Cooling US and Eurozone economies open the way to rate cuts this year. China has no signs of recovery in the real estate sector.
US
The US labor market is showing clearer signs of a slowdown while the risk of recession remains low. Fed Chair Powell indicated at the annual Jackson Hole meeting that with inflation easing and labor markets cooling,“time has come” for interest rate cuts. In August, the Composite PMI edged down from 54.3 in July to 54.1 on a fall in the Manufacturing PMI to an 8-month low of 48. However, the economy is still growing, as reflected by the services PMI rising to 55.2. In addition, existing home sales rose by 1.3% MoM in July and new home sales increased by 10.6%.
The US economic slowdown became more apparent after July's employment numbers showed the slowest growth in two and a half years. Additionally, the US Department of Labor revised down nonfarm payroll numbers from April 2023 to March 2024 by 30% or 818,000 fewer jobs than originally reported, the biggest downward revision since the 2008 financial crisis. However, the chances of a recession remain relatively low due to expanding consumer spending, positive employment figures, and growth in the services sector. Furthermore, the upcoming US presidential election later this year and the Fed’s potential rate cuts are anticipated to help mitigate recession risks going forwards. Krungsri Research expects the Fed will gradually cut the policy rate 3 times this year, by 25bps each, thus bringing the rate to 4.50-4.75% by the end of 2024.
Eurozone
Against a backdrop of rising uncertainty, Eurozone growth remains sluggish. Headline inflation inched up from 2.5% in June to 2.6% YoY in July, while core inflation remained unchanged at 2.9%. August’s Composite PMI strengthened from 50.2 to 51.2 on the back of a rise in the Services PMI to 53.3, up from 51.9 a month earlier. However, at 45.6, the Manufacturing PMI remained in recessionary territory.
Eurozone GDP in the second quarter showed signs of recovery, but growth remained weak and fragile, reflecting the varied economic performance among key member countries. Spain and France saw slight growth, while Germany contracted due to a slowdown in manufacturing and construction. This suggests that in the second half of the year, the Eurozone economy may continue to face multiple challenges, such as weak manufacturing and increasing trade tensions with China. Consequently, these factors, along with slowing inflation, are expected to lead to further interest rate cuts by the European Central Bank (ECB) later this year. Krungsri Research expects that the ECB will lower rates two more times, bringing the policy rate to 3.25% by the end of the year, down from the current 3.75%.
China
Depressed property markets continue to drag on Chinese economy. Despite a slight improvement during April-June, new home sales by the top 100 developers contracted deeper from -17% YoY in June to -19.7% in July. Average prices of new and existing homes in 70 cities declined faster from -4.9% to -5.3% and from -7.9% to -8.2%, respectively. Declines in prices for new homes fell fastest in tier-3 cities (-5.9%), while for existing homes, the fall was sharpest in tier-1 locations (-8.8%). Major developers such as Country Garden and Vanke, are also facing liquidity risks, debt defaults, or liquidation. Meanwhile, rules on minimum prices for new homes are being relaxed or lifted in many areas, and the central government is considering allowing the local governments to issue more bonds to fund purchases of excess housing stock.
The lack of clear improvement in the property sector reflects the limited positive impact of the recent stimulus measures and weak confidence. Easing price guidelines could cause further declines in new home prices for a while but, in the long term, supply and demand should become more balanced. Meanwhile, efforts to buy additional stock (began in May) are making slow progress, and expanding these programs through greater bond issuance may add to fiscal risk. We thus see new home sales and prices to decline further through 2H24, though stimulus measures may slow the pace of contraction.
MPC may leave policy rate unchanged through 2024. Changes to digital wallet policy likely to facilitate initial payments this year.
The MPC has decided by a majority vote to maintain policy rate, citing the economy is performing as expected, though the worsening credit quality requires ongoing monitoring. With the economy on track to meet forecasts, the Monetary Policy Committee (MPC) voted 6 to 1 to keep policy rates at 2.50% at its 21 August meeting. Growth continues to be driven by the strength of the tourism sector and by domestic demand, helped further by a gradual recovery of exports and industrial output. Inflation is also expected to return to the target range by the end of 2024. The majority of committee members have thus taken the view that policy rates are in line with current trends and the return of the economy to its growth potential, and that leaving the rate at 2.5% will help to maintain economic and financial stability. Nevertheless, one member proposed a 25bps cut to provide relief to debtors and to better align the policy rate with Thailand’s lower potential growth as a result of structural challenges.
In light of the MPC’s positive outlook, its expectation that GDP will grow by close to 3% YoY in Q3 and then by 4% in Q4, and the return of the mid-term inflation rate to the 1-3% target range (up from the 7M24 average of 0.11%), we expect that policy rate will remain at 2.50% through the remainder of 2024. However, the MPC has raised concerns over several issues and these will need to be tracked closely. These include the effects of tighter monetary conditions and the impact of worsening credit quality on the financial sector and the economy overall, in particular as this relates to more exposed borrowers and businesses that are still seeing only sluggish growth. That said, Krungsri Research expects the committee will closely monitor (i) the impacts of tightened financial conditions and deteriorated credit quality on the real economy and (ii) sluggishness in public and private investment. These are expectedly crucial factors in determining monetary policy going forward.
It is increasingly probable that the new government will make changes to its flagship digital wallet policy, and this year, payments will likely be targeted at the most vulnerable parts of society. According to Thaksin Shinawatra, ex-prime minister and father of the current PM Paetongtarn Shinawatra, payments totaling THB 145bn, which will be funded by additional FY2024 budget worth THB 122bn and over THB 20bn from central government budget, may now be made directly to welfare cards’ holders. This would then allow the authorities to target the 14.5m individuals currently most in need of financial help.
Following Thaksin Shinawatra’s recent comments, PM Paetongtarn Shinawatra announced that details of changes to the digital wallet scheme will be made in September’s presentation to the legislature of the new government’s policy agenda. The secretary of the MPC, Dr. Piti Disyatat, has said that the BOT is closely tracking changes to this policy, in particular the decision to switch from a digital wallet to cash payments for at-need groups. In the view of the MPC, the total value of payments may have been reduced though the stimulus effect of cash handouts is likely to be greater. Krungsri Research believes that this revised policy could be implemented, not least because the THB 122bn in additional funding has already been announced in the Royal Gazette, and this must now be used before the end of this fiscal year (by September 2024). However, it is still necessary to monitor the clarity of adjustments in the structure, conditions, and the allocated budget for the program, as well as the timeline for implementation. This will enable a clearer assessment of the potential economic impacts in the period ahead.
