Path to US and Eurozone rate cuts opened by cooling inflation; Chinese producer prices begin to recover on improving real estate sector
US
With inflation continuing to cool, markets are increasingly forecasting rate cuts for 2024. In June, headline inflation eased from 3.3% YoY in May to 3.0%, and considered on a monthly basis, this contracted -0.1% MoM, the first drop in 4 years. Likewise, core inflation softened from 3.4% YoY to 3.3% and from 0.2% MoM to 0.1%, its lowest level since April 2021.
June’s softening inflation reinforced the core message of Fed Chair Powell’s Semiannual Monetary Policy Report to Congress made over 10-11 July in underscoring: (i) the progress made over the past 2 years in bringing down inflation and taking some of the heat out of labor markets; and (ii) the Fed’s eagerness to avoid unnecessary damage to labor markets and the economy overall by moving on rates before inflation is back to the 2% target. Given the cooling inflation, slowing economic growth, and high level of real interest rates, we expect that the Fed will start a rate cut at its September meeting, with a second reduction possible in December. This would then bring the Fed Funds rate to 4.75-5.00% at end-2024, down from the current 5.25-5.50%.
Eurozone
Eurozone economy is slowing, while in France, a hung parliament is looking likely. Eurozone headline inflation softened from 2.6% YoY in May to 2.5% in June, while core inflation was steady at 2.9%. June Composite PMI slid from 52.2 to 50.9. Both the Manufacturing and Services PMIs softened, going from respectively 47.3 to 45.8 and 53.2 to 52.8. However, retail sales rose for the 3rd straight month by 0.3% YoY in May.
Although indicators (i.e., Q1 GDP, business sentiment and retail sales) point to improving conditions, growth will remain sluggish through 2H24. Manufacturing and Services PMIs worsened in June and there is a growing risk that trade tensions with China will intensify and drag on growth. Recently, China announced to launch an anti-dumping investigation aimed at EU certain products such as pork and brandy, as well as a possible increase in tariffs on EU large-engine cars. Meanwhile, the recent French election has resulted in a hung parliament, and this may lead to a minority government for the first time in French history, which could undermine political stability in the period ahead.
China
China’s prouder prices are improving while exports continue to grow despite worsening trade tensions. Headline inflation inched down from 0.3% YoY in May to 0.2% in June, while core inflation remained unchanged at 0.6%. Food price index slipped by -1.1%. Meanwhile, the decline in the Producer Price Index (PPI) slowed from -1.4% to -0.8%, its highest in 18 months. Raw materials PPI went up from 0.5% to 1.6% and the Mining and quarrying PPI turned from -1.2% to 2.7%. Export growth improved from 7.6% YoY in May to 8.6% in June, though, over 6M24, exports to the US increased just 1.5% and shrunk -2.6% to the EU.
Low inflation reflects fragile domestic consumption, whereas the rise in PPI is in line with the improving outlook for real estate markets observed over the past 3 months. The latter is due in part to stimulus measures, especially cuts to the minimum down payment ratios for home buyers. Moreover, recent hikes in EU and US import tariffs are still restricted in scope and so their impacts have been limited, allowing exports to make up for weakness in domestic demand, and this should continue to support growth for a while.
Growth momentum in consumption slowing on weaker sentiment; government revising digital wallet policy but details remain uncertain
There are signs of a slowdown in private consumption as June consumer confidence fell for the 4th consecutive month. The Consumer Confidence Index (CCI) dipped from 60.8 in May to a 9-month low of 58.9 in June. This was due to rising worries over: (i) increases in the cost of living that are a result of more expensive energy (i.e., electricity and transport fuels), itself partly a consequence of the ending of subsidies; (ii) slow economic recovery, which is then impacting incomes and purchasing power; and (iii) domestic political uncertainty.
The fall in the Consumer Confidence Index to its lowest level since October 2023 reflects the slowing growth in private consumption, despite having jumped 6.9% YoY in Q1. Through the rest of the year, consumption could be supported by: (i) the ongoing strength of the tourism sector and government efforts to boost tourism and spending in second-tier cities; (ii) the ending of the El Niño-induced drought and the positive impacts of this on agricultural incomes; and (iii) assistance from the government for vulnerable groups. Nevertheless, problems with high levels of household debt will continue to weigh on growth in consumption, with the Bank of Thailand reporting that as of the end of Q1 2024, this stood at THB16.37 trillion or 90.8% of GDP. Moreover, around a third of household debt is non-productive (e.g., credit card and personal loans) and so reducing the overall debt burden will be both difficult and time-consuming. In addition, around 900,000 workers are also employed in manufacturing industries troubled by structural issues.
The government has revised scale and funding sources for digital wallet policy, planned to to be proposed to cabinet at end-July. At a 10 July meeting, the Digital Wallet Steering Committee agreed a reduction to funding for the policy from a total of THB 500bn to THB 450bn. This will now be drawn entirely from the fiscal year 2024 and 2025 budgets, which will contribute respectively (i) THB 165bn (an additional budget of THB 122bn and THB 43bn from budget management) and (ii) THB 285bn (THB 152bn from additional budget and THB 132.3bn from budget management, e.g., from central government budget and unspent allocations). In addition, the committee extended the list of goods on which digital wallet funds cannot be spent to include electrical appliances, electronic goods, and communications devices (e.g., mobile phones).
Some progress may have been made on revising the funding arrangements for the digital wallet policy, but it remains to be seen what details will emerge. Discussions over the FY2025 budget are currently underway and the House of Representatives undertook the first reading of the budget bill in mid-June. This carries a total budget of THB 3.75trn and at THB 865bn, or 4.5% of GDP, this will impose the largest budget deficit in Thai history. In particular, the funding source of the THB 132.3bn in budget management remains opaque. Going forward, key dates will include 24 July, when the prime minister will reveal more details of the program, and 30 July, when the plan will be submitted to the cabinet.
