Economic activities in the U.S. and Eurozone slow down across several sectors, supporting the outlook for interest rate cuts soon
US
The US economy continues to slow down but it is not entering a recession. In August, the manufacturing PMI was at 47.2, contracting for the 5th straight month. Meanwhile, job openings in July fell to 7.67 million, the lowest level since February 2021. Additionally, non-farm payrolls increased by 142,000 in August, following an increase of 89,000 in the previous month. The unemployment rate fell to 4.2% from 4.3% the previous month. Average hourly wages rose by 3.8% YoY, up from 3.6% in the previous month.
Tight financial conditions are expected to lead to an economic slowdown for the rest of this year into next. However, the likelihood of the US slipping into a recession remains low due to (i) the rise in unemployment being largely driven by labor force expansion rather than layoff; (ii) the growth in the services sector, which accounts for about 80% of GDP, with the services PMI improving to 57.3 in August from 57 in July; (iii) resilient private consumption despite declining confidence; and (iv) expectations of Fed’s rate cuts, which could ease financial conditions. Krungsri Research expects that the US will gradually cut the Fed Funds rate, with three 25bp cuts this year, bringing the rate to 4.50-4.75% by the end of 2024.
Eurozone
Eurozone’s economic recovery remains fragile and highly uncertain. In August, the manufacturing PMI was at 45.8, marking the 22nd straight month of contraction. However, the services PMI improved to 52.9, the highest level in 3 months. The Producer Price Index (PPI) fell by -2.1% YoY in July, compared to -3.3% the previous month. Eurozone GDP growth in Q2 was just 0.2% QoQ, below the preliminary estimate of 0.3%, with investment continuing to drag on the economy, while private consumption grew less than expected.
While activity in the Eurozone’s services sector improved, partly due to the Olympic Games in France, consumption recovery remained slow due to concerns about future economic conditions. This is indicated by a rise in household savings rate, which signals more cautious spending. Additionally, high financial costs continue to reduce corporate profit margins, potentially leading to lower investment and employment, in line with the continued contraction in the manufacturing PMI. Trade tensions with China and uncertainty surrounding US policies following the presidential election also pose challenges to the Eurozone's recovery. Consequently, Krungsri Research expects the ECB to cut its deposit rate two more times to 3.25% by the end of the year.
China
China’s real estate remains depressed while trade and tech wars tend to intensify. The new home sales by the top 100 developers contracted deeper from -19.7% YoY in July to -22.8% in August, despite some improvement during April-June. The government is now considering measures to refinance home loans worth USD 5.4trn. Meanwhile, trade and tech tensions are intensifying, with China announcing an anti-dumping investigation into Canadian chemicals and canola oil. China also warns that it will cut off access to crucial minerals for automotive production if Japan restricts the sale and maintenance of chipmaking equipment to Chinese companies. In addition, the US is planning to further tighten controls on hi-tech exports to China (e.g., quantum computers and semiconductors).
Weakness in manufacturing, slowing growth in services, soft consumer sentiment, and the real estate slump might lead to a weaker GDP growth in Q3. In Q4, China could face slower export growth due to rising trade conflicts. The real estate sector is likely to weaken further although refinancing measures may offer some relief. In our view, the positive impacts of recent stimulus measures might be insufficient to boost the economy to reach the growth target of around 5% this year, given several headwinds and challenges.
Despite a recent softening, inflation expected to rise to target range in 4Q24. Foreign tourists now back to 90% of their pre-Covid level.
Headline inflation eased to a 4-month low in August, but core inflation edged up. The MPC is expected to leave rates unchanged through the year. In August, headline inflation softened from 0.83% YoY in July to 0.35% on lower accommodation and energy prices (i.e., for gasohol and electricity) that then fed through into a -0.68% drop in non-food and beverage prices. However, as farm outputs have been affected by heavy rain and floods in some areas, rising prices for fresh fruit and vegetables have translated into a 1.83% rise in overall prices for food and non-alcoholic drinks. Core inflation, which strips out prices for raw food and energy, rose from 0.52% in July to 0.62% August. Over the first 8 months of the year, headline and core inflation rates have averaged respectively 0.15% and 0.44%.
Although headline inflation softened to a 4-month low in August, it could gradually rise towards the BOT’s 1-3% target range in the last quarter of the year. This will partly be a result of base effects last year, when the diesel price was capped at THB 30/liter against the current THB 33/liter. In addition, the flooding in key areas will push up prices for some agricultural products, while ongoing geopolitical stresses are also continuing to impact commodity prices.
For the policy rate outlook, we expect the Monetary Policy Committee (MPC) to leave the rate unchanged at 2.50% for the rest of the year given a rise in inflation and the new government’s plan to begin making cash payments to 14.5 million vulnerable people in September which could boost the economic activity in 4Q24. However, uncertainty remains regarding: (i) the MPC’s concerns over tighter financial conditions, especially the potential impacts of worsening credit conditions on the economy and financial sector; (ii) the pace of Fed’s rate cuts, and the peer pressure on interest rate policy; and (iii) the effectiveness of fiscal policy. These factors may then force the MPC to alter course in the next period.
Foreign tourist arrivals totaled 23.6m over 8M24. We see arrivals hitting 35.6m for the whole of this year. The Economics, Tourism and Sports Division reports that in August, Thailand welcomed 2.96m foreign visitors, up 20.1% YoY, though down slightly from July’s 3.1m. Over 8M24, arrivals rose 23.9% YoY to 23.6m, with the 5 most important markets being China (the source of 4.79m arrivals), Malaysia (3.28m), India (1.36m), South Korea (1.25m) and Russia (1.08m).
The tourism sector remains a major driver of the Thai economic growth. Over 8M24, foreign tourist arrivals were at 89% of their pre-pandemic (2019) level. While Malaysian, Indian, South Korean, and Russian arrivals are now at or above (i.e., at 100-125% of) their pre-Covid totals, Chinese arrivals are at just 63% of theirs. Tourism receipts have staged a similar recovery, and with 8M24 earnings from overseas tourism totaling THB 1.11trn, this was also at 89% of the level in the same period of 2019. Through the last 4 months of the year, arrivals are forecast to average around 3m per month, lifted by the introduction of visa-free travel for arrivals from 93 countries, the celebration of Golden Week in China at the start of October, and the transition to the high season in the last quarter. Given these tailwinds, we expect that foreign tourist arrivals will reach 35.6m in 2024.
