US likely to start rate cuts this month; Japan may hold off on rate rises; China struggling under impacts of fragile manufacturing sector
US
US cooling inflation has opened the way to Fed’s rate cuts in September. Consumer confidence in August increased for the first time after four consecutive months of decline, rising to 67.9 from 66.4 in the previous month. 2Q24 GDP grew by 3.0% QoQ annualized, surpassing market expectations of 2.8%. Consumer spending rose by 0.5% from the previous quarter’s +0.3%. The PCE price index came in slightly below market expectations, with the headline PCE price index increasing 2.5% YoY in July, and the core PCE price index rising 2.6%, matching June's increase.
The US economic growth is expected to slow down further into next year due to the impact of tight financial conditions, which could affect consumers’ debt repayment ability. This is reflected in the rising delinquencies on credit cards and auto loans, as well as the declining household savings rate. Additionally, the labor market has cooled, along with a continued slowdown in overall inflation, indicating a possible rate cut in September. It is expected that there will be three rate cuts this year, by 25bps each. Krungsri Research assesses that the Fed will reduce rates at a gradual pace as the recession risk remains relatively low.
Japan
Japan’s higher-than-expected inflation may not affect the BOJ’s interest rate outlook for the rest of the year. In August, Tokyo CPI increased by 2.6% YoY, higher than market expectations and up from July’s +2.2%. Core Tokyo CPI rose by 2.4%, accelerating from July’s +2.2%. Meanwhile, retail sales growth slowed to 2.6% from 3.8% in the previous month. Additionally, employment figures showed further signs of slowing in July, with the unemployment rate rising to 2.7%, the highest in 11 months, while the jobs-to-applications ratio slightly improved from 1.23 to 1.24, still near a two-year low.
Although Japan's inflation rose in August, the BOJ is unlikely to rush into raising interest rates in the near term due to (i) the ongoing weakness in Japan's economy, especially in manufacturing and exports facing potentially escalating trade tensions; (ii) limited inflationary pressures as energy subsidies are expected to be reinstated in September; and (iii) financial market volatility driven by concerns over the unwinding of yen carry trades, which continues to challenge the BOJ's efforts to exit its easy monetary policy in the short term. Therefore, Krungsri Research estimates that Japan's policy interest rate will not exceed 0.50% by the end of 2024 to maintain financial market stability while supporting economic growth.
China
Chinese manufacturing remains fragile, and the positive impacts of recent stimulus measures have been limited. The official manufacturing PMI contracted for the 4th consecutive month, falling from 49.4 in July to 49.1 in August. However, the Caixin manufacturing PMI returned to expand after hitting a 10-month low in July. Meanwhile, non-manufacturing PMI edged up from 50.2 to 50.3. Alongside this, the trade tension continues to intensify, with Canada recently announcing 100% additional tariffs on Chinese EVs (from 1 October) and 25% additional tariffs on Chinese steel and aluminum (from 15 October).
The weak manufacturing sector in August highlights the limited impact of subsidies for purchases of new vehicles and electronics, which have been extended from late July. Meanwhile, a range of headwinds continues to pressure the economy: (i) structural weaknesses in manufacturing amid excess supply; (ii) sluggish consumption given wealth losses from property slump, July consumer sentiment being 30% below its pre-Covid level, and a sharp rise in youth unemployment from 13.2% to 17.1%; and (iii) intensifying trade conflicts that could slow exports in the coming months. Therefore, achieving the 5% growth target may become more challenging unless additional stimulus measures are introduced later this year.
Tourism and exports helps to drive the economy in early Q3 but growth outlook remains uncertain amid several headwinds/constraints.
Improving overseas demand helped to support growth through July, but domestic sentiment remains weak. The Bank of Thailand reported that having slowed in June, the Thai economy picked up again in July on the improvement of overseas demand. Exports excluding gold rose 2.8% MoM sa, while receipts from tourism rose 4.4% despite a -0.4% drop in arrivals. Private investment also returned to growth of 6.0%, while private consumption remained largely flat (+0.2%). However, both business and consumer sentiment indices fell in July, partly due to worries over the sluggish growth of the economy.
Although domestic spending momentum may slow during the political transition and the installation of the new government, the overall economy will continue to grow through 2H24. The main drivers of this will be: (i) the tourist sector, which will be helped further by the waiving of visas for arrivals from 93 countries and the transition to the high season in Q4; (ii) the low-base effect last year (as a result of delays to the passing of FY2023 annual budget) will then boost year-on-year growth in the last quarter of 2024; and (iii) the new government’s economic policy, which should lift sentiment and boost domestic spending. However, details of policy remain unclear, in particular the digital wallet policy which its payments may be made as cash to the 14.5m individuals holding government welfare cards or who are registered with a disability. In addition, the outlook for recovery in exports remains uncertain, and the impacts of flooding and ongoing high levels of household debt may also weigh on growth.
Although Thai export growth reached a 28-month high in July, the sector may come under pressure through the rest of the year. The Ministry of Commerce reports that having contracted -0.3% in June, export value jumped 15.2% YoY to USD 25.7bn in July. Excluding gold and oil products from the calculations brings the export growth down to 9.3%. Product categories reporting strong growth included computers and computer equipment (+82.6%), chemicals (+38.2%), air conditioners and parts (+27.8%), rubber (+55.4%), rice (+15.6%), and rubber products (+13.8%). However, exports contracted for autos, parts and equipment (-18.6%), integrated circuit boards (-8.7%), sugar (-39.1%) and fresh, chilled, frozen and dried fruit (-15.7%). Exports to the US, the EU, China and the ASEAN-5 nations all grew, while those to Japan continued to contract. Over the first 7 months of this year, total export value was up 3.8%.
In July, export value rose at its fastest rate since March 2022. This was partly due to the more than 4-fold jump in the value of gold exports relative to a year earlier. In addition, exports also benefited from a combination of the health of digital technologies that then drove recovery in global demand for electronic goods and worries over delays to international shipping that then brought forward some exports. However, a number of challenges may cloud the outlook for the export sector through the remainder of 2024, including: (i) slowing economies in the major markets such as the US and China; (ii) ongoing geopolitical stresses; (iii) rising trade tensions and the oversupply of products in China, which is then pushing Chinese manufacturers to export those goods to both Thai and global markets, with knock-on effects for domestic productions; and (iv) structural problems and a lack of competitiveness in Thai manufacturing.
