Market volatility and threats to the economy add to central banks’ cautiousness; China’s spending and housing indicators remain weak
US
The US economy is signaling a slowdown, but a recession is not expected this year. In July, housing starts dropped by 6.8% MoM to 1.23 million units, and building permits fell by 4% MoM to 1.39 million units. Both figures were lower than analysts’ expectations. Additionally, the headline inflation slowed to +2.9% YoY, the lowest since March 2021, while the core inflation eased to 3.2%, the lowest since April 2021.
Despite strong signs of a slowdown, there are no definitive signs of a recession in 2H24. Positive factors include growth of retail sales, a rise in non-farm payrolls, expansion in the service PMI, elevated housing prices, and an expected 2.9% QoQ annualized growth in 3Q24 GDP. Furthermore, consumer confidence in August rose to 67.8, above the market expectation of 66.9, with consumers expecting inflation to remain at 2.9% next year, unchanged from July. Additionally, the upcoming US presidential election later this year will be a key factor in determining the economic direction for 2025. Krungsri Research maintains view that the Fed is likely to cut the benchmark rates by a total of 75 bps this year, 25 bps each, to 4.50-4.75% by the end of 2024.
Japan
Turbulence in financial markets and the unwinding of the yen carry trade may affect the BOJ’s plans for rate rises the rest of this year. In 2Q24, Japan's economy grew more than the market's expectation at 0.8% QoQ and 3.1% YoY, following contractions of -0.6% and -2.3% in Q1, respectively. This aligns with the BOJ's forecast that private spending will help stimulate the economy, potentially leading to further rate hikes in the future.
Hopes that recovery will extend through 2H24 have been boosted by the pick-up in growth momentum in 2Q24, improving private consumption amid wage hikes and slowing inflation, and the recovery of the service sector, particularly tourism. However, growth is expected to remain low due to weaknesses in manufacturing and exports, which may face escalating trade tensions. Krungsri Research estimates that due to financial market volatility and economic risk concerns, the BOJ may refrain from raising interest rates hastily, with the interest rates expected to be not exceeding 0.50% by the end of 2024. Additionally, the resignation of Prime Minister Fumio Kishida has increased political uncertainty, creating challenges for the BOJ in ending its accommodative monetary policy.
China
China’s consumption is edging up but remains weak. Home sales continue to decline. In July, retail sales grew 2.7% YoY and 0.4% MoM, up from June’s 14-month lows of 2% YoY and -0.1% MoM, respectively. Sales of automobiles and electrical appliances slowed from -6.2% YoY in June to -4.9% in July and -7.6% to -2.4%, respectively. However, the decline in new home sales by the top 100 developers worsened from -17% to -19.7%. Meanwhile, the average price of new and existing homes in 70 cities continued to decline, from -4.9% to -5.3% and from -7.9% to -8.2%, respectively.
Private consumption in 3Q24 would likely see a slow recovery and limited growth due to weak consumer sentiment (30.3% below pre-COVID levels in June) and continuing wealth declines, with no clear signs of recovery, especially in the property sector. A survey in 2Q24 also found that 61.5% of respondents preferred more savings, while only 13.3% favored more investments. However, the extension of subsidies for autos and electrical appliances purchases in July, totaling USD 41.5 bn might help boost consumption. We expect the government might stimulate home sales in 2H24 by further relaxing housing purchase regulations or lowering down payment ratios, which could help ease developers’ liquidity problem, reduce the risk of defaults, and slightly improve consumer confidence.
1H24 Thai GDP grew 1.9% YoY. Given this momentum and latest political development, we are likely to maintain our growth forecast at only 2.4%.
2Q24 Thai GDP grew by 2.3% YoY and 0.8% QoQ sa. Exports improved but private consumption slowed down and investment contracted. The NESDC reported that the Thai economy in 2Q24 grew by 2.3% YoY (compared to the expectations by consensus at 2.1% and and by Krungsri Research at 1.9%). This is improved from 1.6% YoY in 1Q24. The main reason of improving year-on-year growth came from (i) a modest rebound in goods exports and an expansion of services exports; (ii) a further expansion of private consumption despite a slowdown; and (iii) the return to growth in government consumption for the first time in two years. However, private investment and public investment contracted in 2Q24. Recently, the NESDC maintained its GDP growth forecast this year at 2.5% median. The range forecast has been narrowed to the range of 2.3-2.8% from 2.0-3.0% in the previous forecast.
The NESDC reported that the seasonally adjusted GDP in 2Q24 rose by 0.8% on a quarter-on-quarter basis (QoQ), which is close to the expectation by consensus (+0.9%) and Krungsri Research (+0.7%). However, this marks a slowdown from the 1.2% QoQ growth in 1Q24. For the 1H24, GDP expanded by 1.9% YoY. Looking ahead, Krungsri Research expects the Thai economy to continue its recovery in 2H24, with the tourism sector remaining a key driver, especially in 4Q24, which coincides with the high season. Additionally, the government is expected to increase its budget disbursement. However, private investment may recover at a slow pace as investors are adopting a wait-and-see stance regarding the political situation and the policy direction of the new government. Moreover, Thailand's export sector is under pressure from structural issues in the manufacturing sector, the economic slowdown of key trading partners, prolonged geopolitical tensions, and ongoing trade conflicts between the U.S. and China. Overall, Krungsri Research is likely to maintain our forecast for Thailand's economic growth this year at only 2.4%, awaiting domestic political development and economic policy direction.
Fears over a political vacuum have subsided following the rapid appointment of a new prime minister but the direction of the new government’s economic policy will be closely monitored. Last week, the Constitutional Court agreed 5-to-4 that Prime Minister Srettha Thavisin was guilty of a clear gross violation of ethics and hence he and the cabinet have been dismissed from office with effect from 14 August. However, on 16 August, the House of Representatives voted 319 for and 145 against (with 27 abstentions) to appoint Paetongtarn Shinawatra to the position of prime minister. Ms. Shinawatra is currently the leader of the Pheu Thai Party, the main party in the current governing coalition.
Our base case is that a new cabinet will quickly be appointed that includes representatives from across the current governing coalition, thereby ensuring that it continues to enjoy a two-thirds voting majority in the House of Representatives. This would then allow the government to push forward with key policies, enable budgetary disbursements to continue to be made without disruption, and help to ensure that the FY2025 budget (worth THB 3.75trn) is also not delayed. In this scenario, any impacts arising from the change may be limited. Nevertheless, it is still necessary to monitor how effective the new government's economic policies will be in supporting consumption, stimulating investment, and boost confidence, as this is a crucial factor for shaping the Thai economic outlook.
