Manufacturing activities in major economies weaken on soft demand; rising trade tension may threaten global trade
US
Signs of a rate cut in September become clearer after the labor market slowed down and inflation showed progress towards the 2% target. In July, nonfarm payrolls increased by only 114,000, down from 179,000 in the previous month, marking the slowest increase since December 2021. The unemployment rate also rose to 4.3%, the highest level since October 2021, while growth of average hourly earnings decelerated to 3.6% YoY from 3.8% in the previous month.
The US central bank agreed unanimously to hold the Fed Funds rate steady at 5.25-5.50%, indicating that a rate cut is likely in September. Key economic indicators suggest possibility of at least two rate cuts in 2024, including: (i) the continuing cooling of housing markets; (ii) the rise in unemployment to its highest level since October 2021; (iii) a drop in the ISM Manufacturing PMIs to a 7-month low and (iv) softening household consumption and consumer sentiment. Meanwhile, officials have said that hikes in tariffs on Chinese battery EVs, computer chips and medical goods will be delayed by at least 2 weeks beyond their planned enforcement date of 1 August. The new rules will come into force some 5 weeks after their initial announcement.
Japan
The BOJ raised interest rates and announced a reduction in monthly bond purchases by half. In July, the Manufacturing PMI turned to contraction territory for the first time in 6 months at 49.2, while the Services PMI turned to post an expansion at 53.9, the highest level in 4 months. Sales reports from major retailers grew by 7% YoY in June, marking the third consecutive month of growth.
The Bank of Japan (BOJ) decided to raise the benchmark interest rate by 15bps to 0.25% and announced a reduction in bond purchases for January-December 2025 to half the current level, targeting 3 trillion yen per month. Meanwhile, the GDP forecast for 2024 was revised down to 0.6% from the previous 0.8%, and the core inflation forecast was also lowered to 2.5% from 2.8%. This adjustment follows signs of slower-than-expected economic growth in Q2, driven by weak private consumption and continued slowdown in the Manufacturing PMI. However, Krungsri Research anticipates that Japan's economic growth will gradually improve in the second half of the year, supported by wage increases, a recovery in tourism and exports, and rising business confidence among major corporations.
China
Chinese manufacturing contracted in early Q3, services grew slowest this year. Measures to boost consumption may have limited impact. The private-sector Caixin Manufacturing PMI slipped from 51.8 in June to 49.8 in July, moving into contractionary territory for the first time since October 2023. The official data also show the manufacturing PMI contracting for the 3rd month to hit 49.4, its lowest since February and down from 49.5 in June. Likewise, the official Services PMI grew at its slowest since November 2023 to drop from 50.5 to 50.2.
Leading indicators are pointing to a slowdown, with the Caixin survey showing export orders softening and new orders in manufacturing contracting at the start of Q3 following 11 months of growth. The official composite PMI shows growth in manufacturing and services at its slowest in 19 months. Looking forward, measures to boost consumption and interest rate cuts would have limited impacts since the former could affect a few parts of the economy (i.e., manufacturers of machinery and electrical appliances), and the latter run to just 10-20bps. Moreover, domestic and export orders are soft, the real estate sector remains mired in trouble, trade tensions are intensifying, and capital inflows are falling (over 1H24, FDI fell -29% YoY).
Economy continued to grow through Q2 amid pressure from structural headwinds; BOI data show investment improving in some industries.
Softening tourism and consumption fed into slower economic growth in June, but overall economy continued to recover in Q2. The Bank of Thailand (BOT) reports that in June, foreign tourist arrivals and receipts from these dropped by respectively -4.4% and -3.5% MoM sa. Private consumption growth also softened -0.2% on weaker purchases of durable automotive goods. Exports (ex. gold) also fell -0.7%. However, private investment grew by +0.6%, while government’s budget disbursements for investments and regular spending both improved.
Relative to Q1, overall economic conditions improved in Q2 (April-June) on the continuing recovery of the tourism sector, which then boosted services generally and lifted employment and consumption. Moreover, after 7 months of delays, the passing of the FY2024 budget bill also boosted public spending. Krungsri Research expected Q2 GDP to grow by +0.7% QoQ sa and +1.8% YoY (compared to Q1 growth of +1.1% QoQ sa and +1.5% YoY). Data on Q2 GDP growth is due to be published on 19 August. For the remainder of the year, structural issues in manufacturing sector will weigh on growth in exports and so some businesses and households will remain exposed to risk. This will likely then drag on private consumption, which is already struggling under a -1.2% YoY drop in 5M24 average wage for the whole country. These difficulties will then be further compounded by ongoing problems with high levels of household debt.
The value of applications for investment promotion jumped 35% over 1H24, but other indicators show that a recovery in overall investment remains weak. The Board of Investment (BOI) reports that over 1H24, 1,412 applications for BOI incentives were received (+64% YoY) with a value of THB 458.4bn (+35% YoY). The targeted industries recoding the most investments were led by electronics &electrical appliances (THB 139.7bn), automobiles & parts (THB 39.9bn), agriculture & food processing (THB 33.1bn), chemicals & petrochemicals (THB 25.3bn) and digital industries (THB 25.1bn). Applications for BOI privileges for Foreign Direct Investment (FDI) came from 889 projects (+83% YoY) valued at THB 325.7bn (+16% YoY). The most important sources of these funds were led by Singapore, China, Hong Kong, Japan and Taiwan.
The mid-term outlook for investment is improving in some targeted industries and this is reflected in the 1,451 projects valued at THB 476.3bn (+27% YoY) that have been approved for BOI privileges in 1H24, led by investment in electronics & electrical appliances. Certificates of investment promotion have also been issued for 1,332 projects with a value of THB 438.7bn (+87% YoY), and these are a key indicator of actual investments that can be expected over the next 1-2 years. However, the Private Investment Index rose just 0.6% YoY in 1H24, the Manufacturing Production Index slipped -2.0% YoY, the production capacity utilization rate is below 60%, and in July, the Business Sentiment Index fell to its weakest since October 2021. This was driven principally by weakness in the manufacturing sector, indicating that that private investment would remain soft. In addition, the Constitutional Court is due to deliver a verdict on the dissolution of the Move Forward party on 7 August, and a week later, a judgement is due on the suitability for office of PM Srettha Thavisin. The domestic political environment is thus uncertain, and it remains to be seen what impacts this will have on sentiment and investment.
