Fears over US recession recede somewhat but still rile financial markets; Chinese growth under threat from internal and external headwinds
US
US recession risk raises concerns in financial markets, but likelihood of a hard landing remains low, as reflected by the latest economic data. In July, the services PMI turned to expand at 51.4 vs 48.8 in June. Initial jobless claims last week fell by 17,000 to 233K, lower than analysts' expectations of 241K. Additionally, the Fed Atlanta's latest GDPNow model indicates that the US economy is expected to grow by 2.9% QoQ annualized in Q3, up from 2.8% in the previous quarter.
Key economic indicators such as home sales, manufacturing activity, consumer confidence, and unemployment, have signaled a clearer slowdown, which has led the market to expect the Fed to cut interest rates by more than 100 bps this year, following significant declines in US stock markets and bond yields due to recession concerns. However, the risk of a severe recession or a hard landing remains low. This is based on other economic data, such as housing prices, money supply, and consumption, which remain at high levels. Furthermore, the upcoming US presidential election at the end of this year may lead to additional economic stimulus. Therefore, Krungsri Research expects the Fed to cut rates by 75 bps this year, with the policy rate expected to be 4.50-4.75% by end-2024, down from the current level of 5.25-5.50%.
Japan
Japanese economic growth may improve in the second half of the year, but the BOJ's rate hikes are expected to proceed cautiously. In June, household spending continued to contract by 1.4% YoY. However, wages showed more positive signs, growing by 4.5% YoY, the highest since January 1997. Meanwhile, in July, the composite PMI for manufacturing and services showed an expansion at 52.5 from 49.7 in the previous month, supported mainly by continued growth in the services sector despite further contraction in manufacturing.
Japan's economy is likely to gradually recover in the second half of the year, driven by (i) rising wages in June, (ii) continued recovery in the services sector, particularly tourism, (iii) income tax cuts since June, and (iv) the government's resumption of electricity and gas price subsidies from September. However, economic growth would be low due to weak manufacturing and uncertain export conditions. Krungsri Research estimates that the likelihood of the BOJ continuing to raise interest rates in every meeting for the remainder of this year is relatively low, given the still-weak economic recovery and the high volatility in financial markets following the unwinding of yen carry trades and declining asset prices. This implies Japan's policy rate would not exceed 0.50% by end-2024.
China
China is facing pressure from internal and external risk factors, which may impact growth in the near future. Headline inflation edged up from 0.2% YoY in June to 0.5% in July, but core inflation moved against this to fall slightly from 0.6% to 0.4%. The producer inflation stayed flat at -0.8%. Meanwhile, export growth in July slightly slowed to 7% from 8.6%, while exports over the first seven months to the US and the EU grew by just 2.4% and contracted by 1.1%, respectively.
The persistence of low inflation coupled with the fragility of the manufacturing sectors and domestic demand reflects the risk that China’s economy is beginning to slow down, and the stimulus measures may not be sufficient. Additionally, the reliance on exports as a key driver of economic growth may also run into problems caused by the increasing risk of a slowdown in the US economy (China’s major trade partner) and the decision by many countries to tighten tariffs on imports from China. Given these challenges, the Chinese government will likely extend measures to stimulate consumption but still focus on specific parts of the economy or at-risk groups. There is also the possibility of a further reduction in policy interest rates later in the year after the rate cuts by just 10-20bps in July.
Inflation likely to return to the target range in Q4; BOT expected to hold the policy rate steady through 2024; consumer confidence still softens
Headline inflation edged up to close to the lower bound of the target range in July, and so the MPC is likely to leave the policy rate unchanged at its 21 August meeting. Headline inflation climbed up from 0.62% YoY in June to 0.83% in July on a combination of higher global crude prices, which then pushed up the domestic cost of gasoline and gasohol, and more expensive food, especially ready-to-eat meals and white and glutinous rice. Core inflation, which excludes raw food and energy prices, also rose from 0.36% to 0.52%. For the first 7 months of this year, headline and core inflation rates have averaged 0.11% and 0.42%, respectively.
Although July inflation edged up to close to the 1-3% target range, this may soften in August given the high baseline set in 2023. Nevertheless, headline inflation is on an upward trend that should return it to the target range during Q4. We still see this averaging 0.7% for the whole of 2024 with some volatility following (i) global oil prices given uncertain geopolitical tensions and (ii) domestic measures to maintain price stability in energy markets and to help consumers with their energy bills. Recently, this has included extending the THB 33/liter cap on diesel prices through to October.
For interest rate outlook, we expect the Monetary Policy Committee (MPC) to leave the policy rate unchanged at 2.50% at its 21 August meeting, and it is likely that these will then remain flat for the rest of the year given: (i) the expected rise in inflation towards the target range in Q4; (ii) the BOT’s view that the Thai economy is returning to its growth potential and that the current policy rate remains appropriate, in line with the BOT’s “outlook-dependent” stance; and (iii) the BOT’s worries about the structural issues affecting the manufacturing sector, increased international competition and high levels of household debt, which imply the need for targeted policies. In light of this, broad-based approaches such as policy rate cuts should not be an appropriate tool for supporting economic growth through the rest of 2024.
July’s consumer confidence fell for the fifth consecutive month, and with this now at an 11-month low, private consumption may be losing its growth momentum. The Consumer Confidence Index (CCI) fell from 58.9 in June to 57.7 in July due to rising consumer worries over: (i) sluggish economic growth; (ii) increases in incomes that have not kept pace with the higher cost of living; (iii) the risk of rising domestic political uncertainty; and (iv) the impact on pump prices of political tensions in the Middle East.
The decline in the Consumer Confidence Index to its lowest level since October 2023, indicates that having grown strongly in Q1, private consumption growth is likely weakening. This is in line with the BOT’s data which showed Private Consumption Index fell -0.2% MoM sa in June against a 0% change in May on weaker spending on durable goods. For the rest of this year, consumers could benefit from: (i) the continuing growth of the tourism sector and the enforcement of government measures encouraging greater spending in second-tier tourism destinations; and (ii) help with energy costs, including the promise to keep consumer electricity prices at THB 4.18/unit for the rest of 2024 and the extension in the THB 33/liter ceiling on diesel prices until October. However, consumption growth will be limited by high levels of household debt and a slow increase in real incomes that has only just returned these to their pre-Covid level. Moreover, while the authorities hope to begin making THB 10,000 payments during Q4, it remains to be seen how fast progress will be made on the government’s Digital Wallet policy.
