with 1Q24 GDP growth down to 1.4% QoQ from 3.4% in 4Q23 and consumer sentiment softening in June. Moreover, in May, house prices growth slowed down for the 3rd month, new home sales dipped to a 5-month low, headline PCE slipped from 2.7% YoY to 2.6%, and core PCE slowed from 2.8% to 2.6%.
Major indicators including 1Q24 GDP, real consumption, consumer sentiment, household savings (now at a 15-month low), new home starts and sales, unemployment, and PCE inflation all provide clearer evidence of a US slowdown. Also, premised on uncertainties over the direction of economic policy following the November presidential elections and the ongoing risk of a US-China trade war, growth momentum could weaken further through 2H24. So, we are holding to our view that to reduce the risk of recessionary conditions, the Fed may cut policy rates twice before the end of the year.
Japan
With inflation climbing up and the yen at its weakest in 37 years, the BOJ is now expected to hike rates in the second half of the year. Retail sales grew 3% YoY in May, up from 2% growth a month earlier, while in June, headline and core inflation in Tokyo accelerated from respectively 2.2% YoY to 2.3% and from 1.9% to 2.1%.
Indicators are pointing to ongoing recovery in Japan: (i) retail sales have grown for 3 months alongside the return to growth of household spending for the first time in 14 months; (ii) exports have enjoyed the strongest rate of expansion since November 2022; and (iii) the tourism sector has continued to recover through 2H24. The economy is thus gradually strengthening, and with the recent round of wage rises, the expiry in May of fuel subsidies, and the yen sliding to a 37-year low against the US dollar, there is a risk of inflation climbing up through 2H24. The Bank of Japan (BOJ) will likely then find it necessary to unwind the ultra-loose monetary policy, and so we expect that the bank will raise policy rates by 10-15 bps in the second half of the year, bringing these to 0.20-0.25%.
China
China’s industrial profit growth slipped, while government stimulus for the real estate sector bears some fruit. Growth in industrial profits crashed from 4% YoY in April to just 0.7% in May despite exports beating expectations to grow 7.6%. Profits in the first five months of some manufacturing sectors remain solid (e.g., equipment (+11.5%) and consumer goods (+10.9%)). However, profits have slumped in upstream industries (e.g., mining (-16.2%) and raw materials (-15.1%)). In the real estate sector, Beijing local government announced a cut in the down payment ratio for first and second-home buyers. Meanwhile, in Shanghai, where similar changes have already been made, new home sales increased by 8% during the first 23 days of May.
Data on industrial profits reflect the unevenness and fragility of the recovery. Although many parts of the economy have benefited from stronger exports and government stimulus measures encouraging sales of machinery and electrical appliances, upstream manufacturers are struggling under excess supply and a real estate slump. Nevertheless, upstream industries may recover somewhat following expected improvement in real estate activities in 2H24, aided by government measures to stimulate housing demand and encourage purchases of unsold homes.
Growth uneven across the economy; demand boosted by cyclical recovery but structural issues dragging on manufacturing and employment
In May, the Thai economy benefited from ongoing growth in the tourism sector and an acceleration in government spending. The Bank of Thailand (BOT) reports that although economic conditions continued to improve in May, the pace of growth has slackened. Services were a core driver of this, in particular the tourism sector, for which income rose 4.1% month-on-month (MoM) sa on the back of a 9.2% increase in foreign tourist arrivals. The economy also benefited from the passing of the FY2024 budget at the end of April and the resulting increase in both regular disbursements and spending on investment projects. Less positively, private consumption edged up by just 0.3%, private investment contracted -3.0%, export value excluding gold slipped
-1.7%, and industrial output inched down -0.6%.
Data for the first 2 months of 2Q24 show that the economy is recovering but that growth is patchy and fragile. This is partly due to structural problems that are depressing manufacturing production, business investment, and household consumption. Through the rest of the year, growth will be dependent on cyclical factors, in particular on the rebound in the tourism sector and an acceleration in government disbursements. Against this, Thailand’s declining competitiveness means that exports are expected to grow only slowly, and this will then have knock-on effects on employment and income in the manufacturing sector. In turn, this has the potential to amplify the negative effects on private consumption of the current high levels of household debt.
Although manufacturing output has likely passed through this cycle’s low point, deep-rooted structural problems mean that recovery remains fragile. The Office of Industrial Economics reports that the Manufacturing Production Index (MPI) contracted again in May, declining -1.5% YoY. This was a consequence of slowing output in major industries that included: (i) automotives, where weak domestic purchasing power and tighter lending conditions have fed into a 10-month run of declines; (ii) electronic components and boards and (iii) manufacturers of concrete, cement and plaster, which have been hurt by high inventories and slowing orders. Overall, the MPI is now down -2.1% over 5M24.
The return of the MPI to contractionary territory following April’s 3.4% expansion (the first in over a year and a half) underscores the fact that despite the sector now being through the worst, the recovery is still fragile. The BOT notes that given their distinct exposure to cyclical and structural factors, rates of growth may vary strongly between different parts of the economy. Generally, industries largely impacted by cyclical factors (e.g., the food and beverage, petroleum, and air conditioning industries) are enjoying stronger growth in demand, whereas the automotive industry is being hit by a mixture of cyclical and structural issues that include growth in demand for EVs but also intensifying competition. For industries primarily exposed to structural factors (e.g., HDD manufacturers, players in textiles and apparel, producers of petrochemicals, and companies active in primary metals), growth will remain sluggish. The differing outlook for these industries will naturally have varying impacts on workers’ income growth. At present, 6.3m individuals are employed in manufacturing industries, accounting for around 16% of total labors.
